1933 Act Registration No. 2-95930
1940 Act Registration No. 811-4546
As filed with the Securities and Exchange Commission on February 26, 1998
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No.
Post-Effective Amendment No. 30
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 30
(Check appropriate box or boxes.)
VAM Institutional Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
90 South Seventh Street, Suite 4300, Minneapolis, Minnesota 55402
(Address of Principal Executive Offices) (Zip Code)
(612) 376-7000
(Registrant's Telephone Number, including Area Code)
Thomas J. Abood
90 South Seventh Street, Suite 4300, Minneapolis, Minnesota 55402
(Name and Address of Agent for Service)
Copy to:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing will become effective (check appropriate box):
--X- immediately upon filing pursuant to paragraph (b)of Rule 485
---- on (specify date) pursuant to paragraph (b) of Rule 485
---- 60 days after filing pursuant to paragraph (a)(1) of Rule 485
---- on (specify date) pursuant to paragraph (a)(1) of Rule 485
---- 75 days after filing pursuant to paragraph (a)(2) of Rule 485
---- on (specify date) pursuant to paragraph (a)(2) of Rule 485
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Cross Reference Sheet for Items required by Form N-1A
(VAM Institutional Funds, Inc.)
Item No. of
Form N-1A Caption in Prospectus
1 Cover Page
2 Fees and Expenses
3 Not Applicable
4 Investment Objectives and Policies; Risks and Characteristics of
Securities and Investment Techniques; Investment Restrictions;
General Information
5 Management; General Information
6 Distributions to Shareholders and Taxes; General Information
7 How to Purchase Shares; Exchange Privilege; Management;
Determination of Net Asset Value
8 How to Sell Shares
9 Not Applicable
Caption in Statement of Additional Information
10 Cover Page
11 Table of Contents
12 Additional Information
13 Investment Policies and Restrictions
14 Directors and Executive Officers of the Funds
15 Directors and Executive Officers of the Funds
16 Directors and Executive Officers of the Funds; The Investment Adviser,
Sub-Adviser, Administrative Services, Expenses and Brokerage
17 The Investment Adviser, Sub-Adviser, Administrative Services, Expenses
and Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxes
21 The Investment Adviser, Sub-Adviser, Administrative Services,
Expenses and Brokerage 22 Calculation of Performance Data
23 Financial Statements
Incorporation by Reference
and
Explanatory Note
This post-effective amendment No. 30 to the registration statement of
VAM Institutional Funds, Inc. (the "Company") includes the prospectus and
statement of additional information relating to the VAM Short Duration Total
Return Fund, VAM Intermediate Duration Total Return Fund, VAM Core Total Return
Fund, VAM Mid Cap Stock Fund, VAM Growth Stock Fund, and the prospectus and
statement of additional information relating to the VAM Financial Institutions
Intermediate Duration Portfolio and VAM Financial Institutions Core Portfolio.
The Part A (Prospectus), Part B (Statement of Additional Information)
and Part C (Other Information) relating to the Segall Bryant and Hamill Growth &
Income Fund are hereby incorporated by reference from Post-Effective Amendment
No. 29 to the Registration Statement of the Company (File Nos. 2-95930 and
811-4546) filed on August 4, 1997.
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VAM Institutional Funds, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which offers its shares in separate
diversified investment portfolios (the "Funds"), each with its own investment
objective and policies. This prospectus relates to shares of the five Funds
listed below. The Funds are primarily designed to provide pension and profit
sharing plans, employee benefit trusts, endowments, foundations, other
institutions, corporations and high net worth individuals access to the
professional investment management services offered by Voyageur Asset Management
LLC (the "Adviser" or "VAM LLC"), which serves as investment adviser to the
Funds.
VAM Short Duration Total Return Fund
VAM Intermediate Duration Total Return Fund
VAM Core Total Return Fund
VAM Mid Cap Stock Fund
VAM Growth Stock Fund
The investment objective of each Fund, along with a detailed
description of the types of securities in which each Fund may invest and the
investment policies and restrictions applicable to each Fund, are set forth in
this Prospectus. There is no assurance that any Fund's investment objective will
be achieved.
The Funds are no-load which means that there is no sales charge when
you buy or redeem shares.
Investors should read and retain this Prospectus for future reference.
The Funds' shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank and are not insured or guaranteed by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
federal agency. An investment in any of the Funds involves investment risk,
including the possible loss of principal due to fluctuations in the applicable
Fund's net asset value.
This Prospectus sets forth certain information about the Funds that a
prospective investor ought to know before investing. Investors should read and
retain this Prospectus for future reference. A Statement of Additional
Information about the Funds dated February 26, 1998 is available free of charge.
Write to the Funds at 90 South Seventh Street, Suite 4300, Minneapolis,
Minnesota 55402 or telephone 612-376-7030 or 800-277-3862. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission and is incorporated in its entirety by reference in this Prospectus.
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 February 26, 1998
TABLE OF CONTENTS
Page
Fees and Expenses..................................................... 3
Financial Highlights.................................................. 4
Investment Objectives and Policies.................................... 5
Investment Techniques, Strategies and Risks........................... 16
Investment Restrictions............................................... 22
How to Purchase Shares................................................ 23
How to Sell Shares.................................................... 24
Exchange Privilege.................................................... 25
Management............................................................ 26
Determination of Net Asset Value...................................... 28
Distributions to Shareholders and Taxes............................... 29
Investment Performance................................................ 30
General Information................................................... 31
FEES AND EXPENSES
Each Fund is offered to investors on a no-load basis, without any sales
commissions or distribution ("12b-1 plan") charges.
Annual Fund Operating Expenses (after fee waivers and expense
reimbursements as a percentage of average net assets)
<TABLE>
<CAPTION>
Investment
Advisory Other Total Operating
Fees Expenses* Expenses*
(after fee (after expense (after expense
waivers) reimbursements) reimbursements)
-------------- --------------------- --------------------
<S> <C> <C> <C>
VAM Short Duration Total Return Fund.................... .25% .25% .50%
VAM Intermediate Duration Total Return Fund............. .25% .25% .50%
VAM Core Total Return Fund ............................. .25% .25% .50%
VAM Mid Cap Stock Fund ................................. .75% .25% 1.00%
VAM Growth Stock Fund................................... .75% .25% 1.00%
* If fees were not reimbursed or waived (i) Other Expenses are estimated to be approximately .50% for
each Fund; Investment Advisory fees would be .50% for each of Short Duration Total Return Fund,
Intermediate Total Return Fund and Core Total Return Fund and 1.00% for Mid Cap Stock
Fund and Growth Stock Fund and (ii) Total Operating Expenses are estimated (on an annual basis
assuming certain asset levels) to be approximately 1.00% for each of Short Duration Total Return
Fund, Intermediate Duration Total Return Fund and Core Total Return Fund and approximately 1.50%
for each of Mid Cap Stock Fund and Growth Stock Fund. As of the date hereof, only VAM Mid Cap
Stock Fund has commenced investment operations.
</TABLE>
Example
You would pay the following expenses on a $1,000 investment, assuming a
5% annual return and redemption at the end of each time period:
<TABLE>
<CAPTION>
1 Year 3 Years
------------------ --------------
<S> <C> <C>
VAM Short Duration Total Return Fund ........................ $ 5 $ 16
VAM Intermediate Duration Total Return Fund.................. $ 5 $ 16
VAM Core Total Return Fund................................... $ 5 $ 16
VAM Mid Cap Stock Fund....................................... $ 10 $ 32
VAM Growth Stock Fund ....................................... $ 10 $ 32
</TABLE>
The examples contained in the table should not be considered a
representation of future expenses. Actual expenses may be greater or less than
those shown. The purpose of the above Fees and Expenses table is to assist the
investor in understanding the various costs and expenses that investors in the
Funds will bear directly or indirectly. Other Expenses set forth in the table
are based on estimated amounts (after expense reimbursements) for the current
fiscal year. The Adviser has voluntarily agreed to absorb expenses for each Fund
through October 31, 1998, to the extent that Total Operating Expenses exceed the
amounts set forth in the table above.
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 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 of the
Fund can be obtained without charge by contacting the Fund at 800-277-3862. In
addition to financial statements, the annual report contains further information
about performance of the Fund.
<TABLE>
<CAPTION>
Period from
September 1, 1997 <F1>to
VAM Mid Cap Stock Fund October 31, 1997
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<S> <C>
Net asset value:
Beginning of period................................................ $10.00
------
Operations:
Net investment income (loss)....................................... --
Net realized and unrealized gain on investments.................... (.31)
-------
Total from operations.......................................... (.31)
-------
Net asset value:
End of period...................................................... $9.69
=====
Total investment return <F2>............................................ (3.10%)
Net assets at end of period (000's omitted)............................. $644
Ratios:
Expenses to average net assets .................................... 1.00% <F3>
Net investment income (loss) to average net assets................. (.12%)<F3>
Portfolio turnover rate (excluding short-term securities)............... 2.8%
Average commission rate................................................. $0.06
Notes to Financial Highlights
<FN>
<F1> 1 Commencement of operations.
<F2> 2 Total investment return is based on the change in net asset value
of a share during the period and assumes investment of
distributions at net asset value.
<F3> 3 Annualized.
</FN>
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Fund are described below.
Each Fund's investment objective is fundamental, which means that it cannot be
changed without the approval of a majority of the respective Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). Unless otherwise stated, the investment policies, techniques
and strategies discussed below represent nonfundamental policies of each Fund
and may be changed by action of the Board of Directors.
Because each Fund has different investment policies, each is subject to
varying degrees of financial, market and credit risks. Therefore, investors
should carefully consider the investment objective, investment policies and
potential risks of any Fund before investing. There are risks in any investment
program and there is no assurance that a Fund's investment objective will be
achieved. The value of each Fund's shares will fluctuate with changes in the
market value of its investments.
THE FIXED INCOME FUNDS
VAM Short Duration Total Return Fund, VAM Intermediate Duration Total
Return Fund and VAM Core Total Return Fund (the "Fixed Income Funds") invest
primarily in debt securities and are therefore subject to interest rate risk and
credit risk. Interest rate risk is the risk that rising interest rates will make
bonds issued at lower interest rates worth less. As a result, the value of each
Fund's shares will vary. To the extent that a Fund invests in non-U.S.
Government securities, it will be subject to credit risk, which is the risk that
a bond issuer will fail to make timely payments of interest or principal. The
Funds will also be subject to prepayment risk and extension risk to the extent
they invest in mortgage-related securities. See "Characteristics and Risks of
Certain Debt Securities--Mortgage-Related Securities."
Other investment techniques used by the Funds also pose certain risks.
See "Investment Techniques, Strategies and Risks."
VAM Short Duration Total Return Fund, VAM Intermediate Duration Total
Return Fund and VAM Core Total Return Fund
The investment objective of each Fund is to achieve as high a level of
total return as is consistent with reasonable risk and with the average
effective duration of its respective portfolio securities. In normal
circumstances, VAM Short Duration Total Return Fund ("Short Fund") seeks to
maintain an average effective portfolio duration ranging from zero to three
years, VAM Intermediate Duration Total Return Fund ("Intermediate Fund") seeks
to maintain an average effective portfolio duration ranging from two and
one-half to four and one-half years and VAM Core Total Return Fund ("Core Fund")
seeks to maintain an average effective portfolio duration ranging from three and
one-half to seven years. Effective duration estimates the interest rate risk of
a portfolio of securities. See " --Duration," below. The total return sought by
each Fund is a combination of income and capital appreciation. The Adviser
emphasizes income in selecting securities for the Funds, but also considers the
potential for changes in value resulting from changes in interest rates,
individual issuers' credit standing and other factors.
Each Fund seeks to realize its objective by investing in a diversified
portfolio of U.S. Government securities (including mortgage-related securities),
corporate bonds and other fixed-income securities, including privately issued
mortgage-backed securities, asset-backed securities, convertible bonds and
short-term fixed-income securities. Each Fund's investments in mortgage-related
securities may include derivative mortgage securities. The Funds will not,
however, invest in any derivative mortgage securities that have risk
characteristics which, in the opinion of the Adviser, are greater than those of
the underlying collateral. The Funds also may invest in fixed-income securities
issued by foreign governmental and nongovernmental issuers and foreign index
linked securities. The Funds' investments in foreign securities (which include
securities issued by both governmental and nongovernmental issuers) will be
limited to no more than 25% of the respective Fund's total assets and will
consist only of U.S. dollar denominated securities.
The securities in each Fund's portfolio will have an overall
dollar-weighted average quality of at least A (as rated by S&P or Moody's). In
determining a Fund's overall dollar-weighted average quality, unrated securities
are treated as if rated, based on the Adviser's view of their comparability to
rated securities. However, each Fund may invest up to 15% of its net assets in
securities that are rated lower than BBB by S&P or lower than Baa by Moody's but
rated at least B by S&P or Moody's (or, in either case, if unrated, deemed by
the Adviser to be of comparable quality). Securities rated Baa are considered by
Moody's as medium-grade obligations which lack outstanding investment
characteristics and in fact have speculative characteristics as well, while
securities rated BBB are regarded by S&P as having an adequate capacity to pay
principal and interest. Securities rated lower than Baa or BBB are sometimes
referred to as "high yield" or "junk" bonds. See "Investment Policies and
Restrictions--High Yield Securities" in the Statement of Additional Information
for a discussion of the risks of investing in high yield securities. The Funds
may be more dependent on the Adviser's investment analysis with respect to
securities for which a comparable quality determination is made than is the case
with respect to rated securities. See Appendix A to the Statement of Additional
Information for a description of Moody's and S&P ratings applicable to fixed
income securities.
Each Fund may buy or sell interest rate futures contracts, options on
interest rate futures contracts and options on debt securities for the purpose
of hedging against changes in the value of securities which a Fund owns or
anticipates purchasing due to anticipated changes in interest rates. The Funds
may enter into swap agreements for purposes of attempting to obtain a particular
investment return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that provided that desired return. In addition, the
Funds may purchase securities on a when-issued basis and purchase or sell
securities on a forward commitment basis, lend their securities to brokers,
dealers and other financial institutions to earn income, and enter into reverse
repurchase agreements as a means of borrowing money for investment purposes. The
foregoing techniques involve special risk considerations. See "Investment
Techniques, Strategies and Risks" for a description of these techniques and a
discussion of the risks involved in their use.
Duration
Duration is one of the fundamental tools used in portfolio selection
for the Fixed Income Funds. Duration estimates the interest rate risk (price
volatility) of a security, i.e., how much the value of the security is expected
to change with a given change in interest rates. Generally, the longer a
security's effective duration, the more sensitive its price is to changes in
interest rates. For example, if interest rates were to increase by 1%, the
market value of a bond with an effective duration of five years would decrease
by about 5%, with all other factors being consistent.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Duration takes the length of the time intervals between the present
time and the time that the interest and principal payments are scheduled or, in
the case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
fixed income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other things
being equal, the lower the stated or coupon rate of interest of a fixed income
security, the longer the duration of the security; conversely, the higher the
stated or coupon rate of interest of a fixed income security, the shorter the
duration of the security.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the underlying securities .
Holding long futures or call option positions (backed by a segregated account of
cash and cash equivalents) will lengthen a Fund's duration by approximately the
same amount as holding an equivalent amount of the underlying securities. Short
futures or put option positions have durations roughly equal to the negative
duration of the underlying securities and have the effect of reducing portfolio
duration by approximately the same amount as selling an equivalent amount of the
underlying securities.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is up to 30 years, but current prepayment
rates are more critical in determining such securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques involving estimates that incorporate the economic life of
a security into the determination of its interest rate exposure. Deviations from
these estimates in the actual prepayments experienced, however, may
significantly affect the ultimate maturity of the security and, in such an
event, the maturity, duration and risk characteristics of the security may be
significantly greater or less than intended.
Characteristics and Risks of Certain Debt Securities
The following describes in greater detail some of the types of
securities in which the Fixed Income Funds invest.
U.S. Government Securities.
Each Fixed Income Fund may invest in U.S. Government securities. U.S.
Government securities are issued or guaranteed as to payment of principal and
interest by the U.S. Government, its agencies or instrumentalities. The current
market prices for such securities are not guaranteed and will fluctuate as will
the net asset value of the Funds. Some U.S. Government securities, such as
Treasury bills, notes and bonds and securities guaranteed by the Government
National Mortgage Association ("GNMA"), are supported by the full faith and
credit of the United States; others, such as those of the Federal Home Loan
Banks, are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the Federal National Mortgage Association
("FNMA"), are supported by the discretionary authority of the U.S. Government to
purchase the agency's obligations, and still others are supported only by the
credit of the instrumentality.
U.S. Government securities include securities that have no coupons, or
have been stripped of their unmatured interest coupons, individual interest
coupons from such securities that trade separately and evidences of receipt of
such securities. Such securities may pay no cash income and are purchased at a
deep discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than
interest-paying securities of similar maturities.
Mortgage-Related Securities.
The Fixed Income Funds' investments in U.S. Government securities may
include investments in mortgage-related securities and each Fixed Income Fund
may invest in mortgage-related securities issued by private issuers.
Mortgage-related securities, as the term is used in this Prospectus, include
mortgage pass-through securities, adjustable rate mortgage securities and
derivative mortgage securities such as collateralized mortgage obligations and
stripped mortgage-backed securities. The investment characteristics of
mortgage-related securities differ from those of traditional fixed-income
securities. The major differences include the fact that interest payments and
principal repayments on mortgage-related securities are made more frequently
(usually monthly), and principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed-income securities. Mortgage-related
securities are subject to both prepayment risk and extension risk. Prepayment
risk is the risk that unanticipated prepayments of the underlying mortgages will
occur. Unanticipated prepayments generally occur when, as a result of falling
interest rates, homeowners refinance their home mortgages. Generally, these
unanticipated prepayments must then be invested at lower interest rates,
reducing the income of the Fund. In addition, when interest rates fall, prices
of mortgage-backed securities may not rise as much as prices of other comparable
fixed income securities because investors may anticipate an increase in mortgage
prepayments. Extension risk is the risk that rising interest rates may cause
prepayments to occur at a slower than expected rate. This particular risk may
effectively change a security which was considered short- or
intermediate-duration at the time of purchase into a long-duration security.
Long-duration securities generally fluctuate more widely in response to changes
in interest rates than short- or intermediate-duration securities.
Mortgage pass-through securities are securities representing interests
in "pools" of mortgage loans secured by residential or commercial real property
in which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the underlying mortgage loans (net of fees paid to the
issuer or guarantor of the securities).
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (in the case of securities guaranteed by FNMA or the
Federal Home Loan Mortgage Corporation ("FHLMC"), which guarantees are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations). Mortgage-related securities created by nongovernmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
Adjustable rate mortgage securities ("ARMS") are pass-through mortgage
securities collateralized by mortgages with interest rates that are adjusted
from time to time. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits. While
values of ARMS, like other fixed-income securities, generally vary inversely
with changes in market interest rates (increasing in value during periods of
declining interest rates and decreasing in value during periods of increasing
interest rates), the values of ARMS should generally be more resistant to price
swings than other fixed-income securities because the interest rates of ARMS
move with market interest rates. The adjustable rate feature of ARMS will not,
however, eliminate fluctuations in the prices of ARMS, particularly during
periods of extreme fluctuations in interest rates. Also, since many adjustable
rate mortgages only reset on an annual basis, it can be expected that the prices
of ARMS will fluctuate to the extent that changes in prevailing interest rates
are not immediately reflected in the interest rates payable on the underlying
adjustable rate mortgages.
Collateralized mortgage obligations ("CMOs") are derivative
mortgage-related instruments. CMOs may be collateralized by whole mortgage loans
but are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured into multiple
classes, with each class bearing a different stated maturity. The principal and
interest payments on the underlying mortgages or mortgage pass-through
securities may be allocated among the several classes of a CMO in many ways. For
example, certain classes may have variable or floating interest rates and others
may be stripped securities which provide only the principal or interest feature
of the underlying security. Generally, the purpose of the allocation of the cash
flow of a CMO to the various classes is to obtain a more predictable cash flow
to certain of the individual classes than exists with the underlying collateral
of the CMO. As a general rule, the more predictable the cash flow is on a CMO
class, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on mortgage-related securities. As
part of the process of creating more predictable cash flows on most of the
classes of a CMO, one or more classes generally must be created that absorb most
of the volatility in the cash flows on the underlying mortgage loans. The yields
on these classes are generally higher than prevailing market yields on
mortgage-related securities with similar maturities. As a result of the
uncertainty of the cash flows of theses classes, the market prices of and yields
on the classes are generally more volatile. The Funds will not invest in classes
that the Adviser believes have risk characteristics greater than those of the
underlying collateral, including any classes that have an imbedded leverage
component. Classes in which the Funds will not invest include "interest only" or
"IO" classes, "principal only" or "PO" classes, "inverse floaters," "companion
bonds," "Z classes" and "inverse IOs." The Funds also will not invest in
stripped mortgage-backed securities.
CMOs that are issued or guaranteed by the U.S. Government or by any of
its agencies or instrumentalities will be considered U.S. Government securities
by the Funds, while other CMOs, even if collateralized by U.S. Government
securities, will have the same status as other privately issued securities for
purposes of applying a Fund's investment policies.
Asset-Backed Securities.
Each Fixed Income Fund may invest in asset-backed securities. Such
securities represent the application of the securitization techniques used to
develop mortgage-related securities to a broad range of other assets. Through
the use of trusts and special purpose corporations, various types of assets,
primarily automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a pay-through structure similar to
the CMO structure.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. As with mortgage-related securities, asset-backed
securities are often backed by a pool of assets representing obligations of a
number of different parties and use various credit enhancement techniques.
Generally, asset-backed securities involve many of the risks associated
with mortgage-related securities; however, asset-backed securities involve
certain risks that are not posed by mortgage-related securities, resulting
mainly from the fact that asset-backed securities do not usually contain the
complete benefit of a security interest in the related collateral. For example,
credit card receivables generally are unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, including
the bankruptcy laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds for repossessed collateral may not always be
sufficient to support payments on these securities.
Foreign Securities.
Each Fixed Income Fund may invest in foreign fixed income securities
denominated in U.S. dollars.
Securities of Supranational Organizations. Each Fixed Income Fund may
invest in fixed-income securities issued or guaranteed by supranational
organizations. Such organizations are entities designated or supported by a
government or government entity to promote economic development, and include,
among others, the Asian Development Bank, the European Coal and Steel Community,
the European Economic Community and the World Bank. These organizations do not
have taxing authority and are dependent upon their members for payments of
interest and principal. Each supranational entity's lending activities are
limited to a percentage of its total capital (including "callable capital"
contributed by members at the entity's call), reserves and net income.
Securities issued by supranational organizations may be denominated in U.S.
dollars or in foreign currencies. Short Fund, Intermediate Fund and Core Fund
will invest only in those securities denominated in U.S. dollars. Securities
issued or guaranteed by supranational organizations are considered by the
Securities and Exchange Commission to be securities in the same industry.
Therefore, no Fund will concentrate 25% or more of the value of its assets in
securities of a single supranational organization.
Brady Bonds. Each Fixed Income Fund may invest in Brady Bonds, which
are created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady (the
"Brady Plan"). Brady Bonds have been issued only recently and, accordingly, do
not have a long payment history. They may be collateralized or uncollateralized
and issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market.
Depository Receipts and Depository Shares. Each Fixed Income Fund may
invest in ADRs or other similar securities, such as American Depository Shares,
Global Depository Receipts and Global Depository Shares. ADRs are receipts
typically issued by a U.S. bank or trust company evidencing ownership of the
underlying securities. American Depository Shares are convertible into
securities of foreign issuers. Global Depository Receipts, which are generally
issued by foreign banks and evidence ownership of either foreign or domestic
securities, and Global Depository Shares are typically issued in bearer form and
are designed for use in European and other international securities markets.
Global Depository Receipts and Global Depository Shares may not necessarily be
denominated in the same currency as the securities into which they may be
converted.
ADRs, which are U.S. dollar-denominated receipts, are typically issued
by domestic banks or trust companies, and represent the deposit with those
entities of securities of a foreign issuer. These securities may not necessarily
be denominated in the same currency as the securities into which they may be
converted. 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 Funds may invest in ADRs through both sponsored and
unsponsored arrangements.
Generally, ADRs, in registered form, are designed for use in U.S.
securities markets. As a result of the absence of established securities markets
and publicly owned corporations in certain foreign countries as well as
restrictions on direct investment by foreign entities, the Funds may be able to
invest in such countries solely or primarily through ADRs or similar securities
and government approved investment vehicles. No more than 5% of a Fund's total
assets will be invested in ADRs sponsored by persons other than the underlying
issuers. Issuers of the stock of such unsponsored ADRs are not obligated to
disclose material information in the United States and, therefore, there may not
be a correlation between such information and the market value of such ADRs.
Risks of Investing in Foreign Securities. Investing in the securities
of foreign issuers involves special risks and considerations not typically
associated with investing in U.S. companies. These include differences in
accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political instability which
could affect U.S. investments in foreign countries. There is generally less
publicly available information about foreign companies than is available about
companies in the United States. Foreign companies are not subject to uniform
audit and financial reporting standards, practices and requirements comparable
to those in the United States. Additionally, foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes,
including taxes withheld from payments on those securities. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore may exhibit greater price volatility. Additional costs associated with
an investment in foreign securities may include higher custodial fees than
domestic custodial arrangements and transaction costs of foreign currency
conversions.
Foreign securities involve currency risks. Changes in foreign exchange
rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar. 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 Index Linked Securities.
Each Fixed Income Fund may invest up to 10% of its total assets in
instruments that return principal and/or pay interest to investors in amounts
which are linked to the level of a particular foreign index ("Foreign Index
Linked Securities"). A foreign index may be based upon the exchange rate of a
particular currency or currencies or the differential between two currencies, or
the level of interest rates in a particular country or countries or the
differential in interest rates between particular countries. In the case of
Foreign Index Linked Securities linking the principal amount to a foreign index,
the amount of principal payable by the issuer at maturity will increase or
decrease in response to changes in the level of the foreign index during the
term of the Foreign Index Linked Securities. In the case of Foreign Index Linked
Securities linking the interest component to a foreign index, the amount of
interest payable will adjust periodically in response to changes in the level of
the foreign index during the term of the Foreign Index Linked Security. Foreign
Index Linked Securities may be issued by a U.S. or foreign governmental agency
or instrumentality or by a private domestic or foreign issuer. Only Foreign
Index Linked Securities issued by foreign governmental agencies or
instrumentalities or by foreign issuers will be considered foreign securities
for purposes of the Funds' investment policies and restrictions.
Foreign Index Linked Securities may offer higher yields than comparable
securities linked to purely domestic indexes but also may be more volatile.
Foreign Index Linked Securities are relatively recent innovations for which the
market has not yet been fully developed and, accordingly, they typically are
less liquid than comparable securities linked to purely domestic indexes. In
addition, the value of Foreign Index Linked Securities will be affected by
fluctuations in foreign exchange rates or in foreign interest rates. If the
Adviser is incorrect in its prediction as to the movements in the direction of
particular foreign currencies or foreign interest rates, the return realized by
a Fund on Foreign Index Linked Securities may be lower than if the Fund had
invested in a similarly rated domestic security.
Corporate Fixed-Income Securities.
Each Fixed Income Fund may each invest in corporate fixed-income
securities, which include corporate bonds, debentures, notes and other similar
corporate debt instruments, including convertible securities.
Fixed-income securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The risks inherent in debt securities depend primarily on the
term and quality of the obligations in a 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. The rate of return or return of principal
on some fixed-income obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies. See
"--Foreign Index Linked Securities."
The Fixed Income Funds' investments in corporate fixed-income
securities may also include zero coupon, pay-in-kind and delayed interest
securities. Zero coupon securities pay no cash income to their holders until
they mature and are issued at substantial discounts from their value at
maturity. When held to maturity, their entire return comes from the difference
between their purchase price and their maturity value. Pay-in-kind securities
pay interest through the issuance to the holders of additional securities.
Delayed interest securities are securities that remain zero coupon securities
until a predetermined date at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals. Because interest on
zero coupon, pay-in-kind and delayed interest securities is not paid on a
current basis, the values of securities of this type are subject to greater
fluctuations than the values of securities that distribute income regularly and
they may be more speculative than such securities. Accordingly, the values of
these securities may be highly volatile as interest rates rise or fall. In
addition, a Fund's investments in zero coupon, pay-in-kind and delayed interest
securities will result in special tax consequences. Although zero coupon
securities do not make interest payments, for tax purposes a portion of the
difference between a zero coupon security's maturity value and its purchase
price is taxable income of the Fund each year.
THE EQUITY FUNDS
General
VAM Mid Cap Stock Fund ("Mid Cap Fund") and VAM Growth Stock Fund
("Growth Fund") (collectively, the "Equity Funds") invest in common stocks and
are therefore subject to market risk. Market risk is the risk that a security
will be worth less when it is sold than when it was bought due to any number of
factors, including reduced demand or loss of investor confidence in the market.
The stock market tends to be cyclical, with periods when stock prices generally
rise and periods when stock prices generally decline. As a result, the value of
each Fund's shares will vary. Because of the risks associated with common stock
investments, the Funds are intended to be long-term investment vehicles and are
not designed to provide investors with a means of speculating on short-term
market movements. Investors should be willing to accept the risk of the
potential for sudden, sometimes substantial declines in market value.
Companies in which Mid Cap Fund invests may involve certain special
risks. Mid cap or medium capitalization companies may have limited product
lines, markets or financial resources, and they may be dependent on a limited
management group. The securities of mid cap companies may have limited market
stability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. Thus, shares of Mid Cap Fund may be subject to greater fluctuation in
value than shares of a more conservative equity fund.
The investment techniques used by the Funds also pose certain risks.
See "Investment Techniques, Strategies and Risks."
Investment Objectives and Policies of Mid Cap Fund and Growth Fund
The investment objective of Mid Cap Fund is long-term capital
appreciation. The Fund will attempt to achieve its objective by investing
primarily (at least 65% of its total assets under normal market conditions) in
common stocks of mid-sized companies which the Adviser believes have the
potential for high earnings growth. The mid-sized companies in which the Fund
invests have stock market capitalizations within the range of market
capitalizations for those companies included in the S&P MidCap 400 Index ($212
million to $13.5 billion as of December 31, 1997) or the Russell 2000 Index
($321 million to $2.0 billion as of December 31, 1997) at the time of purchase.
Mid Cap Fund has been designed to provide investors with potentially greater
long-term rewards than provided by an investment in a fund that seeks capital
appreciation from common stocks with more established earnings histories.
Mid Cap Fund will invest in common stocks of companies which the
Adviser believes to be undervalued and to have the potential for high earnings
growth. Companies in which the Fund invests generally will meet one or more of
the following criteria: high historical earnings-per-share growth; high
projected future earnings-per-share growth; an increase in research analyst
earnings estimates; attractive relative price to earnings ratios; and high
relative discounted cash flows. In selecting the Fund's investments, the Adviser
also focuses on companies with capable management teams, strong industry
positions, sound capital structures, high returns on equity, high reinvestment
rates and conservative financial accounting policies.
The investment objective of Growth Fund is long-term capital
appreciation. The Fund will attempt to achieve its objective by investing
primarily (at least 65% of its total assets under normal market conditions) in
common stocks diversified among individual companies and industries.
Growth Fund will invest in common stocks of companies which the Adviser
believes offer the potential for long-term capital appreciation. Some of the
factors the Adviser will consider in making the Fund's investments are
increasing demand for a company's products or services, the belief that a
company's securities are temporarily undervalued, the development of new or
improved products or services, the probability of increased operating
efficiencies, changes in management, emphasis on research and development,
cyclical conditions, or possible mergers or acquisitions.
Up to 10% of each Equity Fund's total assets may be invested in foreign
securities. See "--The Fixed Income Funds--Characteristics and Risks of Certain
Debt Securities--Foreign Securities--Risks of Investing in Foreign Securities"
for a discussion of the risks associated with investments in foreign securities.
Each Equity Fund may also invest in preferred stocks, convertible
bonds, convertible debentures, convertible notes, convertible preferred stocks
and warrants or rights. To the extent that a Fund invests in convertible debt
securities, those securities will be purchased on the basis of their equity
characteristics, and ratings, if any, of those securities will not be an
important factor in their selection. For more information on warrants, see
"Investment Policies and Restrictions-- Warrants" in the Statement of Additional
Information. In addition, as a means of regulating exposure to the equity
markets, the Equity Funds 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 respective Fund is authorized to invest. To the extent a Fund invests in
other investment companies, the Fund's 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
Equity Funds will purchase exchange traded investment company securities only in
the secondary market and not in an initial offering.
The Equity Funds may write covered put and call options on the
securities in which they may invest, purchase put and call options with respect
to such securities, and enter into closing purchase and sale transactions with
respect thereto. The Equity Funds may also purchase and write put and call
options on stock indexes listed on national securities exchanges. In addition,
solely for the purpose of hedging against changes in the value of its portfolio
securities due to anticipated changes in the market, the Equity Funds may enter
into stock index futures contracts and interest rate futures contracts, purchase
and write put or call options on such contracts, and close such contracts and
options. Each Equity Fund may purchase and sell securities on a when-issued or
delayed-delivery basis and enter into forward commitments to purchase
securities, lend its securities to brokers, dealers and other financial
institutions to earn income, and enter into reverse repurchase agreements as a
means of borrowing money for investment purposes. See "Investment Techniques,
Strategies and Risks."
TEMPORARY INVESTMENTS
Each Fund may retain all its assets in cash or invest in short-term
money market instruments when economic or market conditions are such that the
Adviser deems a temporary defensive position to be appropriate. Even when a Fund
is fully invested, normally up to 5% of the Fund's total assets will be held in
short-term money market securities and cash to pay redemption requests and Fund
expenses. Investments in short-term money market securities may include
obligations of the U.S. Government and its agencies and instrumentalities, time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. See "Investment Objectives,
Policies and Restrictions" in the Statement of Additional Information.
INVESTMENT TECHNIQUES, STRATEGIES AND RISKS
The following discussion describes in greater detail some of the
investment techniques that the Funds may employ from time to time. Additional
information may be found in the Statement of Additional Information.
Illiquid Securities
Each Fund may invest up to 15% of its net assets in illiquid
securities, which are securities that cannot be sold in the ordinary course of
business within seven days at approximately the price at which the Fund has
valued the securities. Each Fund may invest in nonpublicly traded securities
(commonly referred to as "restricted securities"), which are securities that
subject to contractual or legal restrictions on transfer.
"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, since they may be resold only subject to statutory restrictions and
delays or if registered under the 1933 Act. In 1990, however, the Securities and
Exchange Commission adopted Rule 144A under the 1933 Act, which provides a safe
harbor exemption from the registration requirements of the 1933 Act for resales
of restricted securities to "qualified institutional buyers," as defined in the
rule. The result of this rule has been the development of a more liquid and
efficient institutional resale market for restricted securities. Thus,
restricted securities issued under Rule 144A are no longer necessarily illiquid.
The Funds may therefore invest in Rule 144A securities and treat them as liquid
when they have been determined to be liquid by the Board of Directors of the
Company or by the Adviser subject to the oversight of and pursuant to procedures
adopted by the Board of Directors. Similar determinations may be made with
respect to commercial paper issued in reliance on the so-called "private
placement" exemption from registration under Section 4(2) of the 1933 Act.
Illiquid securities may offer a higher yield than securities which are
more readily marketable, but they may not always be marketable on advantageous
terms. The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. A Fund may be restricted in its
ability to sell such securities at a time when the Adviser deems it advisable to
do so. In addition, in order to meet redemption requests, a Fund may have to
sell other assets, rather than such illiquid securities, at a time which is not
advantageous.
A 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.
Repurchase Agreements
Each Fund may engage in repurchase agreement transactions with respect
to instruments in which the Fund is authorized to invest. Repurchase agreements
are transactions by which a Fund purchases a security and simultaneously commits
to resell that security to the seller (a bank or securities dealer) at an agreed
upon price on an agreed upon date. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or date of maturity of the purchased security. This arrangement results in
a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. In these transactions, the Fund will hold collateral at
its custodian bank having a total value equal to or in excess of the repurchase
price. In entering into a repurchase agreement, a 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 collateral, including the risk of a possible decline in the value of the
collateral during the period in which the Fund seeks to assert its rights to
such collateral, 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.
Repurchase agreements maturing in more than seven days are considered illiquid
and subject to each Fund's restriction on investing in illiquid securities.
Reverse Repurchase Agreements
Each Fund may engage in "reverse repurchase agreements" with banks and
securities dealers in an amount up to one-third of the Fund's total assets.
Reverse repurchase agreements will be used as a means of borrowing for
investment purposes. A reverse repurchase agreement involves the sale of a
security by a Fund and its agreement to repurchase the instrument at a specified
time and price. At the time a Fund enters into a reverse repurchase agreement,
cash, U.S. Government securities or other liquid securities having a value
sufficient to make payments for the securities to be repurchased will be
segregated, and will be maintained throughout the period of the obligation. The
use of reverse repurchase agreements by a Fund creates leverage, which increases
a Fund's investment risk. If the income and gains on securities purchased with
the proceeds of reverse repurchase agreements exceed the cost of the agreements,
the Fund's earnings or net asset value will increase faster than otherwise would
be the case; conversely, if the income and gains fail to exceed the cost,
earnings or net asset value would decline faster than otherwise would be the
case.
Borrowing
Each Fund may borrow money from banks for temporary or emergency
purposes in an amount up to one-third of the value of the Fund's total assets.
Reverse repurchase agreements are not included in this limitation. See
"--Reverse Repurchase Agreements" above. Interest paid by a Fund on borrowed
funds would decrease the net earnings of that Fund. None of the Funds will
purchase portfolio securities while outstanding borrowings (other than reverse
repurchase agreements) exceed 5% of the value of the Fund's total assets. Each
Fund may mortgage, pledge or hypothecate its assets to secure temporary or
emergency borrowing. The policies set forth in this paragraph are fundamental
and may not be changed with respect to a Fund without the approval of a majority
of that Fund's shares.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a later date.
The Funds will not accrue income with respect to when-issued or forward
commitment securities prior to their stated delivery date. Pending delivery of
the securities, each Fund maintains in a segregated account cash or liquid
securities in an amount sufficient to meet its purchase commitments. The Funds
will likewise segregate securities they sell on a forward commitment basis.
The purchase of securities on a when-issued or forward commitment basis
exposes a Fund to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. A Fund's purchase of securities on a when-issued or forward commitment
basis while remaining substantially fully invested increases the amount of the
Fund's assets that are subject to market risk to an amount that is greater than
the Fund's net asset value, which could result in increased volatility of the
price of the Fund's shares. Placing securities rather than cash in the
segregated account referred to in the previous paragraph may have a leveraging
effect on a Fund's net asset value per share; that is, to the extent that a Fund
remains substantially fully invested in securities at the same time that it has
committed to purchase securities on a when-issued or forward commitment basis,
greater fluctuations in its net asset value per share may occur than if it had
set aside cash to satisfy its purchase commitments.
Mortgage Dollar Rolls
Consistent with their ability to purchase securities on a when-issued
or forward commitment basis, each Fixed Income Fund may enter into mortgage
"dollar rolls" in which a Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity) but not identical securities on a
specified future date. The Fund entering into the dollar roll gives up the right
to receive principal and interest paid on the securities sold. However, the Fund
would benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase plus any fee
income received. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have been realized on
the securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of a Fund compared with what
such performance would have been without the use of mortgage dollar rolls. Each
Fund entering into mortgage dollar roll transactions will hold and maintain in a
segregated account until the settlement date cash or liquid securities in an
amount equal to the forward purchase price. The benefits derived from the use of
mortgage dollar rolls may depend upon the Adviser's ability to predict correctly
mortgage prepayments and interest rates. There is no assurance that mortgage
dollar rolls can be successfully employed. In addition, as discussed above with
respect to when-issued and forward commitment purchases, the use of mortgage
dollar rolls by a Fund while remaining substantially fully invested in
securities may result in greater fluctuations in the net asset value of a Fund's
shares than would have occurred had the Fund set aside cash to satisfy its
purchase commitments.
Loans of Portfolio Securities
For the purpose of achieving income, each Fund may lend portfolio
securities up to one-third of the value of its total assets to broker-dealers,
banks or other financial borrowers of securities. As with other extensions of
credit there are risks of delay in recovery or even loss of rights in the
collateral should the borrower of the securities fail financially. However, the
Funds will receive collateral in the form of cash, U.S. Government securities or
other high-grade debt obligations equal to at least 100% of the value of the
securities loaned. The value of the collateral and of the securities loaned will
be marked to market on a daily basis. During the time portfolio securities are
on loan, the borrower pays the Fund an amount equivalent to any dividends or
interest paid on the securities and the Fund may invest the cash collateral and
earn additional income or may receive an agreed upon amount on interest income
from the borrower. However, the amounts received by the Fund may be reduced by
finders' fees paid to broker-dealers and related expenses.
Hedging Techniques
To the extent permitted by the investment objective and policies of
each Fund, the Funds may purchase and sell put and call options on securities
and securities indexes, enter into futures contracts and use options on futures
contracts as further described below. Certain Funds also may enter into swap
agreements with respect to interest rates and securities indexes. The Funds may
use these techniques to hedge against changes in interest rates or securities
prices, to generate income, to facilitate allocation of a Fund's investments
among asset classes or otherwise as part of their overall investment strategies.
The Funds will maintain segregated accounts consisting of cash, U.S. Government
securities, or other liquid securities (or, as permitted by applicable
regulation, enter into certain offsetting positions) to cover their obligations
under options and futures contracts to avoid leveraging of the Funds.
Options. A Fund may purchase put options on securities to protect
holdings on an underlying or related security against a substantial decline in
market value. A Fund may purchase call options on securities to protect against
substantial increases in prices of securities the Fund intends to purchase
pending its ability to invest in such securities in an orderly manner. A Fund
may sell put or call options it has previously purchased, which could result in
a net gain or loss depending on whether the amount realized on the sale is more
or less than the premium and other transaction costs paid on the put or call
option which is sold. A Fund may write a call or put option only if the option
is "covered" by the Fund holding a position in the underlying securities or by
other means which would permit immediate satisfaction of the Fund's obligation
as writer of the option. Prior to exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase above the
exercise price in the underlying securities, but, as long as its obligation as a
writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by a Fund is not sold when it has remaining value,
and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, a Fund may be
unable to close out a position.
The Funds may purchase and sell both exchange traded options and
over-the-counter options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. Certain Funds may
invest, as set forth under "Investment Objectives and Policies," in interest
rate futures contracts, stock index futures contracts and options thereon
("futures options").
There are several risks associated with the use of futures and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedged securities in a Fund and the hedging vehicle so that the portfolio
return might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when a Fund seeks to close
out a futures contract or a futures option position. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent a Fund from liquidating an unfavorable position and the
Fund would remain obligated to meet margin requirements until the position is
closed.
The Funds will only enter into futures contracts or futures options
which are standardized and traded on a U.S. exchange or board of trade, or
similar entity, or quoted on an automated quotation system. Each Fund will use
financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission or, with respect to positions in financial futures
and related options that do not qualify as "bona fide hedging" positions, will
enter such non-hedging positions only to the extent that aggregate initial
margin deposits plus premiums paid by it for open futures option positions, less
the amount by which any such positions are "in-the-money," would not exceed 5%
of the Fund's total assets.
Swap Agreements. The Fixed Income Funds may enter into interest rate
and securities index swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to such Funds than if such Funds had
invested directly in an instrument that yielded that desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index. Commonly used swap agreements include interest rate caps,
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap;"
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor;" and interest rate collars, under which a party
sells a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Funds would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, a Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Fund's obligations under a swap agreement
will be accrued daily (offset against amounts owed to the Fund) and any accrued
but unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the Fund's portfolio. A Fund will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Fund's total assets.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Adviser's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two-party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Adviser will cause a Fund to
enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Fund's repurchase
agreement guidelines. Certain restrictions imposed on the Funds by the Internal
Revenue Code may limit the Funds' ability to use swap agreements. The swaps
market is a relatively new market and is largely unregulated. It is possible
that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Portfolio Turnover
It is anticipated that under normal market conditions, the annual rate
of portfolio turnover will not exceed 250% for Short Fund, 200% for Intermediate
Fund, 150% for Core Fund, 200% for Mid Cap Fund and 75% for Growth Fund. A 100%
portfolio turnover rate would occur, for example, if all of the securities in a
Fund's portfolio (other than short-term securities) were replaced once during
the fiscal year. Portfolio turnover could be greater than the rates indicated
above in periods of unusual market movement and volatility. A higher portfolio
turnover rate would result in higher brokerage commissions or other
transactional expenses, which must be borne, directly or indirectly, by a Fund
and ultimately by the Fund's shareholders. High portfolio turnover also may
increase short-term capital gains, which are taxable as ordinary income when
distributed to shareholders. For information on how portfolio turnover rate is
calculated, see "Investment Objectives and Policies--Portfolio Turnover" in the
Statement of Additional Information.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions in addition to
those set forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the following: (1) No Fund,
with respect to 75% of its total assets, will invest more than 5% of its total
assets (taken at market value at the time of such investment) in securities of
any one issuer, except that this restriction does not apply to U.S. Government
Securities. (2) No Fund will concentrate 25% or more of its total assets in any
particular industry, except that this restriction does not apply to U.S.
Government Securities. Except for each Fund's policy regarding borrowing and
investments in illiquid securities, if a percentage restriction is adhered to at
the time of an investment, a later increase or decrease in percentage resulting
from changes in values or assets will not constitute a violation of such
restriction.
HOW TO PURCHASE SHARES
General
Shares of each Fund are purchased at the net asset value per share next
calculated after receipt of the purchase order, without a sales charge. The
minimum initial investment in each Fund is $500,000 and the minimum additional
investment is $10,000. Purchases of Fund shares will be made in full and
fractional shares. In the interest of economy and convenience, certificates for
shares will not be issued. Each Fund reserves the right, in its absolute
discretion, to reject any order for the purchase of its shares.
Shares of the Funds may be purchased by opening an account either by
mail or by phone. An order will be deemed to have been placed at the time that
payment is received. Dividend income begins to accrue 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.
An investor who may be interested in having shares redeemed shortly
after purchase should consider making unconditional payment by certified check,
by transmitting Federal Funds by wire or other means approved in advance by the
Underwriter. Payment of redemption proceeds will be delayed as long as necessary
to verify by expeditious means that the purchase payment has been or will be
collected. Such period of time typically will not exceed 15 days. If a
shareholder has elected to receive dividends and/or capital gain distributions
in cash and the postal or other delivery service is unable to deliver checks to
the shareholder's address of record, such shareholder's distribution option will
automatically be converted to having all dividend and other distributions
reinvested in additional shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks.
Purchases by Mail
To open an account by mail, complete the general authorization form
attached to this Prospectus and mail it along with a check payable to the
appropriate Fund, to Voyageur Asset Management LLC, 90 South Seventh Street,
Suite 4300, Minneapolis, Minnesota 55402.
Purchases By Telephone
To open an account by telephone, call 612-376-7030 or 800-277-3862 to
obtain an account number and instructions. Information concerning the account
will be taken over the phone. The investor must then request a commercial bank
with which he or she has an account and which is a member of the Federal Reserve
System to transmit Federal Funds by wire to the appropriate Fund as follows:
First Bank, N.A., ABA #091000022
For credit of: (insert applicable Fund name)
Checking Account No.:
VAM Short Duration Total Return Fund 1731-0311-7318
VAM Intermediate Duration Total Return Fund 1731-0311-7326
VAM Core Total Return Fund 1731-0311-7334
VAM Mid Cap Stock Fund 1731-0311-7342
VAM Growth Stock Fund 1731-0311-7359
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, 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 appropriate Fund after making the initial telephone purchase.
Contribution in Kind
For investments in excess of $250,000, the Funds may accept, in whole
or in part, a payment in kind of securities that are consistent with the Fund's
investment objectives and policies as payment for the Shares. Each Fund's
investment adviser will have sole discretion to determine whether the Fund will
accept a payment in kind for the Shares. Securities so accepted will be valued
in the same manner as the applicable Fund's securities.
HOW TO SELL SHARES
Written Redemptions
Each Fund will redeem its shares in cash at the net asset value next
determined after receipt of a shareholder's written request for redemption in
"good order." "Good order" means that the redemption request must be executed
exactly as the shares are registered. If the redemption proceeds are to be paid
to the registered holder(s), a signature guarantee is not normally required. A
signature guarantee is required in certain other circumstances. See
"Redemptions" in the Statement of Additional Information.
Telephone Redemption
Shareholders of any Fund redeeming at least $1,000 may do so by
telephoning 612-376- 7030 or 800-277-3862. The applicable section of the
authorization form must have been completed and filed with the Fund before the
telephone request is received. Shares will be redeemed at their net asset value
next determined following a Fund's receipt of the redemption request. The
proceeds of the redemption will be paid if requested at the time of redemption,
by wire to the bank designated on the general authorization form.
The Funds will employ reasonable procedures to confirm that telephone
requests are genuine, including requiring that payment be made only to the
address of record or the bank account designated on the authorization form and
requiring certain means of telephonic identification. The Adviser and
Distributor will not be liable for following instructions which are reasonably
believed to be genuine.
Each Fund reserves the right at any time to suspend or terminate
telephone redemptions or to impose a fee for this service. There is currently no
additional charge to the shareholder for use of the telephone redemption
procedure.
Additional Redemption Information
Shareholders who have submitted a request to one of the Funds for
redemption of their shares will not earn any income on such shares on the
redemption date. If shares for which payment has been collected are redeemed,
payment must be made within seven days. Each Fund may suspend this right of
redemption and may postpone payment only when the Exchange is closed for other
than customary weekends or holidays, or if permitted by the rules of the
Securities and Exchange Commission during periods when trading on the Exchange
is restricted or during any emergency which makes it impracticable for such Fund
to dispose of its securities or to determine fairly the value of its net assets
or during any other period permitted by order of the Commission for the
protection of investors.
Each Fund reserves the right and currently plans to redeem Fund shares
and mail the proceeds to the shareholder if at any time the value of Fund shares
in the account falls below a specified value, currently set at $1,000, as a
result of redemptions or exchanges. Shareholders will be notified and will have
60 days to bring the account up to the required value before any redemption
action will be taken by a Fund.
EXCHANGE PRIVILEGE
Shares may be exchanged for shares of any of the other VAM Funds or any
money market fund available through the Adviser, provided that the shares to be
acquired in the exchange are eligible for sale in the shareholder's state of
residence. An exchange must meet the minimum account size requirement of the
Fund; however, if an account is in existence, the minimum amount which may be
exchanged into that account is $1,000. The exchange will be made on the basis of
the relative net asset values next determined after receipt of the exchange
request. The Underwriter reserves the right, upon 60 days' prior notice, to
restrict the frequency of, or otherwise modify, condition, terminate or impose
charges upon, exchanges. An exchange is considered to be a sale of shares on
which the investor may realize a capital gain or loss for income tax purposes.
Exchange requests should be placed directly with the Fund by calling 612-
376-7030 or 800-277-3862.
MANAGEMENT
Directors and Executive Officers of the Funds
The Board of Directors of the Company is responsible for managing the
business and affairs of the Funds. The names, addresses, principal occupations
and other affiliations of Directors and executive officers of the Company are
set forth in the Statement of Additional Information.
Investment Adviser
VAM LLC has been retained under an investment advisory agreement (the
"Advisory Agreement") with the Company to act as each Fund's investment adviser,
subject to the authority of the Board of Directors. The Adviser is an indirect
wholly owned subsidiary of Dougherty Financial Group LLC ("DFG"), which is owned
approximately 50% by Michael E. Dougherty and 50% equally by James O. Pohlad,
Robert C. Pohlad and William M. Pohlad. Mr. Dougherty co-founded the predecessor
of DFG in 1977 and has served as Chairman of the Board and Chief Executive
officer of DFG since inception. As of January 31, 1998, the Adviser and its
affiliates served as the manager to one open-end investment company (comprising
eight separate investment portfolios), administered numerous private accounts
and managed approximately $6 billion in assets. The Adviser's principal business
address is 90 South Seventh Street, Suite 4300, Minneapolis, Minnesota 55402.
The Funds pay the Adviser monthly investment advisory and management
fees equivalent on an annual basis to 1.00% of the average daily net assets of
Mid Cap Fund and Growth Fund and .50% of the average daily net assets of Short
Fund, Intermediate Fund and Core Fund. However, the Adviser has agreed to
reimburse or waive total fees to the extent set forth under "Fees and Expenses"
above.
Portfolio Management
The day-to-day portfolio manager of Core Fund and Intermediate Fund is
Mark L. Simenstad. Mr. Simenstad is a Executive Vice President and Head of
Taxable Fixed Income of the Adviser. Mr. Simenstad joined the Adviser in July
1996, prior to which he was a Senior Portfolio Manager at Investment Advisers,
Inc. in Minneapolis from 1993 to June 1996 . He has an M.B.A. from the
University of Minnesota, is a Chartered Financial Analyst and has been in the
investment industry since 1983. The day-to-day portfolio manager of Short Fund
is Jan Mowbray. Ms. Mowbray joined the Adviser in 1985 and is a Vice President
and Taxable Fixed Income Portfolio Manager. Ms. Mowbray is a Chartered Financial
Analyst and has been in the investment industry since 1983.
The day-to-day portfolio manager of Mid Cap Fund is Tony Elavia. Mr.
Elavia has been a Senior Equity Portfolio Manager of the Adviser since March
1995, prior to which he had been a Senior Vice President of Piper Capital
Management Incorporated, Minneapolis since 1991. Mr. Elavia has over 9 years of
investment experience. The day-to-day portfolio manager of Growth Fund is James
King. Mr. King has been a Senior Equity Portfolio Manager of the Adviser since
1990 and a director of the Adviser since 1998. Mr. King was a director of the
predecessor of the Adviser and the predecessor of the Underwriter from 1993
through 1995. Mr. King has over 30 years of investment experience.
The Underwriter
Shares of the Funds are distributed through Dougherty Summit Securities
LLC (the "Underwriter") pursuant to a Distribution Agreement between the
Underwriter and the Company. The Underwriter is an affiliated company of DFG. No
compensation is paid by the Funds under the Distribution Agreement.
Custodian
First Trust National Association serves as the custodian of each Fund's
portfolio securities and cash.
Dividend Disbursing, Transfer, Administrative and Accounting Services Agent
VAM LLC acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent to perform dividend-paying
functions, to calculate each Fund's daily share price, to maintain shareholder
records and to perform certain regulatory reporting and compliance related
services for the Funds pursuant to an Administrative Services Agreement. For
more information, see "The Investment Adviser, Sub-Adviser and Administrative
Services--Expenses of the Funds" in the Statement of Additional Information.
Expenses of the Funds
Each Fund's expenses include, among others, fees of Directors, expenses
of Directors' and shareholders' meetings, insurance premiums, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Underwriter), expenses of printing and mailing of
shareholder statements, association membership dues, charges of the Fund's
custodian, bookkeeping, audit 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 have voluntarily agreed to waive
fees in whole or part and to voluntarily reimburse certain other of the Funds'
expenses so that Total Operating Expenses of each Fund for the fiscal year
ending October 31, 1998 are no greater than those set forth under "Fees and
Expenses." After October 31, 1998, such voluntary fee reimbursements and expense
waivers may be discontinued or modified by the Adviser or the Distributor in
their discretion.
Portfolio Transactions
No Fund will effect any brokerage transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with the
Adviser unless such transactions, including the frequency thereof, the receipt
of commissions payable in connection therewith and the selection of the
affiliated broker-dealer effecting such transactions, are not unfair or
unreasonable to the shareholders of such Fund. It is not anticipated that any
Fund will effect any brokerage transactions with any affiliated broker-dealer,
including the Underwriter, unless such use would be to such Fund's advantage.
The Adviser may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' securities transactions.
DETERMINATION OF NET ASSET VALUE
The net asset value of Fund shares is determined once daily, Monday
through Friday, as of 3:00 p.m., Minneapolis time (the regular close of trading
on the Exchange) on each business day the Exchange is open for trading, except
on (i) days on which changes in the value of a Fund's portfolio securities will
not materially affect the current net asset value of the Fund's shares, (ii)
days during which no Fund shares are tendered for redemption and no order to
purchase or sell Fund shares is received by the Fund or (iii) customary national
business holidays on which the Exchange is closed for trading (as of the date
hereof, New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day).
For each Fund, the net asset value per share is determined by dividing
the value of the securities, cash and other assets of the Fund less all
liabilities by the total number of shares outstanding. A security listed or
traded on an exchange is valued at its last sale price (prior to the time as of
which assets are valued) on the exchange where it is principally traded.
Securities which are primarily traded on foreign securities exchanges are
generally valued at the preceding closing values of such securities on their
respective exchanges. Lacking any sales on the exchange where it is principally
traded on the day of valuation, prior to the time as of which assets are valued,
the security generally is valued at the last bid price on that exchange. All
other securities for which over-the-counter quotations are readily available are
valued on the basis of the last current bid price. When market quotations are
not readily available, such securities are valued at fair value as determined in
good faith by the Board of Directors. However, debt securities may be valued on
the basis of valuations furnished by a pricing service which utilizes electronic
data processing techniques to determine valuations without regard to sale or bid
prices, when such valuations are believed by the Fund's officers, under the
supervision of the Board of Directors, to more accurately reflect the fair
market value of such securities. Short-term investments in debt securities with
maturities of less than 60 days when acquired, or which subsequently are within
60 days of maturity, are valued at amortized cost. While this method provides
certainty in valuation, it may result in periods during which the value, due to
changes in interest rates or other factors, of such short term investments is
higher or lower than the value the Fund would receive if it sold the security.
All assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollars as last quoted by any recognized dealer.
Generally, trading in foreign securities and in certain other
securities such as corporate bonds, U.S. Government Securities and money market
instruments is substantially completed each day at various times prior to the
primary close of trading on the Exchange. The values of such securities used in
determining the net asset value of Fund shares are computed as of such times.
Occasionally events affecting the value of such securities may occur between
such times and the primary close of trading on the Exchange which are not
reflected in the computation of a Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities are valued at their fair market value as determined in good faith by
the Adviser in accordance with procedures adopted by the Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
The present policy of each Fixed Income Fund is to declare a
distribution from the net investment income of the Fund daily and to pay such
distributions monthly. Net investment income consists of interest accrued on
portfolio investments of a Fund, less accrued expenses, computed in each case
since the most recent determination of net asset value. The Equity Funds will
make annual distributions from net investment income, if and when available.
Each Fund will distribute any net realized capital gains at least annually.
Shareholders of each Fund receive distributions from investment income
and capital gains in additional shares of the Fund at net asset value, unless
they elect otherwise. Each Fund sends quarterly statements to its shareholders
with details of all account transactions.
Federal Income Taxation
Each Fund is treated as a separate entity for federal income tax
purposes. Each Fund has qualified during its last taxable year and each Fund
intends to so qualify during its current taxable year as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). So
long as a Fund so qualifies, it will not be liable for federal income taxes to
the extent it distributes its taxable income to its shareholders. The following
discussion of the federal income tax consequences of investing in the Funds is
based upon tax laws and regulations in effect on the date of this Prospectus and
is subject to change by legislative or administrative action. For additional
information, see "Taxes" in the Statement of Additional Information. Prospective
investors are advised to consult with their tax advisers concerning the
application of state and local tax laws to investments in and distributions by
the Funds. Shareholders will be notified annually as to the amount, nature and
federal income tax status of dividends and distributions.
If shares of any Fund are sold or otherwise disposed of, the
shareholder will realize a capital gain or loss equal to the difference between
the purchase price and the sales price of the shares disposed of, if, as is
usually the case, the shares are a capital asset in the hands of the
shareholder. If the sale or other disposition occurs more than one year but less
than eighteen months after the shares were acquired, the resulting capital gain
or loss is now categorized as mid-term. If the sale or other disposition occurs
more than eighteen months after the shares were acquired, the resulting capital
gain or loss will be long-term. A special provision of the Code states that, if
a Fund's shares with respect to which a long-term capital gain distribution has
been made are held for six months or less, any loss on the sale or other
disposition of those shares will be a long-term capital loss to the extent of
such long-term capital gain distribution, unless such sale or other disposition
is made pursuant to a plan that provides for the periodic liquidation of an
investment in the Fund.
A Fund investing in foreign securities may be required to pay
withholding and other taxes imposed by foreign countries, generally at rates
from 10% to 40%, which would reduce the Fund's net investment income. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
Distributions by the Funds are generally taxable to shareholders,
whether received in cash or in additional shares of the Fund. Distributions from
a Fund's net investment income and net short-term capital gains are taxable to
shareholders as ordinary income. Distributions from a Fund designated either as
long-term or mid-term capital gain distributions will be taxable to the
shareholder as such irrespective of how long the shareholder has held the
shares. Shareholders not subject to federal income taxation will not be taxed on
distributions by the Funds.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Funds may refer to
"average annual total return," and "cumulative total return" and, with respect
to the Fixed Income Funds only, "yield" and "current distribution rate." The
Funds 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 any Fund will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
The average annual total return is the average annual compounded rate
of return based upon a hypothetical $1,000 investment made at the beginning of
the advertised period. In calculating average annual total return, the maximum
sales charge, if any, is deducted from the hypothetical investment and all
dividends and distributions are assumed to be reinvested.
Cumulative total return is calculated by subtracting a hypothetical
$1,000 payment to a Fund from the ending redeemable value of such payment (at
the end of the relevant advertised period), dividing such difference by $1,000
and multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales charge, if any, is deducted.
Each Fixed Income Fund may advertise its yield. The advertised yield of
a Fund will be based on a 30-day period in the advertisement. Yield is
calculated by dividing the net investment income per share deemed earned during
the period by the maximum offering price per share on the last day of the
period. The result is then annualized using a formula that provides for
semiannual compounding of income.
From time to time, each Fixed Income Fund may also quote a current
distribution rate to shareholders. A current distribution rate as of a date is
calculated by determining the amount of distributions that would have been paid
over the twelve-month period ending on such date to the holder of one
hypothetical Fund share purchased at the beginning of such period, and dividing
such amount by the current maximum offering price per share (the net asset value
per Fund share plus the maximum sales charge, if any).
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Funds'
shares, including data from Lipper Analytical Services, Inc., Morningstar and
other entities or organizations which track the performance of investment
companies. Performance information for the Fixed Income Funds may be compared to
the Lehman Brothers Government and Corporate Bond Index, the Merrill Lynch 1 to
3 Year and 3 to 7 Year Treasury Indexes, the Lehman Brothers Aggregate and
Intermediate Aggregate Index and the Merrill Lynch 1 to 10 Year Intermediate
Term High Quality Corporate Bond Index. Performance information for the Growth
Fund may be compared to the Dow Jones Industrial Average, the Standard & Poor's
500 Composite Stock Price Index, the Russell 2000 and the Russell 5000.
Performance information for the Mid Cap Fund may be compared to the S&P MidCap
400 Index and the Russell 2000 Index. The Funds may be compared to these
unmanaged indexes of common stocks or to other appropriate indexes of investment
securities or with data derived from those indexes. Unmanaged indexes generally
do not reflect deductions for administrative and management costs and expenses.
For Fund performance information and daily net asset value quotations, investors
may call 612-376-7030 or 800-277-3862.
For additional information regarding the calculation of each Fund's
yield, average annual total return, cumulative total return and current
distribution rate, see "Performance Comparisons" in the Statement of Additional
Information.
GENERAL INFORMATION
Each Fund sends to its shareholders six-month unaudited and annual
audited financial statements which include a list of investment securities held
by the Fund.
Each Fund has been established as a separate series of VAM
Institutional Funds, Inc., a Minnesota corporation incorporated in January 1985.
As of the date of this Prospectus, only VAM Mid Cap Stock Fund had commenced
investment operations. All shares of the Company are nonassessable and fully
transferable when issued and paid for in accordance with the terms thereof and
possess no cumulative voting, preemptive or conversion rights. The Board of
Directors is empowered to issue other series of common stock without shareholder
approval.
Fund shares are freely transferable, are entitled to dividends as
declared by the Directors, and, in liquidation of a Fund, are entitled to
receive the net assets of the applicable Fund. The Funds do 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 value of the series' shares. On some issues, such as the election of
Directors, all shares of the Company vote together as one series. On an issue
affecting only a particular series, the shares of the affected series vote as a
separate series. An example of such an issue would be a fundamental investment
restriction pertaining to only one series.
The assets received by the Company for the issue or sale of shares of
each series, and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are allocated to such series, and constitute
the underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series 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 shall be allocated among the series, based upon
the relative net assets of the series at the time such expenses were accrued.
The Articles of Incorporation limit the liability of the Directors to the
fullest extent permitted by law. For a further discussion of the above matters,
see "Additional Information" in the Statement of Additional Information.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus (and/or in the
Statement of Additional Information referred to on the cover page of this
Prospectus), and, if given or made, such information or representations must not
be relied upon as having been authorized by the Funds or Dougherty Summit
Securities LLC. 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.
- --------------------------------------------------------------------------------
VAM FINANCIAL INSTITUTIONS INTERMEDIATE DURATION PORTFOLIO
VAM FINANCIAL INSTITUTIONS CORE PORTFOLIO
VAM Financial Institutions Intermediate Duration Portfolio
("Intermediate Duration Portfolio") and VAM Financial Institutions Core
Portfolio ("Core Portfolio") (together, also referred to as the "Funds") are
series of VAM Institutional Funds, Inc. (the "Company"), an open-end mutual fund
which offers its shares in separate investment portfolios. Each Fund operates as
a diversified mutual fund.
Marquette Trust Company, N.A. ("Marquette"), 60 South Sixth Street,
Suite 4040, Minneapolis, Minnesota 55402, serves as investment adviser to the
Funds. Marquette has retained Voyageur Asset Management LLC ("VAM LLC") to act
as sub-adviser to the Funds.
The investment objective of each Fund is to seek as high a level of
current income as is consistent with preservation of principal and the average
duration of its respective portfolio securities. A detailed description of the
types of securities in which each Fund may invest and of investment policies and
restrictions applicable to each Fund is set forth in this Prospectus. The Funds'
shares are eligible for purchase by national banks and federal credit unions
under current applicable federal law. See "Investment Objectives and Policies --
Investments by National Banks and Federal Credit Unions." There is no assurance
that either Fund's investment objective will be achieved.
The Funds are no-load which means that there is no sales charge when
you buy or redeem shares.
Investors should read and retain this Prospectus for future reference.
The Funds' shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank and are not insured or guaranteed by the U.S. Government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
federal agency. An investment in either Fund involves investment risk, including
the possible loss of principal due to fluctuations in the applicable Fund's net
asset value.
This Prospectus sets forth certain information about the Funds that a
prospective investor ought to know before investing. A Statement of Additional
Information dated February 26, 1998, as amended from time to time, has been
filed with the Securities and Exchange Commission. The Statement of Additional
Information is available free of charge by telephone and at the mailing address
below, and is incorporated in its entirety by reference into this Prospectus in
accordance with the Commission's rules.
VAM INSTITUTIONAL FUNDS, INC.
90 South Seventh Street, Suite 4300
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 February 26, 1998
TABLE OF CONTENTS
Page
Fund Expenses................................................................ 3
Financial Highlights......................................................... 4
Investment Objectives and Policies........................................... 5
Risks and Characteristics of Securities and Investment Techniques............ 6
Investment Restrictions...................................................... 11
Purchase of Shares........................................................... 11
Redemption of Shares......................................................... 13
Exchange Privilege........................................................... 14
Management................................................................... 14
Determination of Net Asset Value............................................. 18
Distributions to Shareholders and Taxes...................................... 19
Investment Performance....................................................... 20
General Information.......................................................... 21
FUND EXPENSES
Each Fund is offered to investors on a no-load basis, without any sales
commissions or distribution ("12b-1 plan") charges.
<TABLE>
<CAPTION>
<S> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Intermediate Core
Duration Portfolio Portfolio
Investment Advisory Fees........................ .20% .20%
Other Expenses.................................. .15% .15%
Service Fees................................ .05% .05%
Other....................................... .10% .10%
---- ----
Total Operating Expenses........................ .35% .35%
---- ----
Example
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return and redemption at the end of each time period:
Intermediate Core
Duration Portfolio Portfolio
1 Year.......................................... $4 $4
3 Years......................................... 11 11
5 Years......................................... 20 20
10 Years........................................ 44 44
</TABLE>
The purpose of the above Fund Expenses table is to assist the investor
in understanding the various costs and expenses that investors in the Funds will
bear directly or indirectly. The examples contained in the table should not be
considered a representation of future expenses. Actual expenses may be greater
or less than those shown.
Under the Investment Advisory Agreement with the Company, the Funds'
investment adviser is entitled to receive from each Fund a monthly advisory and
management fee equivalent on an annual basis to .20% of the average daily net
assets of such Fund. In addition, after the first year of operations, the
investment advisers is entitled to receive a monthly performance adjustment of
up to +/-.15% on an annual basis. See "Management -- Investment Adviser."
Advisory fees may be more or less than those shown above to the extent that each
fund outperforms or underperforms its benchmark index. If the Funds outperformed
the benchmark such that the full +.15% adjustment were achieved, Investment
Advisory Fees would be .35% and Total Operating Expenses would be .50%. Each
Fund also pays a monthly service fee equal, on an annual basis, to .05% of the
Fund's average daily net assets. Such fee is paid to various entities, including
affiliates of the Adviser to compensate for expenses incurred in connection with
the servicing of Fund shareholder accounts. See "Management -- The Underwriter."
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 each Fund. This information has been audited by KPMG Peat Marwick
LLP, independent auditors, and should be read in conjunction with the financial
statements of the Funds contained in their annual report. An annual report of
the Funds can be obtained without charge by contacting the Funds at
800-277-3862. In addition to financial statements, the annual report contains
further information about performance of the Funds. Effective with the close of
business on April 30, 1997, the Funds acquired the assets and assumed all
liabilities of Voyageur Financial Institutions Intermediate Duration Portfolio
and Voyageur Financial Institutions Core Portfolio, series of Voyageur Funds,
Inc., in a tax-free reorganization by issuing new shares. The Funds had no
assets or liabilities prior to the acquisition. Consequently, the information
presented for the Funds prior to May 1, 1997, represents the history of Voyageur
Financial Institutions Intermediate Duration Portfolio and Voyageur Financial
Institutions Core Portfolio (the "predecessor VFI Funds").
<TABLE>
<CAPTION>
VFI VFI Intermediate
Core Duration
Portfolio Portfolio
------------------------ -----------------------
Period from Period from
Year March 27, Year March 27,
ended 1996 <F1> to ended 1996 <F1> to
October 31, October 31, October 31, October 31,
1997 1996 1997 1996
--------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Net asset value:
Beginning of period............................ $10.04 $10.00 $10.02 $10.00
------ ------ ------ ------
Operations:
Net investment income.......................... .66 .37 .62 .34
Net realized and unrealized gain (loss)
on investments............................... .16 .04 .02 .02
----- -------- --- ---------
Total from operations.................... .82 .41 .64 .36
----- -------- --- ---------
Distributions to shareholders:
From net investment income..................... (.66) (.37) (.62) (.34)
----- -------- ----- ---------
Net asset value:
End of period.................................. $10.20 $10.04 $10.04 $10.02
====== ====== ====== ======
Total investment return <F2>...................... 8.50% 4.25% 6.58% 3.65%
Net assets at end of
period (000's omitted)......................... $57,650 $41,035 $34,922 $30,712
Ratios:
Ratio of expenses to
average daily net assets..................... .35% .35% <F3> .35% .35% <F3>
Ratio of net investment income
to average daily net assets.................. 6.59% 6.31% <F3> 6.18% 5.64% <F3>
Portfolio turnover rate
(excluding short-term securities)............ 437.48% 304.10% 192.74% 487.04%
Notes to Financial Highlights
<FN>
<F1>
1 Commencement of operations.
<F2>
2 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.
<F3>
3 Annualized.
</FN>
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
General
The investment objective of each Fund is to seek as high a level of
current income as is consistent with preservation of principal and the average
duration of its respective portfolio securities. The securities in which the
Funds invest and the investment techniques discussed in this section are
described in greater detail in the Prospectus under "Risks and Characteristics
of Securities and Investment Techniques" and in the Statement of Additional
Information. Intermediate Duration Portfolio seeks to maintain an average
effective portfolio duration ranging from 1.5 to 3.5 years and Core Portfolio
seeks to maintain an average effective portfolio duration ranging from 3.5 to
5.5 years.
Each Fund's investment objective is fundamental, which means that it
cannot be changed without the vote of a majority of its respective shareholders
as provided in the Investment Company Act of 1940, as amended (the "1940 Act").
The investment policies and techniques employed in pursuit of the Funds'
objectives may be changed without shareholder approval, unless otherwise noted.
There are risks in any investment program and there is no assurance that a
Fund's investment objective will be achieved. The value of each Fund's shares
will fluctuate with changes in the market value of its investments.
Investment Policies and Techniques
Each Fund seeks to achieve its objective by investing exclusively in
securities issued or guaranteed by the United States government or its agencies
or instrumentalities ("U.S. Government Securities") and repurchase agreements
fully secured by U.S. Government Securities. The U.S. Government Securities in
which each Fund may invest include mortgage-related securities, such as
pass-through securities, collateralized mortgage obligations, and zero coupon
treasury securities. The Funds will not invest, however, in any mortgage-related
securities that are considered "high risk" under the supervisory policies of the
Office of the Comptroller of the Currency applicable to national banks. Each
Fund may purchase securities on a when-issued basis and purchase or sell
securities on a forward commitment basis. See "Risks and Characteristics of
Securities and Investment Techniques" for a description of these securities and
investment techniques and the risks involved in their use.
Effective Duration
Effective duration estimates the interest rate risk (price volatility)
of a security, i.e., how much the value of the security is expected to change
with a given change in interest rates. The longer a security's effective
duration, the more sensitive its price is to changes in interest rates. For
example, if interest rates were to increase by 1%, the market value of a bond
with an effective duration of five years would decrease by about 5%, with all
other factors being constant.
It is important to understand that, while a valuable measure, effective
duration is based on certain assumptions and has several limitations. It is most
useful as a measure of interest rate risk when interest rate changes are small,
rapid and occur equally across all the different points of the yield curve. In
addition, effective duration is difficult to calculate precisely for bonds with
prepayment options, such as mortgage-backed securities, because the calculation
requires assumptions about prepayment rates. For example, when interest rates go
down, homeowners may prepay their mortgages at a higher rate than assumed in the
initial effective duration calculation, thereby shortening the effective
duration of the Fund's mortgage-backed securities. Conversely, if rates
increase, prepayments may decrease to a greater extent than assumed, extending
the effective duration of such securities. For these reasons, the effective
durations of funds which invest a significant portion of their assets in
mortgage-backed securities can be greatly affected by changes in interest rates.
Temporary Investments
Each Fund may hold all of its assets in cash or in short-term money
market instruments, when economic or market conditions are such that the Fund's
investment adviser or sub-adviser deems a temporary defensive position to be
appropriate. In addition, even when a Fund is fully invested, normally up to 5%
of the Fund's total assets will be held in short-term money market securities
and cash to pay redemption requests and Fund expenses. Investments in short-term
money market securities will be limited to U.S. Government Securities and money
market mutual funds that invest exclusively in U.S. Government Securities. See
"Investment Policies and Restrictions" in the Statement of Additional
Information.
Investments by National Banks and Federal Credit Unions
The Funds' shares are eligible for purchase by national banks and
federal credit unions under current applicable federal law. Since the regulation
of financial institutions is a rapidly evolving area of law, however, it remains
the responsibility of each such institution and its board of directors to insure
that shares of the Funds are permissible investments and proper holdings for the
institution's investment portfolio.
RISKS AND CHARACTERISTICS OF SECURITIES
AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities
and investment techniques used by the Funds, and discusses certain concepts
relevant to the investment policies of the Funds. Additional information about
the Funds' investments and investment practices may be found in the Statement of
Additional Information.
General
The Funds are subject to interest rate risk, which is the potential for
a decline in bond prices due to rising interest rates. In general, bond prices
vary inversely with interest rates. When interest rates rise, bond prices
generally fall. Conversely, when interest rates fall, bond prices generally
rise. Interest rate risk applies to U.S. Government Securities as well as other
bonds. U.S. Government Securities are guaranteed only as to the payment of
interest and principal. The current market prices for such securities are not
guaranteed and will fluctuate. In general, shorter term bonds are less sensitive
to interest rate changes, but longer term bonds generally offer higher yields.
The Funds also are subject to prepayment risk to the extent they invest in
mortgage-related securities. Certain types of investments and investment
techniques that may be used by the Funds are described in greater detail,
including the risks of each, in this section.
U.S. Government Securities
Each Fund invests in U.S. Government Securities. U.S. Government
Securities are issued or guaranteed as to payment of principal and interest by
the U.S. Government, its agencies or instrumentalities. The current market
prices for such securities are not guaranteed and will fluctuate as will the net
asset value of the Funds. The Funds may invest in direct obligations of the U.S.
Treasury, such as U.S. Treasury bills, notes and bonds, and in obligations of
U.S. Government agencies or instrumentalities in which both national banks and
federal credit unions may invest directly without limitation. These include ,
among others, obligations of Federal Home Loan Banks, the Federal National
Mortgage Association, the Government National Mortgage Association, the Federal
Home Loan Mortgage Corporation, the Financing Corporation and the Student Loan
Marketing Association.
Obligations of U.S. Government agencies or instrumentalities are backed
in a variety of ways by the U.S. Government or its agencies or
instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-backed securities, are backed by the full faith
and credit of the U.S. Treasury. Others, such as obligations of the Federal Home
Loan Banks, are backed by the right of the issuer to borrow from the Treasury.
Still others, such as those issued by the Federal National Mortgage Association,
are backed by the discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality. Finally, obligations of
other agencies or instrumentalities are backed only by the credit of the agency
or instrumentality issuing the obligations.
Mortgage-Related Securities
Mortgage-related securities are securities that, directly or
indirectly, represent participations in, or are secured by and payable from,
loans secured by real property. The current issuers or guarantors of
mortgage-related securities in which the Funds may invest are the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Mortgage-related securities, as the term is used in this Prospectus, include
government guaranteed mortgage pass-through securities, adjustable rate mortgage
securities and collateralized mortgage obligations. The Funds will not invest in
any mortgage-related securities other than those issued or guaranteed by the
U.S. government or its agencies and instrumentalities.
(a) Guaranteed Mortgage Pass-Through Securities. The government
guaranteed mortgage pass-through securities in which each Fund may invest
include certificates issued or guaranteed by GNMA, FNMA and FHLMC, which
represent interests in underlying residential mortgage loans. These mortgage
pass-through securities provide for the pass-through to investors of their
pro-rata share of monthly payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees paid to the
guarantor of such securities and the servicer of the underlying mortgage loans.
Each of GNMA, FNMA and FHLMC guarantee timely distributions of interest to
certificate holders. GNMA and FNMA guarantee timely distributions of scheduled
principal. FHLMC generally guarantees only ultimate collection of principal of
the underlying mortgage loans. For a further description of these securities,
see "Investment Policies and Restrictions -- Government Guaranteed
Mortgage-Related Securities" in the Statement of Additional Information.
(b) Adjustable Rate Mortgage Securities. Each Fund may also invest in
adjustable rate mortgage securities ("ARMS"). ARMS are pass-through mortgage
securities collateralized by mortgages with interest rates that are adjusted
from time to time. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits. While
values of ARMS, like other fixed-income securities, generally vary inversely
with changes in market interest rates (increasing in value during periods of
declining interest rates and decreasing in value during periods of increasing
interest rates), the values of ARMS should generally be more resistant to price
swings than other fixed-income securities because the coupon rates of ARMS move
with market interest rates. The adjustable rate feature of ARMS will not,
however, eliminate fluctuations in the prices of ARMS, particularly during
periods of extreme fluctuations in interest rates. ARMS typically have caps
which limit the maximum amount by which the interest rate may be increased or
decreased at periodic intervals or over the life of the loan. To the extent
interest rates increase in excess of the caps, ARMS can be expected to behave
more like traditional fixed income securities and to decline in value to a
greater extent than would be the case in the absence of such caps. Also, since
many adjustable rate mortgages only reset on an annual basis, it can be expected
that the prices of ARMS will fluctuate to the extent that changes in prevailing
interest rates are not immediately reflected in the interest rates payable on
the underlying adjustable rate mortgages.
(c) Collateralized Mortgage Obligations. Each Fund may invest, within
the limits discussed below, in CMOs (collateralized mortgage obligations and
multiclass pass-through securities unless the context otherwise indicates).
Collateralized mortgage obligations are debt instruments issued by special
purpose entities which are secured by pools of mortgage loans or other
mortgage-related securities. Multi-class pass-through securities are equity
interests in a trust composed of mortgage loans or other mortgage-related
securities. Payments of principal and interest on underlying collateral provide
the funds to pay debt service on the collateralized mortgage obligation or make
scheduled distributions on the multi-class pass-through security. CMOs may be
issued by agencies or instrumentalities of the U.S. Government or by private
organizations. The Funds will only invest in CMO's issued or guaranteed by
agencies or instrumentalities of the U.S. Government.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMO, often referred to as a "tranche," is issued at a
specific coupon rate and has a stated maturity or final distribution date.
Principal prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
The principal and interest on the underlying mortgages may be allocated
among the several tranches of a CMO in many ways. For example, certain tranches
may have variable or floating interest rates and others may be stripped
securities which provide only the principal or interest feature of the
underlying security. Generally, the purpose of the allocation of the cash flow
of a CMO to the various tranches is to obtain a more predictable cash flow to
certain of the individual tranches than exists with the underlying collateral of
the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on the tranche at the time of
issuance relative to prevailing market yields on mortgage-related securities. As
part of the process of creating more predictable cash flows on most of the
tranches of a CMO, one or more tranches generally must be created that absorb
most of the volatility in the cash flows on the underlying mortgage loans. The
yields on these tranches are generally higher than prevailing market yields on
mortgage-related securities with similar maturities. As a result of the
uncertainty of the cash flows of these tranches, the market prices of and yield
of these tranches generally may be more volatile. The Funds will not invest in
any tranche of a CMO that would be considered "high risk" under the supervisory
policies of the Office of the Comptroller of the Currency applicable to national
banks. See "Investment Policies and Restrictions" in the Statement of Additional
Information. For example, the Funds will not invest in "interest-only" or "IO"
tranches, "principal only" or "PO" tranches, "inverse floaters" or "inverse
IOs."
Zero Coupon Securities
The Funds may invest in "zero coupon" securities issued or guaranteed
by the United States government or its agencies or instrumentalities. The Funds
will not invest in any such securities that are "privately issued" (i.e., sold
by a bank or brokerage firm which itself separates the principal portions from
the coupon portions of the U.S. Treasury bonds and notes and holds such
instruments in a custodial or trust account). A zero coupon security pays no
interest to its holder during its life. Its value to an investor consists of the
difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price). The Funds will
not purchase any zero coupon security with a maturity date that is more than ten
years from the settlement date for the purchase of such security.
Zero coupon securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, these securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. In certain circumstances, a Fund could fail to recoup its initial
investment in zero coupon securities. Current federal tax law requires that a
holder of a zero coupon security accrue a portion of the discount at which the
security was purchased as income each year even though such holder receives no
interest payments in cash on the security during the year. In addition, as a
registered investment company, a Fund will be required to distribute this income
to shareholders. See "Distributions to Shareholders and Taxes." These
distributions will be made from the Fund's cash assets or, if necessary, from
the proceeds of sales of portfolio securities. A Fund will not be able to
purchase additional income producing securities with cash used to make such
distributions, and the Fund's current income ultimately may be reduced as a
result.
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to U.S.
Government Securities. A repurchase agreement involves the purchase by a Fund of
securities with the condition that after a stated period of time the original
seller (a member bank of the Federal Reserve System or a recognized securities
dealer) will buy back the same securities ("collateral") at a predetermined
price or yield. Repurchase agreements involve certain risks not associated with
direct investments in securities. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), if a seller were to default on its
repurchase obligation, a Fund would suffer a loss to the extent proceeds from
the sale of collateral were less than the repurchase price. In the event of a
seller's bankruptcy, a Fund might be delayed in, or prevented from, selling the
collateral to the Fund's benefit. The Funds will not invest in repurchase
agreements maturing in more than seven days.
Reverse Repurchase Agreements
Each Fund may engage in "reverse repurchase agreements" with banks and
securities dealers. Reverse repurchase agreements are ordinary repurchase
agreements in which the Fund is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market risks and
transactions costs. Because certain of the incidents of ownership of the
security are retained by the Fund, reverse repurchase agreements are considered
a form of borrowing by the Fund from the buyer, collateralized by the security.
Reverse repurchase agreements will not be used as a means of borrowing for
investment purposes but will be used by a Fund in order to meet redemption
requests without immediately selling portfolio securities. No more than
one-third of the total assets of each Fund will be subject to reverse repurchase
agreements. The Funds will only enter into fully covered reverse repurchase
agreements. See "Investment Policies and Restrictions -- Reverse Repurchase
Agreements" in the Statement of Additional Information.
Borrowing
Each Fund may borrow money from banks for temporary or emergency
purposes in an amount up to one-third of the value of its total assets in order
to meet redemption requests without immediately selling any of its portfolio
securities. If, for any reason, the current value of a Fund's total assets falls
below an amount equal to three times the amount of its indebtedness from money
borrowed, such Fund will, within three days, reduce its indebtedness to the
extent necessary. To do this, the Fund may have to sell a portion of its
investments at a time when it may be disadvantageous to do so. Interest paid by
a Fund on borrowed funds would decrease the net earnings of that Fund. None of
the Funds will purchase portfolio securities while outstanding borrowings exceed
5% of the value of the Fund's total assets. Each Fund may mortgage, pledge or
hypothecate its assets to secure permitted temporary or emergency borrowing. The
policies set forth in this paragraph are fundamental and may not be changed with
respect to a Fund without the approval of a majority of that Fund's shares. The
Funds do not consider fully covered reverse repurchase agreements to be
borrowings for purposes of the investment policies set forth in this paragraph.
When-Issued Securities
Each Fund may purchase securities on a "when-issued" basis. In a
when-issued purchase, a Fund contracts to purchase securities in the period
between the announcement of the offering and the issuance of the securities. The
price is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. The Funds will not accrue income with
respect to when-issued securities prior to their stated delivery date. Pending
delivery of the securities, each Fund maintains in a segregated account cash or
liquid high-grade debt obligations in an amount sufficient to meet its purchase
commitments.
The purchase of securities on a when-issued basis exposes a Fund to
risk because the securities may decrease in value prior to their delivery.
Purchasing securities on a when-issued basis involves the additional risk that
the return available in the market when the delivery takes place will be higher
than that obtained in the transaction itself. Placing securities rather than
cash in the segregated account referred to in the previous paragraph may have a
leveraging effect on a Fund's net asset value per share; that is, to the extent
that a Fund remains substantially fully invested in securities at the same time
that it has committed to purchase securities on a when-issued or forward
commitment basis, greater fluctuations in its net asset value per share may
occur than if it had set aside cash to satisfy its purchase commitments.
Portfolio Turnover
Each Fund will use short-term trading to benefit from yield disparities
among different issues of securities or otherwise to achieve its investment
objective. Higher portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund,
and may increase short-term capital gains which are taxable as ordinary income
when distributed to shareholders. The Funds' portfolio turnover rates are set
forth under "Financial Highlights" and the method of calculating portfolio
turnover rate is set forth in the Statement of Additional Information under
"Investment Policies and Restrictions -- Portfolio Turnover."
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions in addition to
those set forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval. Except for each Fund's policy regarding
borrowing, if a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from changes in
values or assets will not constitute a violation of such restriction.
PURCHASE OF SHARES
General
Shares of each Fund are purchased at the net asset value per share next
calculated after receipt of the purchase order, without a sales charge. The
minimum initial investment in the Funds is $500,000, in the aggregate, and the
minimum additional aggregate investment is $100,000. Shares of the Funds may be
purchased by opening an account either by mail or by phone. Purchases of Fund
shares will be made in full and fractional shares. In the interest of economy
and convenience, certificates for shares will not be issued. Each Fund reserves
the right, in its absolute discretion, to reject any order for the purchase of
its shares. Shares will be evidenced in book entry form. The Funds do not expect
to issue share certificates.
Interest income begins to accrue as of the opening of the New York
Stock Exchange (the "Exchange") on the day that payment is received. The date of
payment receipt may differ from the date of receipt of a purchase order. 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 up to 15 days from
the purchase date to verify by expeditious means that the purchase payment has
been or will be collected. If a shareholder has elected to receive dividends
and/or capital gain distributions in cash and the postal or other delivery
service is unable to deliver checks to the shareholder's address of record, such
shareholder's distribution option will automatically be converted to having all
dividend and other distributions reinvested in additional shares. No interest
will accrue on amounts represented by uncashed distribution or redemption
checks.
Purchases by Mail
To open an account by mail, complete the general authorization form
attached to this Prospectus and mail it along with a check payable to the
appropriate Fund, toVoyageur Asset Management LLC, 90 South Seventh Street,
Suite 4300, Minneapolis, Minnesota 55402.
Purchases By Telephone
To open an account by telephone, call (612) 376-7030 or (800) 277-3862
to obtain an account number and instructions. Information concerning the account
will be taken over the phone. The investor must then request a commercial bank
with which such investor has an account and which is a member of the Federal
Reserve System to transmit Federal Funds by wire to the appropriate Fund as
follows:
Marquette Trust Company, N.A. ABA #091016647
For credit of Marquette Trust Company as Custodian for: (insert
applicable Fund name)
VAM Funds Account No. 2100-206482
Account Number: (assigned by telephone)
Information on how to transmit Federal Funds by wire is available at
any national bank or any state bank that is a member of the Federal Reserve
System. The bank may charge the shareholder for the wire transfer. If the phone
order and Federal Funds are received before the primary close of trading on the
Exchange (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
primary close of trading on the Exchange on the next day the Exchange is open
for trading. The investor will be required to complete the general authorization
form attached to this Prospectus and mail it to the appropriate Fund after
making the initial telephone purchase.
Contribution in Kind
For investments in excess of $500,000, each Fund may accept, in whole
or in part, a payment in kind of securities that are consistent with such Fund's
investment objective and policies as payment for Fund shares. The Funds'
investment adviser will have sole discretion to determine whether a Fund will
accept a payment in kind for its shares. Securities so accepted will be valued
in the same manner as the applicable Fund's securities.
REDEMPTION OF SHARES
Written Redemptions
Each Fund will redeem its shares in cash at the net asset value next
determined after receipt of a shareholder's written request for redemption in
"good order." "Good order" means that the redemption request must be executed
exactly as the shares are registered. If the redemption proceeds are to be paid
to the registered holder(s), a signature guarantee is not normally required. A
signature guarantee is required in certain other circumstances. See
"Redemptions" in the Statement of Additional Information.
Telephone Redemptions
Shareholders may redeem shares of either Fund by telephoning (612)
376-7030 or (800) 277-3862. The applicable section of the authorization form
must have been completed and filed with the Fund before the telephone request is
received. Shares will be redeemed at their net asset value next determined
following a Fund's receipt of the redemption request. The proceeds of the
redemption will be paid to the shareholder's address of record by wire transfer
to the bank designated on the authorization form.
The Funds will employ reasonable procedures to confirm that telephone
requests are genuine, including requiring that payment be made only to the
address of record or the bank account designated on the authorization form and
requiring certain means of telephonic identification. If a Fund follows such
procedures, it will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone instructions.
Each Fund reserves the right at any time to suspend or terminate
telephone redemptions or to impose a fee for this service. There is currently no
additional charge to the shareholder for use of the telephone redemption
procedure.
Redemption in Kind
Redemption proceeds for redemption requests of $500,000 or more may be
paid, at the sole option of a Fund, in whole or in part by a distribution in
kind of securities or other assets held by such Fund. The determination of which
of a Fund's assets will be distributed to meet such redemption requests will be
made by the Fund's investment adviser, in consultation with the redeeming
shareholder. Securities or other assets so distributed will be valued in the
same manner as the applicable Fund's securities. In order to dispose of such
securities or other assets, the redeeming shareholder would most likely be
required to bear transaction costs, if any.
Additional Redemption Information
Shareholders who have submitted a request to one of the Funds for
redemption of their shares will not earn any income on such shares distributed
by the Fund on the redemption date. If shares for which payment has been
collected are redeemed, payment must be made within seven days. Each Fund may
suspend this right of redemption and may postpone payment only when the Exchange
is closed for other than customary weekends or holidays, or if permitted by the
rules of the Securities and Exchange Commission during periods when trading on
the Exchange is restricted or during any emergency which makes it impracticable
for such Fund to dispose of its securities or to determine fairly the value of
its net assets or during any other period permitted by order of the Commission
for the protection of investors.
Each Fund reserves the right and currently plans to redeem Fund shares
and mail the proceeds to the shareholder if at any time the value of Fund shares
in the account falls below a specified value, currently set at $1,000, as a
result of redemptions or exchanges. Shareholders will be notified and will have
60 days to bring the account up to the required value before any redemption
action will be taken by a Fund.
EXCHANGE PRIVILEGE
Shares of either Fund may be exchanged for shares of the other Fund in
minimum increments of $100,000, provided that the shares to be acquired in the
exchange are eligible for sale in the shareholder's state of residence. The
exchange will be made on the basis of the relative net asset values next
determined after receipt of the exchange request. The Distributor reserves the
right, upon 60 days' prior notice, to restrict the frequency of, or otherwise
modify, condition, terminate or impose charges upon, exchanges. An exchange is
considered to be a sale of shares on which the investor may realize a capital
gain or loss for income tax purposes. Exchange requests should be placed
directly with the Fund by calling (612) 376-7030 or (800) 277-3862.
MANAGEMENT
Directors and Executive Officers of the Funds
Under the laws of the State of Minnesota, the Board of Directors of the
Company is responsible for managing the business and affairs of the Funds. The
names, addresses, principal occupations and other affiliations of Directors and
executive officers of the Company are set forth in the Statement of Additional
Information.
Investment Adviser
Marquette has been retained under an investment advisory agreement (the
"Advisory Agreement") with the Company to act as the Funds' investment adviser,
subject to the authority of the Board of Directors.
Marquette Trust Company, N.A., headquartered in Minneapolis, Minnesota,
is the lead trust company for a $4.3 billion community bank organization under
common ownership. The bank group includes over 40 banks in ten states. Marquette
provides investment management, custody, and trust administration services for
over $650 million of assets in Minnesota, Wisconsin, Iowa, and South Dakota. It
has been providing trust services for the past 50 years. Marquette is owned by
Marquette Bank Rochester, which is controlled by Carl and Eloise Pohlad.
Each Fund pays Marquette a monthly investment advisory and management
fee equivalent on an annual basis to .20% of its average daily net assets (the
"Basic Fee"). The Basic Fee for each Fund is subject to adjustment as described
below.
Adjustments to each Fund's Basic Fee are made by comparison of the
respective Fund's investment performance for the applicable period with the
investment record of a comparison index, as described below (individually a
"Comparison Index" and collectively the "Comparison Indexes"). A Fund's Basic
Fee for each month may be increased or decreased by up to .15% (on an annualized
basis) of the Fund's average daily net assets depending upon the extent by which
the Fund's performance varies from its Comparison Index over the applicable
performance period. For purposes of calculation of the performance adjustment,
average daily net assets are equal to the Fund's average daily net assets during
the month for which the calculation is being made.
For each Fund, no change is made to the Basic Fee to the extent the
Fund's performance falls within .05% of the performance of the Fund's Comparison
Index during the applicable performance period. If a Fund's performance exceeds
that of its Comparison Index by .06% or more, the Basic Fee will be increased by
the product of 20% and the number of basis points by which the Fund's
performance has exceeded that of its Comparison Index, up to a maximum increase
of .15% (on an annualized basis) for performance which exceeds the Comparison
Index by .75% or more. Thus, for Fund performance which exceeds the Comparison
Index by .06%, the Basic Fee will be increased by .00012% (20% X .06%).
Corresponding decreases will be made to the Basic Fee to the extent the Fund's
performance falls below that of its Comparison Index by more than .05%, up to a
maximum decrease of .15% for performance which falls .75% or more below that of
the Comparison Index.
The following table sets forth examples of resulting increases or
decreases to the Basic Fee on an annualized basis given various performance
results:
Adjustment to Basic
Performance of Fund Relative to Comparison Indexes Fee (Annualized)
+.75 percentage points or more................................... +.15%
+.50............................................................. +.10%
+.25............................................................. +.05%
+.05............................................................. 0%
0............................................................. 0%
- -.05............................................................. 0%
- -.25............................................................. -.05%
- -.50............................................................. -.10%
- -.75 percentage points or more................................... -.15%
The Basic Fee, plus or minus the performance adjustments calculated as
described herein, is paid monthly. The applicable performance period is a
rolling 12-month period consisting of the most recent calendar month plus the
immediately preceding 11 months. For the period from November 1, 1996 to October
31, 1997, the performance adjustment resulted in a reduction of investment
advisory fees of $11,219 and $13,913 for Intermediate Duration Portfolio and
Core Portfolio, respectively.
In calculating the investment performance of a Fund as compared with
the investment record of its Comparison Index, dividends and other distributions
of the Fund and dividends and other distributions made with respect to component
securities of the Comparison Index during the performance period are treated as
having been reinvested. The investment performance of the Fund is calculated
based upon the total return of the Fund for the applicable period, which
consists of the total net asset value of the Fund at the end of the applicable
period, including reinvestment of dividends and distributions, less the net
asset value of the Fund at the commencement of the applicable period divided by
the net asset value of the Fund at the commencement of the applicable period.
Fractions of a percentage point are rounded to the nearest whole point (to the
higher whole point if exactly one-half).
Comparison Indexes for the Funds were chosen taking into account the
targeted duration ranges of the Funds and the types of securities in which the
Funds will invest.
The performance of Intermediate Duration Portfolio will be compared to
that of the Lehman Brothers Mutual Fund (1-5 year) U.S. Government Index. This
index currently has a duration of 2.28 years and consists of all Treasury and
U.S. government agency issues maturing in one to five years (currently 775
issues). The performance of Core Portfolio will be compared to that of the
Lehman Brothers Mutual Fund Government/Mortgage Index. This index currently has
a duration of 4.35 years and consists of all U.S. government, treasury, agency
and agency mortgage-backed securities.
Sub-Adviser
VAM LLC acts as the Sub-Adviser to each Fund. VAM LLC is an indirect
wholly-owned subsidiary 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 Chairman of the Board of DFG since inception.
VAM LLC's principal business address is 90 South Seventh Street, Suite 4300,
Minneapolis, Minnesota 55402. As of January 31, 1998, VAM LLC and its affiliates
served as the adviser or sub-adviser to the eight series of the Company,
administered numerous private accounts and managed approximately $6 billion in
assets.
The Sub-Advisory Agreement between Marquette and VAM LLC provides that
VAM LLC is entitled to a fee paid by Marquette, which is accrued daily and paid
monthly, equal to an annual rate of 50% of the Basic Fee plus or minus 50% of
the performance fee adjustment described above under "Management -- Investment
Adviser."
Portfolio Management
All investment decisions for the Funds are made by a committee, and no
individual or individuals are primarily responsible for making recommendations
to that committee.
The Distributor
The shares of the Funds are distributed through Dougherty Summit
Securities LLC (the "Distributor") pursuant to a Distribution Agreement between
the Distributor and the Company. The Distributor is an affiliated company of
DFG. Pursuant to the Distribution Agreement, the Distributor receives a monthly
service fee from each Fund equal, on an annual basis, to .05% of such Fund's
average daily net assets. Such fee is intended to compensate the Distributor for
expenses incurred in connection with the servicing of Fund shareholder accounts.
Such expenses may include the payment of compensation by the Distributor to
persons and institutions who respond to inquiries of Fund shareholders regarding
their ownership of shares or their accounts with the Funds or who provide other
administrative or accounting services not otherwise required to be provided by
the Funds' investment adviser or sub-adviser, the Funds' transfer agent or any
other agent of the Funds.
Custodian
Marquette serves as the custodian of each Fund's portfolio securities
and cash. Marquette receives no additional compensation for acting as the Funds'
custodian.
Dividend Disbursing, Transfer, Administrative and Accounting Services Agent
VAM LLC acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent to perform dividend-paying
functions, to calculate each Fund's daily share price, to maintain shareholder
records and to perform certain regulatory reporting and compliance related
services for the Funds. The fees paid for these services are based on each
Fund's assets and include reimbursement of out-of-pocket expenses. VAM LLC
receives a monthly fee from each Fund equal on an annual basis to .10% of each
Fund's average daily net assets. See "The Investment Adviser, Sub-Adviser and
Underwriter" in the Statement of Additional Information.
Expenses of the Funds
Each Fund's expenses include, among others, fees of Directors, expenses
of Directors' and shareholders' meetings, insurance premiums, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Distributor), expenses of printing and mailing and
shareholder statements, association membership dues, charges of the Fund's
custodian (if any), 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. Marquette, VAM LLC and the Distributor reserve the right, from
time to time, to voluntarily waive their fees in whole or part and to
voluntarily reimburse certain other of the Funds' expenses.
Portfolio Transactions
Neither Fund will effect any brokerage transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with
Marquette or VAM LLC unless such transactions, including the frequency thereof,
the receipt of commissions payable in connection therewith and the selection of
the affiliated broker-dealer effecting such transactions, are not unfair or
unreasonable to the shareholders of such Fund. It is not anticipated that either
Fund will effect any brokerage transactions with any affiliated broker-dealer,
including the Distributor, unless such use would be to such Fund's advantage.
Marquette and VAM LLC may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute the Funds' securities transactions.
DETERMINATION OF NET ASSET VALUE
The net asset value of Fund shares is determined once daily, Monday
through Friday, as of 3:00 p.m., Minneapolis time (the regular close of trading
on the Exchange) on each business day the Exchange is open for trading, except
on (i) days on which changes in the value of a Fund's portfolio securities will
not materially affect the current net asset value of the Fund's shares, (ii)
days during which no Fund shares are tendered for redemption and no order to
purchase or sell Fund shares is received by the Fund or (iii) customary national
business holidays on which the Exchange is closed for trading (as of the date
hereof, New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day).
For each Fund, the net asset value per share is determined by dividing
the value of the securities, cash and other assets of the Fund less all
liabilities by the total number of shares outstanding. For the purpose of
determining the aggregate net assets of a Fund, cash and receivables will be
valued at their face amounts. Interest will be recorded as accrued.
The value of most fixed-income securities held by the Funds will be
provided by an independent pricing service, which determines these valuations at
a time earlier than the close of the Exchange. Pricing services consider such
factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at securities
valuations. Occasionally events affecting the value of such securities may occur
between the time valuations are determined and the close of the Exchange. If
events materially affecting the value of such securities occur during such
period, or if a Fund's investment adviser or sub-adviser determines for any
other reason that valuations provided by the pricing service are inaccurate,
such securities will be valued at their fair value according to procedures
established in good faith by the Company's Board of Directors. Fixed-income
securities for which prices are not available from an independent pricing
service but where an active market exists will be valued using market
quotations, prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Company's Board of Directors. Short-term securities with remaining maturities of
60 days or less are valued at amortized cost. In addition, any securities or
other assets of a Fund for which market prices are not readily available will be
valued at their fair value in accordance with procedures established in good
faith by the Company's Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
Distributions
The present policy of each Fund is to declare a distribution from the
net investment income of the Fund on each day that the Fund is open for
business. Net investment income consists of interest accrued on portfolio
investments of a Fund, less accrued expenses, computed in each case since the
most recent determination of net asset value. Net realized long-term or mid-term
capital gains, if any, are distributed at least annually, after utilization of
any available capital loss carryovers.
Shareholders of each Fund receive distributions from investment income
and capital gains in additional shares of the Fund at net asset value, without
any sales charge, unless they elect otherwise. The Funds will pay distributions
not reinvested to the shareholder of record via wire transfer. Each Fund sends
monthly statements to its shareholders with details of any reinvested dividends.
Federal Income Taxation
Each Fund is treated as a separate entity for federal income tax
purposes. Each Fund qualified as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code") during its most recent
taxable year and intends to qualify as a regulated investment company during the
current taxable year. If so qualified, a Fund will not be liable for federal
income taxes to the extent it distributes its taxable income to its
shareholders. The following discussion of the federal income tax consequences of
investing in the Funds is based upon tax laws and regulations in effect on the
date of this Prospectus and is subject to change by legislative or
administrative action. For additional information, see "Taxes" in the Statement
of Additional Information.
If shares of either Fund are sold or otherwise disposed of, the
shareholder will realize a capital gain or loss equal to the difference between
the purchase price and the sales price of the shares disposed of, if, as is
usually the case, the shares are a capital asset in the hands of the
shareholder. If the sale or other disposition occurs more than one year but less
than eighteen months after the shares were acquired, the resulting capital gain
or loss is now categorized as mid-term. If the sale or other disposition occurs
more than eighteen months after the shares were acquired, the resulting capital
gain or loss will be long-term. A special provision of the Code states that, if
a Fund's shares with respect to which a long-term capital gain distribution has
been made are held for six months or less, any loss on the sale or other
disposition of those shares will be a long-term capital loss to the extent of
such long-term capital gain distribution, unless such sale or other disposition
is made pursuant to a plan that provides for the periodic liquidation of an
investment in the Fund.
Distributions by the Funds are generally taxable to shareholders,
whether received in cash or in additional shares of the Fund. Distributions from
a Fund's net investment income and net short-term capital gains are taxable to
shareholders as ordinary income. Distributions from a Fund designated as either
long-term or mid-term capital gain distributions will be taxable to the
shareholder as such irrespective of how long the shareholder has held the
shares. Shareholders not subject to federal income taxation will not be taxed on
distributions by the Funds.
State Income Taxation
Certain states exempt mutual fund dividends attributable to interest
paid on certain U.S. Government Securities from income taxation when received by
banks that are shareholders in the mutual fund. Prospective investors are
advised to consult with their tax advisers concerning the application of state
and local tax laws to investments in and distributions by the Funds.
Shareholders will be notified annually as to the amount, nature and federal
income tax status of dividends and distributions.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Funds may refer to
"yield," "average annual total return," "cumulative total return," "current
distribution rate" and may compare such performance quotations with published
indices and comparable quotations of other funds. When a Fund advertises any
performance information, it also will advertise its average annual total return
as required by the rules of the Securities and Exchange Commission. 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 either Fund will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The advertised "yield" of a Fund will be based on a 30-day period in
the advertisement. Yield is calculated by dividing the net investment income per
share deemed earned during the period by the maximum offering price per share on
the last day of the period. The result is then "annualized" using a formula that
provides for semi-annual compounding of income.
The "average annual total return" is the average annual compounded rate
of return based upon a hypothetical $1,000 investment made at the beginning of
the advertised period. In calculating average annual total return, the maximum
sales charge is deducted from the hypothetical investment and all dividends and
distributions are assumed to be reinvested.
"Cumulative total return" is calculated by subtracting a hypothetical
$1,000 payment to a Fund from the ending redeemable value of such payment (at
the end of the relevant advertised period), dividing such difference by $1,000
and multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales charge is deducted.
Each Fund, from time to time, may also quote a "current distribution
rate" to shareholders. A current distribution rate as of a date is calculated by
determining the amount of distributions that would have been paid over the
twelve-month period ending on such date to the holder of one hypothetical Fund
share purchased at the beginning of such period, and dividing such amount by the
current maximum offering price per share (the net asset value per Fund share
plus the maximum sales charge).
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Funds'
shares, including data from Lipper Analytical Services, Inc., Morningstar and
other entities or organizations which track the performance of investment
companies. Performance information for each Fund may also be compared to its
Comparison Index and to other unmanaged indices. Unmanaged indices generally do
not reflect deductions for administrative and management costs and expenses. For
Fund performance information and daily net asset value quotations, investors may
call (612) 376-7030 or (800) 277-3862.
For additional information regarding comparative performance
information and the calculation of each Fund's yield, average annual total
return, cumulative total return and current distribution rate, see "Performance
Comparisons" in the Statement of Additional Information.
GENERAL INFORMATION
Each Fund sends to its shareholders six-month unaudited and annual
audited financial statements which include a list of investment securities held
by the Fund.
The Funds were established in 1997, each as a separate series of VAM
Institutional Funds, Inc., a Minnesota corporation incorporated in January 1985.
Effective with the close of business on April 30, 1997, Intermediate Duration
Portfolio and Core Portfolio acquired the assets and assumed all liabilities of
Voyageur Financial Institutions Intermediate Duration Portfolio and Voyageur
Financial Institutions Core Portfolio, respectively, each a series of Voyageur
Funds, Inc., in a tax-free exchange by issuing new shares. The Funds had no
assets or liabilities prior to the acquisition.
The Articles of Incorporation limit the liability of the Directors to
the fullest extent permitted by law. The Articles of Incorporation currently
permit the Directors to issue an unlimited number of full and fractional shares
of four distinct series, each of which evidences an interest in a separate
portfolio of investments with its own investment objective, policies and
restrictions. The Articles of Incorporation also permit the Directors, without
shareholder approval, to create additional series of shares and to subdivide any
series into various classes of shares with such dividend preferences and other
rights as the Directors may designate.
Each share of a Fund represents an equal proportionate interest in the
assets belonging to the Fund and has identical voting, dividend, liquidation and
other rights. Fund shares are freely transferable, are entitled to dividends as
declared by the Directors, and, in liquidation of a Fund, are entitled to
receive the net assets of such Fund. The Funds do not generally hold annual
meetings of shareholders and will do so only when required by law.
Each share of a series has one vote irrespective of the relative net
asset value of the series' shares. On some issues, such as the election of
Directors, all shares of the Company vote together as one series. On an issue
affecting only a particular series, the shares of the affected series vote as a
separate series. An example of such an issue would be a fundamental investment
restriction pertaining to only one series.
The assets received by the Company for the issue or sale of shares of
each series or class thereof, and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are allocated to such series,
and in the case of a class, allocated to such class, and constitute the
underlying assets of such series or class. The underlying assets of each series
or class thereof are required to be segregated on the books of account, and are
to be charged with the expenses in respect to such series or class and with a
share of the general expenses of the Company. Any general expenses of the
Company not readily identifiable as belonging to a particular series or class
shall be allocated among the series or classes thereof, based upon the relative
net assets of the series or class at the time such expenses were accrued. For a
further discussion of the above matters, see "Additional Information" in the
Statement of Additional Information.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus (and/or in the
Statement of Additional Information referred to on the cover page of this
Prospectus), and, if given or made, such information or representations must not
be relied upon as having been authorized by the Funds or Dougherty Summit
Securities LLC. This Prospectus does not constitute an offer or solicitation by
anyone in the state in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so or
to any person to whom it is unlawful to make such offer or solicitation.
- --------------------------------------------------------------------------------
PART B
VAM SHORT DURATION TOTAL RETURN FUND
VAM INTERMEDIATE DURATION TOTAL RETURN FUND
VAM CORE TOTAL RETURN FUND
VAM MID CAP STOCK FUND
VAM GROWTH STOCK FUND
Separately managed series of VAM Institutional Funds, Inc.
Statement of Additional Information
Dated February 26, 1998
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus of the Funds dated February
26, 1998. A copy of the Prospectus or this Statement of Additional Information
may be obtained free of charge by contacting the Funds at 90 South Seventh
Street, Suite 4300, Minneapolis, Minnesota 55402. Telephone: 612- 376-7000 or
toll free 800-553-2143.
The Funds are primarily designed to provide pension and profit sharing
plans, employee benefit trusts, endowments, foundations, corporations, other
institutions and high net worth individuals access to the professional
investment management services offered by Voyageur Asset Management LLC (the
"Adviser").
TABLE OF CONTENTS
Page
Investment Policies and Restrictions.................................... 2
Directors and Executive Officers........................................ 13
The Adviser, Sub-Adviser and Administrative Services.................... 15
Net Asset Value and Public Offering Price............................... 18
Taxes................................................................... 19
Calculations of Performance Data........................................ 21
Redemptions............................................................. 22
Additional Information.................................................. 22
Appendix A-- Description of Securities Ratings.......................... A-1
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 February 26, 1998, and, if given or made,
such information or representations may not be relied upon as having been
authorized by the Funds. This Statement of Additional Information does not
constitute an offer to sell securities in any state or jurisdiction in which
such offering may not lawfully be made. The delivery of this Statement of
Additional Information at any time shall not imply that there has been no change
in the affairs of the Funds since the date hereof.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions of VAM Short
Duration Total Return Fund ("Short Fund"), VAM Intermediate Duration Total
Return Fund ("Intermediate Fund"), VAM Core Total Return Fund ("Core Fund"), VAM
Mid Cap Stock Fund ("Mid Cap Fund") and VAM Growth Stock Fund ("Growth Fund")
(collectively, the "Funds") are set forth in the Prospectus. Certain additional
investment information is set forth below. All capitalized terms not defined
herein have the same meanings as set forth in the Prospectus.
Repurchase Agreements
The Funds may invest in repurchase agreements. When investing in a
repurchase agreement, a 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
Funds 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 respective 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 respective 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.
The Funds' 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 respective 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 respective 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 respective Fund and therefore subject to sale by the
trustee in bankruptcy.
Investments in repurchase agreements by the Funds will be only for
defensive or temporary purposes. Each 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 " --Illiquid Investments," below.
Illiquid Investments
As a nonfundamental policy, each Fund is permitted to invest up to 15%
of its net assets in illiquid investments. An investment is generally deemed to
be "illiquid" if it cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the investment company
is valuing the investment. "Restricted securities" are securities which were
originally sold in private placements and which have not been registered under
the Securities Act of 1933 (the "1933 Act"). Such securities generally have been
considered illiquid by the staff of the Securities and Exchange Commission (the
"SEC"), since such securities may be resold only subject to statutory
restrictions and delays or if registered under the 1933 Act. However, the SEC
has 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 mortgaged-backed U.S. Government securities and commercial
paper issued pursuant to the private placement exemption of Section 4(2) of the
1933 Act). Each 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 a Fund's
illiquidity to the extent that qualified purchasers of the securities become,
for a time, uninterested in purchasing these securities.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities in which the Funds 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, each Fund invests in obligations issued
by an instrumentality of the U.S. Government only if the Fund's Adviser
determines that the instrumentality's credit risk does not make its securities
unsuitable for investment by a Fund.
Mortgage-Related Securities
As discussed in the Prospectus, each Fixed Income Fund may invest in
mortgage-related securities. The mortgage-related securities in which the Funds
may invest include mortgage pass-through securities, adjustable rate mortgage
securities and derivative mortgage securities such as collateralized mortgage
obligations. There are currently three basic types of mortgage-related
securities: (a) those issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities, such as GNMA, FNMA and FHLMC; (b) those issued by
non-governmental issuers that represent interests in, or are collateralized by,
mortgage-related securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities; and (c) those issued by non-governmental
issuers that represent an interest in, or are collateralized by, whole mortgage
loans or mortgage-related securities without a government guarantee but usually
with over-collateralization or some other form of private credit enhancement.
Non-governmental issuers referred to in (b) and (c) above include originators of
and investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
The government guaranteed mortgage pass-through securities in which the
Funds may invest will include certificates issued or guaranteed by GNMA, FNMA
and FHLMC, which represent interests in underlying residential mortgage loans.
These mortgage pass-through securities provide for the pass-through to investors
of their pro-rata share of monthly payments (including any prepayments) made by
the individual borrowers on the pooled mortgage loans, net of any fees paid to
the guarantor of such securities and the servicer of the underlying mortgage
loans. Each of GNMA, FNMA and FHLMC guarantee timely distributions of interest
to certificate holders. GNMA and FNMA guarantee timely distributions of
scheduled principal. FHLMC generally guarantees only ultimate collection of
principal of the underlying mortgage loans.
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through securities
and are issued by originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. Since Private
Pass-Throughs typically are not guaranteed by an entity having the credit status
of GNMA, FNMA or FHLMC, such securities generally are structured with one or
more types of credit enhancement.
Collateralized mortgage obligations ("CMOs") are debt instruments
issued by special purpose entities which are secured by pools of mortgage loans
or other mortgage-related securities. Multi-class pass-through securities are
equity interests in a trust composed of mortgage loans or other mortgage-related
securities. Payments of principal and interest on underlying collateral provide
the funds to pay debt service on the CMO or make scheduled distributions on the
multi-class pass-through security. CMOs and multi-class pass-through securities
(collectively CMOs unless the context indicates otherwise) may be issued by
agencies or instrumentalities of the United States Government or by private
organizations.
High Yield Securities
Each Fixed Income Fund may invest up to 15% of its net assets in
fixed-income securities rated lower than Baa by Moody's or lower than BBB by S&P
but rated at least B by Moody's or S&P. Securities rated lower than Baa by
Moody's or lower than BBB by S&P are sometimes referred to as "high yield" or
"junk" bonds. In addition, securities rated Baa are considered by Moody's to
have some speculative characteristics.
Investing in high yield securities involves special risks in addition
to the risks associated with investments in higher rated fixed-income
securities. High yield securities may be regarded as predominately speculative
with respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality fixed-income securities,
and the ability of the Funds to achieve their investment objectives may, to the
extent of their investments in high yield securities, be more dependent upon
such creditworthiness analysis than would be the case if the Funds were
investing in higher quality securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of high yield securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of high
yield securities defaults, the Funds may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically and in cash.
There may be special tax considerations associated with investing in
high yield securities structured as zero coupon or payment-in-kind securities. A
Fund records the interest on these securities as income even though it receives
no cash interest until the security's maturity or payment date. The Funds will
be required to distribute all or substantially all such amounts annually and may
have to obtain the cash to do so by selling securities which otherwise would
continue to be held. Shareholders will be taxed on these distributions.
The secondary markets on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. The
Adviser does not rely solely on credit ratings when selecting securities for the
Funds and develops its own independent analysis of issuer credit quality. If a
credit rating agency changes the rating of a portfolio security held by a Fund,
the Fund may retain the portfolio security if the Adviser deems it in the best
interest of the Fund's shareholders.
The market for high yield securities may be thinner and less active
than that for higher rated fixed-income securities, which can adversely affect
the prices at which the former are sold. If market quotations are not available,
high yield securities will be valued in accordance with procedures established
by the Board of Directors, including the use of outside pricing services.
Judgment plays a greater role in valuing high yield debt securities than is the
case for securities for which more external sources for quotations and last sale
information is available. Adverse publicity and changing investor perception may
affect the ability of outside pricing services to value high yield securities
and the Funds' ability to dispose of these securities.
Since the risk of default is high for high yield securities, research
and credit analysis are an especially important part of managing securities of
this type. The Adviser will attempt to identify those issuers of high yielding
debt securities whose financial condition is adequate to meet future
obligations, has improved or is expected to improve in the future. The Adviser's
analysis will focus on relative values based on such factors as interest in
dividend coverage, asset coverage, earnings prospects and the experience and
managerial strength of the issuer.
Options and Futures Transactions
Certain Funds may buy and sell put and call options, futures contracts
and options on futures contracts with respect to financial instruments and stock
and interest rate indexes. The Funds will engage in such transactions only to
hedge existing positions. They will not engage in such transactions for the
purposes of speculation or leverage. Different uses of futures and options have
different risk and return characteristics. Generally, selling futures contracts,
purchasing put options and writing (i.e., selling) call options are strategies
designed to protect against falling securities prices and can limit potential
gains if prices rise. Purchasing futures contracts, purchasing call options and
writing put options are strategies whose returns tend to rise and fall together
with securities prices and can cause losses if prices fall. If securities prices
remain unchanged over time option writing strategies tend to be profitable,
while option buying strategies tend to decline in value.
Writing Options. Certain Funds may write (i.e., sell) covered put and
call options with respect to the securities in which they may invest. By writing
a call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.
"Covered options" means that so long as a Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). A Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains with its custodian cash, U.S. Government securities or other
liquid securities having a value equal to or greater than the exercise price of
the option.
Through the writing of call or put options, a Fund may obtain a greater
current return than would be realized on the underlying securities alone. A Fund
receives premiums from writing call or put options, which it retains whether or
not the options are exercised. By writing a call option, a Fund might lose the
potential for gain on the underlying security while the option is open, and by
writing a put option, a Fund might become obligated to purchase the underlying
security for more than its current market price upon exercise.
Purchasing Options. Certain Funds may purchase put options in order to
protect portfolio holdings in an underlying security against a decline in the
market value of such holdings. Such protection is provided during the life of
the put because a Fund may sell the underlying security at the put exercise
price, regardless of a decline in the underlying security's market price. Any
loss to a Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit a Fund realizes on the sale of the security
will be reduced by the premium paid for the put option less any amount for which
the put is sold.
A Fund may wish to protect certain portfolio securities against a
decline in market value at a time when no put options on those particular
securities are available for purchase. The Fund may therefore purchase a put
option on securities other than those it wishes to protect even though it does
not hold such other securities in its portfolio.
Each Fund may also purchase call options. During the life of the call
option, the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
The securities exchanges have established limitations governing the
maximum number of options which may be written by an investor or group of
investors acting in concert. These position limits may restrict a Fund's ability
to purchase or sell options on a particular security. It is possible that with
respect to a Fund, the Fund and other clients of the Adviser may be considered
to be a group of investors acting in concert. Thus, the number of options which
a Fund may write may be affected by options written by other investment advisory
clients of the Adviser.
Securities Index Option Trading. Certain Funds may purchase and write
put and call options on securities indexes. Options on securities indexes are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated to make delivery of
this amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in a Fund's portfolio
correlate with price movements of the index selected. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular security, whether a Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in the
level of prices in the stock or bond markets generally or, in the case of
certain indexes, in an industry market segment, rather than movements in the
price of a particular security. Accordingly, successful use by a Fund of options
on security indexes will be subject to the Adviser's ability to predict
correctly movements in the direction of the stock market or interest rates
market generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual securities. In the
event the Adviser is unsuccessful in predicting the movements of an index, a
Fund could be in a worse position than had no hedge been attempted.
Because exercises of index options are settled in cash, a Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When a Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker as collateral for the option, cash, liquid
securities or "qualified securities" with a market value determined on a daily
basis of not less than 100% of the current market value of the option.
Options purchased and written by a Fund may be exchange traded or may
be options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by the Adviser. OTC options are illiquid and it may not be possible for the Fund
to dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when the Adviser believes it would be
advantageous to do so.
Futures Contracts and Options on Futures Contracts. Certain Funds may
enter into futures contracts and purchase and write options on these contracts,
including but not limited to interest rate and securities index futures
contracts and put and call options on these futures contracts. These contracts
will be entered into on domestic exchanges and boards of trade, subject to
applicable regulations of the Commodity Futures Trading Commission. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes.
In connection with transactions in futures contracts and writing
related options, each Fund will be required to deposit as "initial margin" a
specified amount of cash or short-term, U.S. Government securities. The initial
margin required for a futures contract is set by the exchange on which the
contract is traded. It is expected that the initial margin would be
approximately 1-1/2% to 5% of a contract's face value. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract. No Fund will purchase or
sell futures contracts or related options if, as a result, the sum of the
initial margin deposit on that Fund's existing futures and related options
positions and premiums paid for options or futures contracts entered into for
other than bona fide hedging purposes would exceed 5% of the liquidation value
of the Fund's portfolio.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded, a
Fund will incur brokerage fees when it purchases or sells futures contracts.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using stock index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in stock indexes of securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by a Fund is subject to the ability
of the Adviser to predict correctly movements in the direction of interest rates
or the stock market. If a Fund has hedged against the possibility of a decline
in the value of the stocks held in its portfolio or an increase in interest
rates adversely affecting the value of fixed-income securities held in its
portfolio and stock prices increase or interest rates decrease instead, the Fund
will lose part or all of the benefit of the increased value of its security
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may, but will not necessarily, be at increased prices which
reflect the rising market or decline in interest rates. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Liquidity of Futures Contracts. A Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risks of Options. The use of options on financial instruments and
indexes and on interest rate and stock index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium which may
partially offset a decline in the value of a Fund's portfolio assets. By writing
a call option, the Fund becomes obligated to sell an underlying instrument or a
futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option generates a premium, but the Fund
becomes obligated to purchase the underlying instrument or futures contract,
which may have a value lower than the exercise price. Thus, the loss incurred by
a Fund in writing options may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on a Fund's ability to terminate options positions at a time when the
Adviser deems it desirable to do so. Although a Fund will enter into an option
position only if the Adviser believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
A Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by the Adviser,
which could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; a Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Certain Funds may purchase put options to hedge against a decline in
the value of their portfolios. By using put options in this way, such Funds will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
Certain Funds may purchase call options to hedge against an increase in
the price of securities that the Funds anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, much of the protection
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Funds to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when the Adviser believes it would be advantageous to do so. Accordingly,
OTC options are subject to each Fund's limitation that a maximum of 15% of its
net assets be invested in illiquid securities. In the event of the bankruptcy of
the writer of an OTC option, a Fund could experience a loss of all or part of
the value of the option.
Foreign Transactions. Transactions in options and futures contracts by
Funds investing in foreign securities may be conducted outside of the United
States. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (a) other complex
foreign political and economic factors; (b) lesser availability than in the
United States of data on which to make trading decisions; (c) delays in a Fund's
ability to act upon economic events occurring in foreign during nonbusiness
hours in the United States; (d) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States; and (e) lesser trading volume. In addition, such transactions may not
involve a clearing mechanism and related guarantee.
Warrants
Growth Fund and Mid Cap Fund may invest in 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.
Temporary Investments
To the extent set forth in the Prospectus, the Funds may invest in
short-term money market securities, including obligations of the U.S. Government
and its agencies and instrumentalities, bank certificates of deposit, bankers'
acceptances, high-grade commercial paper and other money market instruments.
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities include Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have initial
maturities of one year or less; Treasury notes have initial maturities of one to
ten years; and Treasury bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, GNMA pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal Home Loan Banks, by the right of the issuer to borrow from the Treasury;
others, such as those issued by the Federal National Mortgage Association, by
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; and others, such as those issued by the
Student Loan Marketing Association, only by the credit of the agency or
instrumentality. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies or instrumentalities, no assurance can be
given that it will always do so, since it is not so obligated by law. Securities
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
that mature within 397 days are considered money market securities for purposes
of the Funds' investment policies.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits are not transferable and are therefore illiquid prior to their
maturity. No Fund will invest more than 15% of its net assets in time deposits
and other illiquid securities. See "Investment Restrictions" below. Certificates
of deposit are certificates evidencing the obligation of a bank to repay funds
deposited with it for a specified period of time. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the full amount of the instrument upon maturity.
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. The commercial paper purchased by the
Funds will consist only of direct obligations which, at the time of their
purchase, are (a) rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P (or
comparably rated by any other nationally recognized statistical rating
organization), (b) issued by companies having an outstanding unsecured debt
issue currently rated at least Aa by Moody's or at least AA by S&P (or
comparably rated by any other nationally recognized statistical rating
organization), or (c) if unrated, determined by the Adviser to be of comparable
quality to those rated obligations which may be purchased by the Funds.
Money market instruments in which the Funds may invest also include
nonconvertible corporate debt securities (for example, bonds and debentures)
with no more than 397 days remaining to maturity, provided such obligations are
rated Aa or better by Moody's, AA or better by S&P (or comparably rated by any
other nationally recognized statistical rating organization) or, if unrated,
determined to be of comparable quality by the Adviser.
Investment Restrictions
Each Fund has adopted the following investment restrictions which,
together with the investment objective of such Fund, cannot be changed without
approval by holders of a majority of the outstanding voting shares of such Fund.
As defined in the 1940 Act, this means the lesser of the vote of (a) 67% of the
shares of such Fund at a meeting where more than 50% of the outstanding shares
of such Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of such Fund.
1. No Fund, with respect to 75% of its total assets, will invest more
than 5% of the value of its total assets (taken at market value at the
time of purchase) in the outstanding securities of any one issuer, or
own more than 10% of the outstanding voting securities of any one
issuer, in each case other than securities issued or guaranteed by the
U.S. Government or any agency or instrumentality thereof.
2. No Fund will invest 25% or more of the value of its total assets in
the securities of issuers conducting their principal business
activities in any one industry. This restriction does not apply to
securities of the U.S. Government or its agencies and instrumentalities
and repurchase agreements relating thereto. The various types of
utilities companies, such as gas, electric, telephone, telegraph,
satellite and microwave communications companies, are considered as
separate industries.
3. No Fund will underwrite the securities of other issuers except to
the extent that, in connection with the disposition of its portfolio
securities, the Fund may be deemed to be an underwriter.
4. No Fund will borrow money except for temporary or emergency
purposes. The amount of such borrowing (not including borrowing through
reverse repurchase agreements) may not exceed one- third of such Fund's
total assets. No Fund will purchase portfolio securities while
outstanding borrowings (other than reverse repurchase agreements)
exceed 5% of the value of the Fund's total assets. The Funds will not
borrow for leverage purposes.
5. No Fund will issue any senior securities, as defined in the 1940
Act, except as set forth in investment restriction number 4 above, and
except to the extent that using options, futures contracts and options
on futures contracts, or purchasing or selling securities on a
when-issued or forward commitment basis, or using similar investment
strategies may be deemed to constitute issuing a senior security.
6. No Fund will purchase or sell commodities or commodities futures
contracts, except that the Funds may enter into financial futures
contracts and engage in related options transactions.
7. No Fund will mortgage, pledge or hypothecate its assets except to
secure temporary or emergency borrowing. For purposes of this policy,
collateral arrangements for margin deposits on future contracts or with
respect to the writing of options are not deemed to be a pledge of
assets.
8. No Fund will lend money to other persons, except through purchasing
debt obligations, lending portfolio securities and entering into
repurchase agreements.
9. No Fund will purchase or sell real estate or real estate limited
partnership interests, except that the Funds may purchase and sell
securities of companies that deal in real estate or interests in real
estate.
For purposes of the Funds' concentration policy contained in
fundamental restriction (2) above, the applicable Funds intend to comply with
the SEC staff position that securities issued or guaranteed as to principal and
interest by any single foreign government are considered to be securities of
issuers in the same industry.
Each Fund has adopted the following operating (i.e., non-fundamental)
investment restrictions which may be changed by the Board of Directors at any
time without shareholder approval. No Fund will:
1. Invest more than 15% of its net assets in illiquid securities.
2. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and
except that the Funds may make margin deposits in connection with
futures contracts.
3. Make short sales of securities.
Additionally, Growth Fund and Mid Cap Fund may invest in warrants if no
more than 5% of the value of each Fund's net assets would be invested in such
securities.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets, except the policies regarding borrowing and
investments in illiquid securities, 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.
Diversification
As indicated by the first fundamental investment restriction set forth
above, each Fund operates as a "diversified" fund. Each Fund intends to conduct
its operations so that it will comply with diversification requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
qualify as a "regulated investment company." In order to qualify as a regulated
investment company, each Fund must limit its investments so that, at the close
of each quarter of the taxable year, with respect to at least 50% of its total
assets, not more than 5% of its total assets will be invested in the securities
of a single issuer. In addition, the Code requires that not more than 25% in
value of each Fund's total assets may be invested in the securities of a single
issuer at the close of each quarter of the taxable year.
Portfolio Turnover
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities by a Fund to the average monthly value of
portfolio securities owned by the Fund, not including securities maturing in
less than 12 months. A 100% portfolio turnover rate would occur, for example, if
the lesser of the value of purchases or sales of a Fund's portfolio securities
for a particular year were equal to the average monthly value of the portfolio
securities owned by the Fund during the year. Each Fund will dispose of
securities without regard to the time they have been held when such action
appears advisable to the Adviser. Frequent portfolio trades may result in higher
transaction and other costs for a Fund.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and officers of the Company, their position with the
Company and their principal occupations are set forth below. Unless indicated
otherwise, all positions have been held at least five years.
<TABLE>
<CAPTION>
Principal Occupation(s) During
Name, Address, and Age Position Past Five Years and Other Affiliations
- ----------------------- -------- ---------------------------------------
<S> <C> <C>
Richard F. McNamara, 64 Director Chief Executive Officer of Activar, Inc., a Minneapolis-
7808 Creekridge Circle #200 based holding company consisting of seventeen companies
Minneapolis, Minnesota 554239 in industrial plastics, sheet 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.
James W. Nelson, 56 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, 77 Director Special Assistant to the President of the University of
University of Minnesota Minnesota.
Foundation
1300 South Second Street
Minneapolis, Minnesota 55454
Thomas F. Madison, 62 Director President and CEO of MLM Partners, Inc. since January
200 South Fifth Street 1993; previously, Vice Chairman--Office of the CEO,
Suite 2100 The Minnesota Mutual Life Insurance Company from
Minneapolis, Minnesota 55402 February to September 1994; 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), Minnegasco, Span Link Communications (software),
ACI Telecentrics (outbound telemarketing and telecommunications)
and various civic and educational organizations.
Michael E. Dougherty*, 57 Director Chairman and Director of Dougherty Financial Group LLC
90 South Seventh Street ("DFG") since 1997; Chairman, Director and Chief Executive
Suite 4300 Officer of predecessor of DFG since its inception; Director
Minneapolis, MN 55402 of the Adviser since 1997; Director of the predecessor of the
Adviser since its inception; Director of the Underwriter since
1997; Director of the predecessor of the Underwriter since its
inception.
John G. Taft, 43 President Director of the Adviser since 1998, previously Chief Executive
90 South Seventh Street Officer and Director of the Adviser since 1997; President and
Suite 4300 Chief Executive Officer and Director of the Underwriter since
Minneapolis, Minnesota 55402 1997; previously, President and Director from 1993 to 1997 of
the predecessor of the Adviser and the Underwriter; President
of the predecessor of the Underwriter from 1991 to 1995;
Management committee member of the predecessor of the Adviser
from 1991 to 1993.
James C. King, 57 Vice Director of the Adviser since 1998; Senior Equity Portfolio
90 South Seventh Street President Manager of the Adviser since 1997; previously, Senior Equity
Suite 4300 Portfolio Manager of the predecessor of the Adviser from
Minneapolis, Minnesota 55402 1993 to 1997; Director of the predecessor of the Adviser and the
Underwriter from 1993 to 1995.
Steven P. Eldredge, 42 Vice Senior Tax Exempt Portfolio Manager of the Adviser since
90 South Seventh Street President 1997; previously, Senior Tax Exempt Portfolio Manager of
Suite 4300 the predecessor of the Adviser from 1995 to 1997; portfolio
Minneapolis, Minnesota 55402 manager for ABT Mutual Funds, Palm Beach, Florida,
from 1989 to 1995.
Michelle M. Sandberg, 34 Treasurer Director, Vice President and Treasurer of the Adviser since 1997.
90 South Seventh Street Director, Vice President and Treasurer of DFG since 1997; previously
Suite 4300 Vice President and Controller of the predecessor of DFG and the
Minneapolis, Minnesota 55402 predecessor of the Underwriter from 1995 to 1997, Controller of the
predecessor of DFG and the predecessor of the Underwriter from 1990 to 1995.
Thomas J. Abood, 33 Secretary Secretary, Senior Vice President and General Counsel of
90 South Seventh Street Dougherty Financial Group LLC since 1997; previously,
Suite 4300 Senior Vice President and General Counsel of Dougherty
Minneapolis, Minnesota 55402 Financial Group, Inc. (from 1995 to 1997); Senior Vice President
of the predecessor of the Adviser and the Underwriter and of
Voyageur Companies, Inc. from 1994 to 1997; Vice President of the
predecessor 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.
</TABLE>
- ---------------------------
* Directors of the Company who are interested persons (as that term is defined
by the 1940 Act) of the Company and the Funds.
As of January 31, 1998, the officers and directors of the Company as a
group did not own any shares of the Funds.
The Company does not compensate its officers. Each director (who is not
an employee of the Adviser or any of its affiliates) receives a total annual fee
of $1,000 for serving as a director of the Company, plus a $500 fee for each
in-person meeting attended by such director. These fees are allocated among each
series of the Company based on the relative average net asset value of each
series. In addition, each director who is not an employee of the Adviser any of
its affiliates is reimbursed for expenses incurred in connection with attending
meetings. The Adviser currently serves as investment adviser to the Company
which has eight series.
For the calendar year ended December 31, 1997, each of Messrs.
McNamara, Madison, Nelson and Odegard received compensation from the investment
companies (the "Fund Complex") for which the Adviser served as investment
adviser. (During the calendar year ended December 31, 1997, the Fund Complex
consisted of up to 1 open-end investment company comprising 8 series or funds.
On April 30, 1997, the investment advisory contracts for other investment
companies previously affiliated with the Adviser were assigned to a new adviser
and are not included in the information for the following table.) The following
table sets forth the compensation received by each director from the Company
during the fiscal year ended October 31, 1997, as well as the total compensation
received by each director from the Fund Complex during the calendar year ended
December 31, 1997. During these periods, each director received a total annual
fee of $1,000, plus a $500 fee for each special in-person meeting attended.
Aggregate Compensation Total Compensation
Director from the Company from Fund Complex
- -------- ------------------------------ ------------------
Richard F. McNamara $ 25 $ 1,000
Thomas F. Madison $ 25 $ 1,000
James W. Nelson $ 25 $ 1,000
Robert J. Odegard $ 25
THE INVESTMENT ADVISER, SUB-ADVISER AND ADMINISTRATIVE SERVICES
General
Voyageur Asset Management LLC (the "Adviser"), a Minnesota limited
liability company, has been retained under an investment advisory agreement (the
"Advisory Agreement") with the Company to act as each Fund's investment adviser,
subject to the authority of the Board of Directors. Dougherty Summit Securities
LLC (the "Distributor") is the principal distributor of the Funds' shares. The
Adviser is an indirect wholly-owned subsidiary of Dougherty Financial Group LLC
("DFG"). The Underwriter is owned approximately 42% by DFG.
Investment Advisory Agreement
The Funds do not maintain their own research department. The Company,
on behalf of each Fund, has contracted with the Adviser for investment advice,
research and management. Pursuant to the Investment Advisory Agreement, the
Adviser has the sole and exclusive responsibility for the management of each
Fund's portfolio and the making and execution of all investment decisions for
the Fund subject to the objectives and investment policies and restrictions of
the Fund and subject to the supervision of the Company's Board of Directors. The
Adviser also furnishes, at its own expense, office facilities, equipment and
personnel for servicing the investments of each Fund. The Adviser has agreed to
arrange for officers and employees of the Adviser to serve without compensation
from the Funds as directors, officers or employees of the Company if duly
elected to such positions by the shareholders or directors.
As compensation for the Adviser's services, each Fixed Income Fund is
obligated to pay a monthly fee equivalent on an annual basis to .50% of each
such Fund's average daily net assets and each Equity Fund is obligated to pay a
monthly fee equivalent on an annual basis to 1.00% of each such Fund's average
daily net assets. The percentage fee is based on the average daily value of each
Fund's net assets at the close of each business day. For purposes of calculating
average daily net assets, as such term is used in the Investment Advisory
Agreement, each Fund's net assets equal its total assets minus its total
liabilities. The Funds have agreed to reimburse or waive these fees to the
extent set forth under Fees and Expenses in the prospectus.
The Investment Advisory Agreement continues from year to year only if
approved annually (a) by the Board of Directors of the Company or by vote of a
majority of the outstanding voting securities of each Fund and (b) by vote of a
majority of Directors of the Company who are not parties to such Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
such party, cast in person at a meeting of the Board of Directors called for the
purpose of voting on such approval. The Investment Advisory Agreement may be
terminated by either party on 60 days' notice to the other party and terminates
automatically upon its assignment. The Investment Advisory Agreement also
provides that amendments to the Agreement may be effected if approved by the
Board of Directors of the Company (including a majority of the directors who are
not interested persons of the Adviser or the Company), unless the 1940 Act
requires that any such amendment must be submitted for approval by the
shareholders and that all proposed assignments of such agreement are subject to
approval by the Company's Board of Directors (unless the 1940 Act otherwise
requires shareholder approval thereof).
Administrative Services Agreement
The Adviser also acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement (the "Administrative Services Agreement") between the Adviser
and the Company. Pursuant to the Administrative Services Agreement, the Adviser
provides each Fund all dividend disbursing, transfer agency, administrative and
accounting services required by such Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of each Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of such Fund's
shares or the receipt of redemption requests with respect to such Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon such Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of such Fund to be received by
each shareholder of such Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of such Fund as such Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of such Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
such Fund and the Adviser may from time to time agree upon. Pursuant to the
Administrative Services Agreement, the Adviser also provides such regulatory
reporting and compliance related services and tasks for the Company or any Fund
as the Company may reasonably request.
As compensation for these services, each Fund pays the Adviser a
monthly fee equivalent on an annual basis to .15% of the Fund's average daily
net assets. For purposes of calculating average daily net assets, as such term
is used in the Administrative Services Agreements, each Fund's net assets equals
its total assets minus its total liabilities. Each Fund also reimburses the
Adviser for its out-of-pocket expenses in connection with the Adviser's
provision of services under such Fund's Administrative Services Agreement.
The Administrative Services Agreement is renewable from year to year if
the Company's directors (including a majority of the Company's disinterested
directors) approve the continuance of the Agreement. Each Fund or the Adviser
can terminate such Fund's Administrative Services Agreement on 60 days' notice
to the other party. The Administrative Services Agreement also provides that
amendments to the Agreement may be effected if approved by the Board of
Directors of the Company (including a majority of the directors who are not
interested persons of the Adviser or the Fund), unless the 1940 Act requires
that any such amendment must be submitted for approval by the Fund's
shareholders, and that all proposed assignments of such agreement are subject to
approval by the Company's Board of Directors (unless the 1940 Act otherwise
requires shareholder approval thereof).
Expenses of the Funds
All costs and expenses (other than those specifically referred to as
being borne by the Adviser or the Distributor) incurred in the operation of each
Fund are borne by such Fund. These expenses include, among others, fees of the
directors who are not employees of the Adviser or any of its affiliates,
expenses of directors' and shareholders' meetings, including the cost of
printing and mailing proxies, expenses of insurance premiums for fidelity and
other coverage, expenses of redemption of shares, expenses of issue and sale of
shares (to the extent not borne by the Distributor under its agreement with such
Fund), association membership dues, charges of such Fund's custodian, and
bookkeeping, auditing and legal expenses. Each Fund will also pay the fees and
bear the expense of registering and maintaining the registration of such Fund
and its shares with the Securities and Exchange Commission and registering or
qualifying its shares under state or other securities laws and the expense of
preparing and mailing prospectuses, reports and statements to shareholders.
The Adviser reserves the right to voluntarily waive its fees in whole
or part and to voluntarily reimburse certain other of the Fund's expenses. Any
such waiver or reimbursement, however, is in the Adviser's sole discretion and
may be lifted or reinstated at any time. The Adviser has voluntarily agreed to
waive fees and reimburse expenses for each Fund through October 31, 1998, to the
extent set forth under "Fees and Expenses" in the Prospectus.
Portfolio Transactions and Allocation of Brokerage
Decisions with respect to placement of the Funds' portfolio
transactions are made by the Adviser. In selecting brokers to execute portfolio
transactions, the Adviser seeks to obtain the best net price and efficiency of
execution of orders. Commission rates, being a component of price, are
considered together with other relevant factors.
When consistent with the objectives of best net price and efficiency of
execution of orders, business may be placed with broker-dealers who furnish
investment research services to 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 to supplement its 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 a 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 receives a benefit,
not capable of evaluation in dollar amounts, without providing any direct
monetary benefit to the Funds from these transactions.
The Adviser has not entered into any formal or informal agreements with
any broker-dealers, nor do it maintain any "formula" which must be followed in
connection with the placement of the Funds' portfolio transactions in exchange
for research services provided the Adviser, except as noted below. However, the
Adviser maintains informal lists of broker-dealers, which is used from time to
time as a general guide in the placement of the Funds' business, in order to
encourage certain broker-dealers to provide the Adviser with research services
which the Adviser anticipates will be useful. Because the list is merely a
general guide, which is to be used only after the primary criterion for the
selection of broker-dealers (discussed above) has been met, substantial
deviations from the list are permissible and may be expected to occur. The
Adviser will authorize the Funds to pay an amount of commission for effecting a
securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the Adviser determines in good faith
that such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the Adviser's overall responsibilities
with respect to the accounts as to which it exercises investment discretion. The
Funds will not purchase at a higher price or sell at a lower price in connection
with transactions effected with a broker-dealer, acting as principal, who
furnishes research services to the Adviser than would be the case if no weight
were given by the Adviser to the dealer's furnishing of such services.
The Adviser believes that most research services obtained will
generally benefit one or more of the investment companies managed by the Adviser
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.
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. In determining the commissions to be paid to a broker-dealer
affiliated with the Adviser, it is the policy of the Funds that such commissions
will, in the judgment of the Adviser, subject to review by the Board of
Directors, be both (a) at least as favorable as those which would be charged by
other qualified brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time, and (b) at least as favorable as commissions contemporaneously
charged by such affiliated broker-dealers on comparable transactions for their
most favored comparable unaffiliated customers.
When two or more clients of the 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 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.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Funds may purchase securities from an underwriting
syndicate of which an affiliated broker-dealer is a member (but not directly
from such affiliated broker-dealer itself). Such conditions relate to the price
and amount of the securities purchased, the commission or spread paid and the
quality of the issuer. The rules further require that such purchases take place
in accordance with procedures adopted and reviewed periodically by the Board of
Directors of the Funds, particularly those directors who are not interested
persons of the Funds.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Company's directors may
determine, the Adviser may consider sales of shares of the Funds as a factor in
the selection of broker-dealers to execute the Funds' securities transactions.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares,
which is equal to the net asset value per share, is summarized in the
Prospectus. The portfolio securities in which the Funds invest fluctuate in
value and hence the net asset value per share of each Fund also fluctuates. The
net asset value of each Fund's shares is determined on each day on which the New
York Stock Exchange is open, provided that the net asset value need not be
determined on days when no Fund shares are tendered for redemption and no order
for Fund shares is received. The New York Stock Exchange is not open for
business on the following holidays (or on the nearest Monday or Friday if the
holiday falls on a weekend): New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving
Day and Christmas Day.
The portfolio securities in which each Fund invests fluctuate in value
and hence the net asset value per share of each Fund also fluctuates. On October
31, 1997, the net asset value per share for VAM Mid Cap Fund was calculated as
follows:
Net Assets ($643,818) = Net Asset Value Per Share ($9.69)
--------------------------
Shares Outstanding (66,414)
TAXES
General
Each Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). In order to so qualify, a Fund must meet certain requirements
imposed by the Code as to the sources of the Fund's income and the
diversification of the Fund's assets. A Fund must, among other things, (a)
derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to loans of securities, gains from the sale or
other disposition of securities or other income derived with respect to its
business of investing in such securities (including, but not limited to, gains
from options, futures or forward contracts); and (b) diversify its holdings so
that, at the end of each fiscal quarter, (i) at least 50% of the value of the
Fund's assets is represented by (A) cash, United States government securities or
securities of other regulated investment companies, and (B) other securities
that, with respect to any one issuer, do not represent more than 5% of the value
of the Fund's assets or more than 10% of the voting securities of such issuer,
and (ii) not more than 25% of the value of the Fund's assets is invested in the
securities of any issuer (other than United States government securities or the
securities of other regulated investment companies).
If a Fund qualifies as a regulated investment company and satisfies a
minimum distribution requirement, the Fund will not be subject to federal income
tax on income and gains to the extent that it distributes such income and gains
to its shareholders. The minimum distribution requirement is satisfied if a Fund
distributes at least 90% of its net investment income (including tax-exempt
interest and net short-term capital gains) for the taxable year.
Each Fund will be subject to a nondeductible 4% excise tax to the
extent that it does not distribute by the end of each calendar year (or is not
subjected to regular corporate tax in such year on) an amount equal to the sum
of (a) 98% of the Fund's ordinary income for such calendar year; (b) 98% of the
excess of capital gains over capital losses for the one-year period ending on
October 31 of each year; and (c) the undistributed income and gains from the
preceding years (if any).
Federal Tax Treatment of Shareholders
Distributions to shareholders attributable to a Fund's net investment
income (including interest income and net short-term capital gains) are taxable
as ordinary income whether paid in cash or reinvested in additional shares of
the Fund. Distributions of any net capital gain (i.e., the excess of net
long-term and mid-term capital gain over net short-term capital loss, if any)
that are designated as capital gain dividends are taxable as long-term or
mid-term capital gains, whether paid in cash or additional shares of a Fund,
regardless of how long the shares have been held.
Dividends and distributions by each Fund are generally taxable to the
shareholders at the time the dividend or distribution is made (even if
reinvested in additional shares of the Fund). However, any dividend declared by
a Fund in October, November or December of any calendar year which is payable to
shareholders of record on a specified date in such a month will be treated as
received by the shareholders on December 31 of such year if the dividend is paid
during January of the following year. The realization by a Fund of original
issue or market discount will increase the investment income of such Fund and
the amount required to be distributed.
Distributions may also be subject to state, local and foreign taxes
depending on each shareholder's particular situation.
In general, if a share of common stock is sold or exchanged, the seller
will recognize gain or loss equal to the difference between the amount realized
in the sale or exchange and the seller's adjusted basis in the share of common
stock. Any gain or loss realized upon a sale or exchange of shares of common
stock will be treated as mid-term capital gain or loss if the shares have been
held for more than one year but less than eighteen months, long-term capital
gain or loss if the shares have been held for eighteen months or more, and
otherwise as short-term capital gain or loss. Further, if such shares are held
for six months or less, loss realized by a shareholder will be treated as
long-term capital loss to the extent of the total of any capital gain dividend
received by the shareholder. In addition, any loss realized on a sale or
exchange of shares of common stock will be disallowed to the extent the shares
disposed of are replaced within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
Each Fund may be required to withhold federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to provide
such Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code are generally exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's federal income tax liability.
The foregoing discussion relates solely to United States federal income
tax law as applicable to "U.S. persons,"i.e., U.S. citizens and residents and
U.S. domestic corporations, partnerships, trusts and estates. Shareholders who
are not U.S. persons should consult their tax advisers regarding the U.S. and
non-U.S. tax consequences of ownership of shares of the Funds, including the
fact that such a shareholder may be subject to U.S. withholding tax at a rate of
30% (or at a lower rate under an applicable U.S. income tax treaty) on amounts
constituting ordinary income from U.S. sources, including ordinary dividends
paid by the Funds.
Tax Information Relating to Fund Investments
The Funds will recognize gain or loss on futures contracts, options,
and forward currency contracts when realized by entering into a closing
transaction or by exercise. In addition, if a Fund holds such contracts and
options at the end of its taxable year, unrealized gain or loss on such
contracts is taken into account at the then current fair market value thereof
under a special "marked-to-market, 60/40 system," and such gain or loss is
recognized for tax purposes. The gain or loss from such contracts and options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by a
Fund in a subsequent sale or other disposition of such contracts will be
adjusted to reflect any capital gain or loss taken into account by the Fund in a
prior year as a result of the constructive sale under the "marked-to-market,
60/40 system." Notwithstanding the rules described above, with respect to
certain futures or forward currency contracts, a Fund may make an election that
will have the effect of exempting all or a part of those identified contracts
from being treated for federal income tax purposes as sold on the last business
day of the Fund's taxable year. All or part of any loss realized by a Fund on
any closing of a contract may be deferred until all of the Fund's offsetting
positions with respect to the futures contract are closed.
Code Section 988 may also apply for forward currency contracts. Under
Section 988, each foreign currency gain or loss is generally computed separately
and treated as ordinary income or loss. In the case of overlap between Sections
1256 and 988, special provisions determine the character and timing of any
income, gain or loss. The Funds engaging in forward currency contracts will
attempt to monitor Section 988 transactions to avoid an adverse tax impact.
Sales of forward currency contracts which are intended to hedge against
a change in the value of securities or currencies held by a Fund may affect the
holding period of such securities or currencies and, consequently, the nature of
the gain or loss on such securities or currencies upon distribution.
It is expected that any net gain realized from the closing out of
forward currency contracts will be considered gain from the sale of securities
or currencies and therefore be qualifying income for purposes of the 90% of
gross income from qualified sources requirement, as discussed above. In order to
avoid realizing excessive gains on securities or currencies held less than three
months, a Fund may be required to defer the closing out of forward currency
contracts beyond the time when it would otherwise be advantageous to do so. It
is expected that unrealized gains on forward currency contracts, which have been
open for less than three months as of the end of a Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on securities or
currencies held less than three months for purposes of the 30% test, as
discussed above.
Under the Code, a Fund's taxable income for each year will be computed
without regard to any net foreign currency loss attributable to transactions
after October 31, and any such net foreign currency loss will be treated as
arising on the first day of the following taxable year.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Funds may refer to
"average annual total return" and "cumulative total return" and, with respect to
the Fixed Income Funds only, "yield" and "current distribution rate." These
amounts are calculated as described below. Applicable performance information is
provided solely for the Mid Cap Fund since none of the other Funds had commenced
operations as of the date of this Statement of Additional Information.
Yield
Yield is computed by dividing the net investment income per share
deemed earned during the computation period by the maximum offering price per
share on the last day of the period, according to the following formula:
6
YIELD = 2(((a-b) + 1) - 1)
---
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
Average Annual Total Return
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment made at the beginning
of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
Cumulative Total Return
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
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.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The cumulative total return for Mid Cap Fund from inception (September
2, 1997) to October 31, 1997 was (3.10%). The adviser has paid certain expenses
of the Mid Cap Fund, thereby increasing cumulative total return. These fees and
expenses may or may not be reimbursed or paid in the future in the advisers
discretion. Absent any voluntary expense reimbursements or fee waivers, the
cumulative total return for Mid Cap Fund from inception (September 2, 1997) to
October 31, 1997 was (3.60%).
Distribution Rate
A Fund's current distribution rate as of a specified date is calculated
by determining the amount of distributions that would have been paid over the
twelve-month period ending on such date to the holder of one hypothetical Fund
share purchased at the beginning of such period, and dividing such amount by the
current offering price per share.
REDEMPTIONS
A signature guarantee is required if a redemption: (1) exceeds $50,000
(unless it is being wired to a pre-authorized bank account, in which case a
guarantee is not required), (2) is to be paid to someone other than the
registered shareholder or (3) is to be mailed to an address other than the
address of record or wired to an account other than the pre-authorized bank or
brokerage account. On joint account redemptions, each signature must be
guaranteed. A signature guarantee may not be provided by a notary public. Please
contact the Adviser for instructions as to what institutions constitute eligible
signature guarantors. The Underwriter may waive certain of these redemption
requirements at its own risk, but also reserves the right to require signature
guarantees on all redemptions, in contexts perceived by the Underwriter to
subject a Fund to an unusual degree of risk.
ADDITIONAL INFORMATION
Organizational costs incurred by the Company, if any, in connection
with its start-up and initial registration will be amortized over 60 months on
an inverse acceleration (sum-of-the-years-digits) basis beginning on the date of
each Fund's initial effective date. If the Adviser redeems any or all of its
shares of any Fund prior to the end of such Fund's 60-month amortization period,
the redemption proceeds will be reduced by its pro rata portion of such Fund's
unamortized organizational costs. If a Fund liquidates prior to the date such
costs are fully amortized, the Adviser will bear all unamortized organizational
costs of such Fund.
Custodian; Counsel; Independent Auditors
First Trust National Association, 180 East Fifth Street, St. Paul,
Minnesota 55101, acts as custodian of the Funds' assets and portfolio
securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, serves as counsel for the Funds.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as the Funds' independent auditors.
Financial Statements
The audited financial statements of the Funds for the period ended
October 31, 1997, are incorporated herein by reference from the annual report of
each Fund as filed with the Securities and Exchange Commission. Please call
800-277-3862 to obtain a copy of the most recent annual report at no charge.
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 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 a Fund may demand a regular meeting of shareholders of a
Fund by written notice of demand given to the chief executive officer or the
chief financial officer of the Fund. Within ninety days after receipt of the
demand, a regular meeting of shareholders must be held at the expense of the
fund. Additionally, the 1940 Act requires shareholder votes for all amendments
to fundamental investment policies and restrictions and for all investment
advisory contracts and amendments thereto.
Limitation of Director Liability
Under Minnesota law, each director of the Company owes certain
fiduciary duties to each Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances). Minnesota corporations are authorized to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of the fiduciary duty of "care". Minnesota law does
not, however, permit a corporation to eliminate or limit the liability of
directors (i) for any breach of the directors' duty of "loyalty" to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for
authorizing a dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions of Minnesota
securities law, or (iv) for any transaction from which the directors derived an
improper personal benefit. The Articles of Incorporation of the Company limit
the liability of the Company'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 Act prohibits any provisions which purport to
limit the liability of directors arising from such directors' willful
misfeasance, bath faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers). Minnesota law does not permit elimination or limitation of
the availability of equitable relief, such as injunctive or rescissionary
relief. Further, Minnesota law does not permit elimination or limitation of a
director's liability under the 1933 Act or the Securities Exchange Act of 1934,
and it is uncertain whether and to what extent the elimination of monetary
liability would extend to violations of duties imposed on directors by the 1940
Act and the rules and regulations adopted thereunder.
Organization and Capitalization of the Funds
The Fund's fiscal year ends on October 31 of each year.
The Articles of Incorporation of the Company were amended and restated
on November 23, 1993 to, among other things, change the name of the Company from
Voyageur Money Market Fund, Inc. to Voyageur Mutual Funds IV, Inc. and were
amended and restated on January 20, 1995 to change the Company name to VAM
Institutional Funds, Inc.
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
Standard & Poor's Ratings Services -- A brief description of the
applicable Standard & Poor's Ratings Services (S&P) rating symbols and their
meanings (as published by S&P) follows.
An S&P corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
1. Long-term bonds.
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small
degree.
A Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB Debt rated 'BB,' 'B,' 'CCC,' 'CC' and 'C' is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
'BB' indicates the lowest degree of speculation and 'C' the highest
degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties
of exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The 'B'
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BB' or 'BB-' rating.
2. Commercial Paper.
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
165 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The Funds may invest in:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designation 1, 2, and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated "A-1."
Moody's Investors Service -- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows.
1. Long-term bonds.
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e. they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future can be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Note: Those bonds in the above groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa1, A1, Baa1,
Ba1, and B1.
2. Commercial paper.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers.
The Funds may invest in:
Issuers rated Prime-1 (or related supporting institutions)
have a superior capacity for repayment of short-term promissory
obligations.
Issuers rated Prime-2 (or related supporting institutions)
have a strong capacity for repayment of short-term promissory
obligations.
- --------------------------------------------------------------------------------
PART B
VAM INSTITUTIONAL FUNDS, INC.
VAM FINANCIAL INSTITUTIONS INTERMEDIATE DURATION PORTFOLIO
VAM FINANCIAL INSTITUTIONS CORE PORTFOLIO
Statement of Additional Information
Dated February 26, 1998
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus of the Funds dated February
26, 1998. A copy of the Prospectus or this Statement of Additional Information
may be obtained free of charge by contacting the Funds at 90 South Seventh
Street, Suite 4300, 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........................................ B-7
The Investment Adviser, Sub-Adviser and Underwriter ................... B-10
Net Asset Value and Public Offering Price.............................. B-14
Taxes .............................................................. B-14
Performance Comparisons................................................ B-15
Redemptions............................................................ B-17
Additional Information................................................. B-18
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 February 26, 1998, and, if given or made,
such information or representations may not be relied upon as having been
authorized by the Funds.
The delivery of this Statement of Additional Information at any time
shall not imply that there has been no change in the affairs of the Funds since
the date hereof.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions of VAM Financial
Institutions Intermediate Duration Portfolio ("Intermediate Duration Portfolio")
and VAM Financial Institutions Core Portfolio ("Core Portfolio") (collectively,
the "Funds") are set forth in the Prospectus. Certain additional investment
information is set forth below. All capitalized terms not defined herein have
the same meanings as set forth in the Prospectus.
On April 11, 1997, shareholders of each of Voyageur Financial
Institutions Intermediate Duration Portfolio and Voyageur Financial Institutions
Core Portfolio, each a series of Voyageur Funds, Inc., approved an Agreement and
Plan of Reorganization pursuant to which all the assets of Voyageur Financial
Institutions Intermediate Duration Portfolio would be acquired by a new fund,
VAM Financial Institutions Intermediate Duration Portfolio and all the assets of
Voyageur Financial Institutions Core Portfolio would be acquired by a new fund,
VAM Financial Institutions Core Portfolio, each a newly formed series of VAM
Institutional Funds, Inc. In this Statement of Additional Information, certain
performance and financial information is provided for the Funds for periods
prior to May 1, 1997. Such information relates to the Voyageur Financial
Institutions Intermediate Duration Portfolio and Voyageur Financial Institutions
Core Portfolio (the "predecessor VFI Funds"), the predecessors of the Funds
prior to the reorganization.
Government Guaranteed Mortgage-Related Securities
As set forth in the Prospectus, the Funds will invest solely in U.S.
Treasury bills, notes and bonds and other securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("U.S. Government
Securities") and repurchase agreements fully secured by U.S. Government
Securities. Included in the U.S. Government Securities the Funds may purchase
are pass-through securities and collateralized mortgage obligations ("CMOs").
Mortgages backing these securities purchased by the Funds include, among others,
conventional 30-year fixed rate mortgages, graduated payment mortgages, 15-year
mortgages and adjustable rate mortgages. The current issuers and guarantors of
mortgage-related securities in which the Funds may invest are the Government
National Mortgage Association, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Association. A description of the mortgage-related
securities in which the Funds may invest is contained in the Prospectus.
Additional information with respect to these mortgage-related securities is set
forth below.
GNMA Pass-Through Securities. The Government National Mortgage
Association ("GNMA") issues mortgage-backed securities ("GNMA Certificates")
which evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that the Funds purchase are the "modified pass-through" type, which
entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the United States. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that the Fund has
purchased the certificates at a premium in the secondary market.
FHLMC Pass-Through Securities. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created in 1970 through enactment of Title III of the
Emergency Home Finance Act of 1970. Its purpose is to promote development of a
nationwide secondary market in conventional residential mortgages.
FHLMC issues two types of mortgage pass-through securities ("FHLMC
Certificates"), mortgage participation certificates ("PCS") and guaranteed
mortgage certificates ("GMCs"). PCS resemble GNMA Certificates in that each PCS
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FHLMC guarantees timely monthly payment of interest on
PCS and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semiannually and return principal once a
year in guaranteed minimum payments. The expected average life of these
securities is approximately ten years. The FHLMC guarantee is not backed by the
full faith and credit of the United States.
FNMA Pass-Through Securities. The Federal National Mortgage Association
("FNMA") was established in 1938 to create a secondary market in mortgages
insured by the FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA
Certificates" ). FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of interest
and principal on FNMA Certificates. The FNMA guarantee is not backed by the full
faith and credit of the United States.
Adjustable Rate Mortgage Securities
Adjustable Rate Mortgage Securities ("ARMS") are mortgage-related
securities that, unlike fixed-rate mortgage securities, have periodic
adjustments in the coupons on the underlying mortgages. The interest rates on
ARMS are reset at periodic intervals (generally one year or less) to an
increment over some predetermined interest rate index. There are two main
categories of indexes: those based on U.S. Treasury securities and those derived
from a calculated measure such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indexes include the one-year and five-year
constant maturity Treasury note rates, the three-month Treasury bill rate, the
180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds Index, the National Median Cost of
Funds, the one-month or three-month London Interbank Offered Rate ("LIBOR"), the
prime rate of a specific bank, or commercial paper rates. Some indices, such as
the one-year constant maturity Treasury note rate, closely mirror changes in
market interest rate levels. Others, such as the 11th District Home Loan Bank
Cost of Funds Index (often related to ARMS issued by FNMA), tend to lag changes
in market rate levels and tend to be somewhat less volatile. The investment
adviser or sub-adviser of a Fund will seek to diversify Fund investments in ARMS
among a variety of indices and reset periods so that such Fund is not at any one
time unduly exposed to the risk of interest rate fluctuations. In selecting a
type of ARMS for investment, the investment adviser or sub-adviser will also
consider the liquidity of the market for such ARMS.
The underlying adjustable rate mortgages which back ARMS in which the
Funds invest will frequently have caps and floors which limit the maximum amount
by which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
adjustable rate mortgage loans restrict periodic adjustments by limiting changes
in the borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative amortization;
i.e., an increase in the balance of the mortgage loan.
ARMS, like other mortgage-related securities, differ from conventional
bonds in that principal is paid back over the life of the ARMS rather than at
maturity. As a result, the holder of the ARMS receives monthly scheduled
payments of principal and interest, and may receive unscheduled principal
payments representing prepayments on the underlying mortgages. When the holder
reinvests the payments and any unscheduled prepayments of principal it receives,
it may receive a rate of interest which is lower than the rate on the existing
ARMS. For this reason, ARMS are less effective than longer-term debt securities
as a means of "locking-in" long-term interest rates.
ARMS, while having less risk of price decline during periods of rapidly
rising rates than other investments of comparable maturities, will have less
potential for capital appreciation due to the likelihood of increased
prepayments of mortgages as interest rates decline. In addition, to the extent
ARMS are purchased at a premium, mortgage foreclosures and unscheduled principal
prepayments will result in some loss of the holders' principal investment to the
extent of the premium paid. On the other hand, if ARMS are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which, when distributed to shareholders, will be taxable
as ordinary income.
High Risk Mortgage Securities
As set forth in the Prospectus, neither Fund will invest any of its
assets in mortgage-related securities that are considered "high risk" under
applicable supervisory policies of the Office of the Comptroller of the Currency
(the "OCC"). After purchase of a non high-risk security, a Fund will determine
no less frequently than annually that such security remains outside the
high-risk category. In OCC Banking Circular 228 (Rev.) (January 10, 1992), the
OCC defined "high-risk mortgage security" as any mortgage derivative product
that at the time of purchase, or at a subsequent testing date, meets any of the
following three tests:
1. Average Life Test. The mortgage derivative product has an expected
weighted average life greater than 10.0 years.
2. Average Life Sensitivity Test. The expected weighted average life of
the mortgage derivative product:
a. Extends by more than 4.0 years, assuming an immediate and
sustained parallel shift in the yield curve of plus 300 basis points,
or
b. Shortens by more than 6.0 years, assuming an immediate and
sustained parallel shift in the yield curve of minus 300 basis points.
3. Price Sensitivity Test. The estimated change in the price of the
mortgage derivative product is more than 17%, due to an immediate and sustained
parallel shift in the yield curve of plus or minus 300 basis points.
Examples of certain "high-risk mortgage securities" include "IO" and "PO"
classes of stripped mortgage- backed securities, inverse floating CMOs and
certain zero coupon Treasury securities.
Repurchase Agreements
Each Fund may invest in repurchase agreements. The Funds' custodian
will hold the securities underlying any repurchase agreement or such securities
will be part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest),
the respective Fund will promptly receive additional collateral (so the total
collateral is an amount at least equal to the repurchase price plus accrued
interest). In entering into repurchase agreements, the Funds will comply with
the standards set forth by the OCC with respect to bank investments in
repurchase agreements. Accordingly, the Funds will enter into repurchase
agreements only with the primary reporting dealers that report to the Federal
Reserve Bank of New York or with banks that are among the 100 largest United
States commercial banks. The Board of Directors has established procedures,
which are periodically reviewed by the Board, pursuant to which a Fund's adviser
or sub-adviser, as appropriate, will monitor the creditworthiness of the banks
and dealers with which the Fund enters into repurchase agreement transactions.
Reverse Repurchase Agreements
Each Fund may engage in "reverse repurchase agreements" with banks and
securities dealers. At the time a Fund enters into a reverse repurchase
agreement, cash or U.S. Government Securities having a value sufficient to make
payments for the securities to be repurchased will be segregated, and will be
maintained throughout the period of the obligation. When a Fund enters into a
reverse repurchase agreement, either the securities purchased with the funds
obtained from the transaction or the securities collateralizing the transaction
will have a maturity date not later than the settlement date for the reverse
repurchase transaction.
When-Issued and Forward Commitment Securities
Each Fund may purchase securities offered on a "when-issued" basis and
may purchase or sell securities on a "forward commitment" basis. When a Fund
purchases securities on a when-issued or forward commitment basis, it will
maintain in a segregated account with its custodian cash or liquid high-grade
debt obligations having an aggregate value equal to the amount of such purchase
commitments until payment is made; a Fund will likewise segregate securities it
sells on a forward commitment basis.
Temporary Investments
To the extent set forth in the Prospectus, the Funds may invest in
short-term money market securities that are obligations of the U.S. Government
and its agencies and instrumentalities. Securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities that mature within 397 days
are considered money market securities for purposes of the Funds' investment
policies.
Investment Restrictions
Each Fund has adopted the following investment restrictions which,
together with the investment objective of such Fund, cannot be changed without
approval by holders of a majority of the outstanding voting shares of such Fund.
As defined in the 1940 Act, this means the lesser of the vote of (a) 67% of the
shares of such Fund at a meeting where more than 50% of the outstanding shares
of such Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of such Fund.
1. Neither Fund will operate in such a manner that it would no longer
qualify as a "diversified" management investment company, as defined under
Section 5 of 1940 Act. In connection therewith, neither Fund will, with respect
to 75% of its total assets, purchase any securities (other than obligations
issued or guaranteed by the U.S. Government or its agencies and
instrumentalities) if, as a result, more than 5% of the Fund's total assets
would then be invested in the securities of a single issuer or if, as a result,
the Fund would hold more than 10% of the outstanding voting securities of any
single issuer, or each Fund will otherwise limit its investments as required in
order to qualify as a "diversified" management investment company as defined
under Section 5 of the 1940 Act.
2. Neither Fund will concentrate 25% or more of the value of its total
assets in any one industry; provided, however, that there is no limitation with
respect to investments in obligations issued or guaranteed by the U.S.
Government or its agencies and instrumentalities and repurchase agreements
secured thereby.
3. Neither Fund will make loans, except through the purchase of
fixed-income obligations in which such Fund may invest consistent with its
investment objective and policies and through repurchase agreements.
4. Neither Fund will underwrite the securities of other issuers except
to the extent that, in connection with the disposition of its portfolio
securities, the Fund may be deemed to be an underwriter.
5. Neither Fund will borrow money (provided that the Funds may enter
into reverse repurchase agreements) except from banks for temporary or emergency
purposes and then only in an amount not exceeding one-third of the value of such
Fund's total assets. Neither Fund will purchase portfolio securities while
outstanding borrowings (other than fully covered reverse repurchase agreements)
exceed 5% of the value of the Fund's total assets. In order to secure any
permitted borrowings under this section, each Fund may pledge, mortgage or
hypothecate its assets.
6. Neither Fund will issue any senior securities (as defined in the
1940 Act), except as set forth in investment restriction number 5 above, and
except to the extent that purchasing or selling securities on a when-issued or
forward commitment basis, or using similar investment strategies may be deemed
to constitute issuing a senior security.
7. Neither Fund will invest in commodities, commodities futures
contracts or real estate.
Each Fund has adopted the following operating (i.e., non-fundamental)
investment restrictions which may be changed by the Board of Directors at any
time without shareholder approval.
Neither Fund will:
1. Purchase the securities of any issuer with less than three years'
continuous operation if, as a result, more than 5% of the value of its total
assets would be invested in securities of such issuers.
2. Purchase illiquid securities.
3. Purchase or retain securities of any issuer if the officers and
directors of the Fund or its investment adviser or any sub-adviser, owning
beneficially more than 1% of the securities of such issuer, together own
beneficially more than 5% or such issuer's securities.
4. Invest in warrants.
5. Invest in interests in oil, gas or other mineral exploration or
development programs or leases although it may invest in securities of issuers
which invest in or sponsor such programs.
6. Invest in the securities of an investment company, except to the
extent permitted by the 1940 Act and except as part of a merger, consolidation
or acquisition of assets.
7. Purchase any securities on margin except that each Fund may obtain
such short-term credits as may be necessary for the clearance of purchases and
sales of securities.
8. Invest for the purpose of exercising control or management of
another issuer.
9. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open it owns an
equal amount of such securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable for securities of
the same issue as, and equal in amount to, the securities sold short.
10. Write, purchase or sell puts, calls or combinations thereof.
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.
Diversification
As indicated by the first fundamental investment restriction set forth
above, each Fund operates as a "diversified" fund. Each Fund intends to conduct
its operations so that it will comply with diversification requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and
qualify as a "regulated investment company." In order to qualify as a regulated
investment company, each Fund must limit its investments so that, at the close
of each quarter of the taxable year, with respect to at least 50% of its total
assets, not more than 5% of its total assets will be invested in the securities
of a single issuer. In addition, the Code requires that not more than 25% in
value of each Fund's total assets may be invested in the securities of a single
issuer at the close of each quarter of the taxable year.
Portfolio Turnover
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities by a Fund to the average monthly value of
portfolio securities owned by the Fund, not including securities maturing in
less than 12 months. A 100% portfolio turnover rate would occur, for example, if
the lesser of the value of purchases or sales of a Fund's portfolio securities
for a particular year were equal to the average monthly value of the portfolio
securities owned by the Fund during the year. For the one-year period ended
October 31, 1997, the portfolio turnover rates for the Core Fund and
Intermediate Fund were 437.48% and 192.74%, respectively. Each 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 subadviser. Frequent
portfolio trades may result in higher transaction and other costs for a 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.
<TABLE>
<CAPTION>
Principal Occupation(s) During
Name, Address, and Age Position Past Five Years and Other Affiliations
- ---------------------- ------- ----------------------------------------
<S> <C> <C>
Richard F. McNamara, 64 Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle #200 Minneapolis-based holding company consisting of
Minneapolis, Minnesota 55439 seventeen companies in industrial plastics, sheet 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.
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, 77 Director Special Assistant to the President of the University of
University of Minnesota Minnesota.
Foundation
1300 South Second Street
Minneapolis, Minnesota 55454
Thomas F.Madison, 62 Director President and CEO of MLM Partners, Inc. since January
200 South Fifth Street 1993; previously, Vice Chairman-- Office of the CEO,
Suite 2100 The Minnesota Mutual Life Insurance Company from
Minneapolis, Minnesota 55402 February to September 1994; 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.
Michael E. Dougherty*, 57 Director Chairman and Director of Dougherty
90 South Seventh Street Financial Group LLC ("DFG") since 1997; previously,
Suite 4300 Chairman, Director and Chief Executive Officer of the
Minneapolis, Minnesota 55402 predecessor of DFG since its inception; Director of the
Adviser since 1997; previously, Director of the predecessor
of the Adviser since its inception; Director of the
Underwriter since 1997; previously, Director of the
predecessor of the Distributor since its inception.
John G. Taft, 43 President Director of the Adviser since 1998; previously Chief
90 South Seventh Street Executive Officer and Director of the Adviser from 1993 to 1997;
Suite 4300 President, Chief Executive Officer and Director of the
Minneapolis, Minnesota 55402 Distributor since 1997; previously, Director of the
predecessor of the Adviser and the Distributor from 1993
to 1997; President of the predecessor of the Distributor
from 1991 to 1995; Management committee member of the
Adviser from 1991 to 1993.
James C. King, 57 Vice Director of the Adviser since 1998; Senior Equity 90
South Seventh Street President Portfolio Manager of the Adviser since 1997;
Suite 4300 previously, Senior Equity Portfolio Manager of the
Minneapolis,Minnesota 55402 predecessor of the Adviser from 1993 to 1997; Director
of the Adviser and the Distributor from 1993 to 1995.
Steven P. Eldredge, 42 Vice Senior Tax Exempt Portfolio Manager of the Adviser
90 South Seventh Street President since 1997; previously, Senior Tax Exempt
Suite 4300 Portfolio Manager of the predecessor of the Adviser
Minneapolis, Minnesota 55402 from 1995 to 1997; portfolio manager for ABT Mutual
Funds, Palm Beach, Florida, from 1989 to 1995.
Michelle M.Sandberg, 34 Treasurer Director, Vice President and Treasurer of the Adviser
90 South Seventh Street since 1997; Director, Vice President and Treasurer of
Suite 4300 DFG since 1997; previously, Vice President and
Minneapolis, Minnesota 55402 Controller of the predecessor of DFG and the
predecessor of the Distributor from 1995 to 1997,
Controller of the predecessor of DFG and the predecessor
of the Distributor from 1990 to 1995.
Thomas J. Abood, 34 Secretary Senior Vice President and General Counsel of
90 South Seventh Street Dougherty Financial Group, Inc. (since 1995); Senior
Suite 4300 Vice President (since 1995) of the Adviser, the
Minneapolis, Minnesota 55402 Distributor and Voyageur Companies, Inc. (since 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.
</TABLE>
* Denotes Directors who are interested persons (as that term is defined
by the 1940 Act) of the Adviser and the Fund.
The Company does not compensate its officers. Each director (who is not
an employee of the Adviser or Sub-Adviser or any of their 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.
The following table sets forth the aggregate compensation received by
each director from the Company during the fiscal year ended October 31, 1997, as
well as the total compensation received by each director from the Company and
all other registered investment companies for which the Adviser acted as
investment advisor or sub-adviser during the calendar year ended December 31,
1997 (the "Fund Complex"). For the year ended December 31, 1997, the Fund
Complex consisted of 1 open-end investment company comprising 8 series or funds.
On April 30, 1997, the investment advisory contracts for other investment
companies previously affiliated with the Adviser were assigned to a new adviser
and are not included in the information for the following table.
Aggregate Compensation Total Compensation
Director from the Company from Fund Complex
- -------- ---------------- -------------------
Richard F. McNamara $677 $1,000
Thomas F. Madison $677 $1,000
James W. Nelson $677 $1,000
Robert J. Odegard $677 $1,000
THE INVESTMENT ADVISER, SUB-ADVISER AND UNDERWRITER
The Investment Adviser
Marquette Trust Company, N. A. ("Marquette") has been retained under an
investment advisory agreement (the "Advisory Agreement") with the Company to act
as investment adviser to the Funds, subject to the authority of the Board of
Directors.
The Company, on behalf of the Funds, has contracted with Marquette for
investment advice, research and management. Pursuant to the Investment Advisory
Agreement, Marquette has the sole and exclusive responsibility for the
management of each Fund's portfolio and the making and execution of all
investment decisions for such Fund subject to the objectives and investment
policies and restrictions of the Funds and subject to the supervision of the
Company's Board of Directors. However, Marquette is authorized to retain a
sub-adviser to assist in furnishing investment advice to the Company. Marquette
is responsible for monitoring compliance by such sub-adviser with the investment
policies and restrictions of the respective Funds and with such other
limitations or directions as the Board of Directors of the Company may from time
to time prescribe. The investment adviser furnishes, at its own expense, office
facilities, equipment and personnel for servicing the investments of the Funds.
Each Fund pays a monthly investment advisory and management fee
equivalent on an annual basis to .20% of its average daily net assets subject to
a performance adjustment of +/- .15%. For the fiscal period from March 27, 1996
(commencement of operations) to October 31, 1996, and the fiscal year ended
October 31, 1997, Intermediate Duration Portfolio paid $36,234 and $51,291 and
Core Portfolio paid $40,795 and $81,118 in investment advisory fees. There was
no performance adjustment made during the fiscal period ended October 31, 1996.
For the fiscal year ended October 31, 1997, the performance adjustment was minus
$11,219 and $13,913 for Intermediate Duration Portfolio and Core Portfolio,
respectively.
The Investment Advisory Agreement continues from year to year only if
approved annually (a) by the Board of Directors of the Company or by vote of a
majority of the outstanding voting securities of each Fund and (b) by vote of a
majority of Directors of the Company who are not parties to the Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
such party, cast in person at a meeting of the Board of Directors called for the
purpose of voting on such approval. The Investment Advisory Agreement may be
terminated by either party on 60 days' notice to the other party and terminates
automatically upon its assignment. The Investment Advisory Agreement also
provides that amendments to the Agreement may be effected if approved by the
Board of Directors of the Company (including a majority of the Company's
disinterested directors), unless the 1940 Act requires that any such amendment
must be submitted for approval by the shareholders and that all proposed
assignments of such agreement are subject to approval by the Company's Board of
Directors (unless the 1940 Act otherwise requires shareholder approval thereof).
The Sub-Adviser
Voyageur Asset Management LLC ("VAM LLC") acts as the sub-adviser to
the Funds pursuant to a Sub-Advisory Agreement with Marquette. Under the
Sub-Advisory Agreement, VAM LLC provides the Funds with investment advice and
portfolio management. The Sub-Advisory Agreement requires VAM LLC, among other
things, to report to Marquette or the Board of Directors regularly at such times
and in such detail as Marquette or the Board of Directors may from time to time
request in order to permit Marquette and the Board of Directors to determine the
adherence of the Funds to their investment objectives, policies and
restrictions. The Sub-Advisory Agreement also requires VAM LLC to provide all
office space, personnel and facilities necessary and incident to VAM LLC's
performance of its services under the Sub-Advisory Agreement.
The fees paid by Marquette to VAM LLC as sub-adviser for the fiscal
period from March 27, 1996 (commencement of operations of the predecessory
Funds) through October 1996, and the fiscal year ended October 31, 1997, were
$18,117 and $25,645 for Intermediate Duration Portfolio and $20,397, and
$40,559, for Core Portfolio. Such fees are payable out of the advisory fees
received by Marquette for the same period and are not in addition to such
amounts.
The Underwriter
Dougherty Summit Securities LLC (the "Underwriter") is the principal
distributor of each Fund's shares. With regard to the Underwriter, John G. Taft
is President and a director and Mr. Abood is secretary.
The Underwriter receives a monthly service fee from each Fund equal, on
an annual basis, to .05% of such Fund's average daily basis. For the fiscal
period from March 27, 1996 (commencement of operations of the predecessor Funds)
to October 31, 1996 and the fiscal year ended October 31, 1997, Intermediate
Duration Portfolio paid service fees of $9,058 and $15,628 and Core Portfolio
paid $10,119, and $23,758 to the Underwriter.
Administrative Services Agreement
VAM LLC also acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement (the "Administrative Services Agreement") between VAM LLC and
the Company. Pursuant to the Administrative Services Agreement, VAM LLC provides
each Fund all dividend disbursing, transfer agency, administrative and
accounting services required by such Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of each Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of such Fund's
shares or the receipt of redemption requests with respect to such Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon such Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of such Fund to be received by
each shareholder of such Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of such Fund as such Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of such Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
such Fund and VAM LLC may from time to time agree upon. Pursuant to the
Administrative Services Agreement, VAM LLC also provides such regulatory
reporting and compliance related services and tasks for the Company or the Funds
as the Company may reasonably request.
As compensation for these services, each Fund pays VAM LLC a monthly
fee equivalent on an annual basis to .10% of each Fund's average daily net
assets. For purposes of calculating average daily net assets, as such term is
used in the Administrative Services Agreements, each Fund's net assets equal its
total assets minus its total liabilities. Each Fund also reimburses VAM LLC for
its out-of-pocket expenses in connection with VAM LLC's provision of services
under such Fund's Administrative Services Agreement. For the fiscal period from
March 27, 1996 (commencement of operations of the predecessor Funds) to October
31, 1996, and the fiscal year ended October 31, 1997, Intermediate Duration
Portfolio paid $18,118 and $31,255, and Core Portfolio paid $20,397 and $47,516
in administrative services fees.
The Administrative Services Agreement is renewable from year to year if
the Company's directors (including a majority of the Company's disinterested
directors) approve the continuance of the Agreement. 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 of the
Company (including a majority of the disinterested directors) and that all
proposed assignments of such Agreement are subject to approval by the Company's
Board of Directors.
Expenses of the Funds
Marquette, VAM LLC and the Underwriter reserve the right to voluntarily
waive their fees in whole or part and/or to voluntarily reimburse certain other
of the Fund's expenses. Any such waiver or reimbursement, however, will be in
their sole discretion and may be lifted or reinstated at any time. For the
fiscal year ended October 31, 1997, VAM LLC voluntarily reimbursed $3,697 and
$2,789 for Intermediate Duration Portfolio and Core Portfolio, respectively.
All costs and expenses (other than those specifically referred to as
being borne by Marquette, VAM LLC or the Underwriter) incurred in the operation
of each Fund are borne by such Fund. These expenses include, among others, fees
of the directors who are not employees of the investment adviser or sub-adviser
or any of their affiliates, expenses of directors' and shareholders' meetings,
including the cost of printing and mailing proxies, expenses of insurance
premiums for fidelity and other coverage, expenses of redemption of shares,
expenses of issue and sale of shares (to the extent not borne by the Underwriter
under its agreement with such Fund), expenses of printing and mailing stock
certificates representing shares of such Fund, association membership dues,
charges of such Fund's custodian, and bookkeeping, auditing and legal expenses.
Each Fund will also pay the fees and bear the expense of registering and
maintaining the registration of such Fund and its shares with the Securities and
Exchange Commission and registering or qualifying its shares under state or
other securities laws and the expense of preparing and mailing prospectuses,
reports and statements to shareholders.
Portfolio Transactions and Allocation of Brokerage
As the Funds' portfolios are composed exclusively of debt, rather than
equity securities, most of the Funds' portfolio transactions are effected with
dealers without the payment of brokerage commissions, but rather at net prices
which usually include a spread or markup. In effecting such portfolio
transactions on behalf of a Fund, such Fund's investment adviser or sub-adviser
seeks the most favorable net price consistent with the best execution. However,
frequently, such investment adviser or sub-adviser selects a dealer to effect a
particular transaction without contacting all dealers who might be able to
effect such transaction, because of the volatility of the bond market and the
desire of the investment adviser or sub-adviser to accept a particular price for
a security because the price offered by the dealer meets its guidelines for
profit, yield or both. No brokerage commissions are expected to be paid by the
Funds.
Decisions with respect to placement of a Fund's portfolio transactions
are made by such Fund's investment adviser or sub-adviser. The primary
consideration in making these decisions is efficiency in the execution of orders
and obtaining the most favorable net prices for such Fund. When consistent with
these objectives, business may be placed with broker-dealers who furnish
investment research services to the investment adviser or sub-adviser. Such
research services include advice, both directly and in writing, as to the value
of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows the investment adviser or sub-adviser to supplement its
own investment research activities and enables the investment adviser or
sub-adviser to obtain the views and information of individuals and research
staffs of many different securities firms prior to making investment decisions
for a Fund. To the extent portfolio transactions are effected with
broker-dealers who furnish research services to an investment adviser or
sub-adviser, such investment adviser or 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 Funds' investment adviser and sub-adviser have not entered into any
formal or informal agreements with any broker-dealers, nor do they maintain any
"formula" which must be followed in connection with the placement of the Funds'
portfolio transactions in exchange for research services provided the investment
adviser or sub-adviser, except as noted below. However, the investment adviser
and sub-adviser each maintains an informal list of broker-dealers, which is used
from time to time as a general guide in the placement of a Fund's business, in
order to encourage certain broker-dealers to provide the investment adviser or
sub-adviser with research services which the investment adviser or sub-adviser
anticipates will be useful to it. Because the list is merely a general guide,
which is to be used only after the primary criterion for the selection of
broker-dealers (discussed above) has been met, substantial deviations from the
list are permissible and may be expected to occur. The investment adviser and
sub-adviser will authorize the Funds to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker-dealer would have charged only if the investment adviser or sub-adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or the
investment adviser's or sub-adviser's overall responsibilities with respect to
the accounts as to which it exercises investment discretion.
The Funds will not effect any brokerage transactions in their portfolio
securities with any broker-dealer affiliated directly or indirectly with the
investment adviser or sub-adviser, unless such transactions, including the
frequency thereof, the receipt of commissions payable in connection therewith
and the selection of the affiliated broker-dealer effecting such transactions
are not unfair or unreasonable to the shareholders of the Funds. In the event
any transactions are executed on an agency basis, the investment adviser or
sub-adviser will authorize the respective Fund to pay an amount of commission
for effecting a securities transaction in excess of the amount of commission
another broker-dealer would have charged only if the investment adviser or
sub-adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the investment adviser's or sub-adviser's overall
responsibilities with respect to the Funds. If the Funds execute any
transactions on an agency basis, they will generally pay higher than the lowest
commission rates available.
In determining the commissions to be paid to a broker-dealer affiliated
with the investment adviser or sub-adviser, it is the policy of the Funds that
such commissions will, in the judgment of the investment adviser or sub-adviser,
subject to review by the Board of Directors, be both (a) at least as favorable
as those which would be charged by other qualified brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time, and (b) at least as favorable as
commissions contemporaneously charged by such affiliated broker-dealers on
comparable transactions for their most favored comparable unaffiliated
customers. While each Fund does not deem it practicable and in its best interest
to solicit competitive bids for commission rates on each transaction,
consideration will regularly be given to posted commission rates as well as to
other information concerning the level of commissions charged on comparable
transactions by other qualified brokers.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Funds may purchase securities from an underwriting
syndicate of which an affiliated broker-dealer is a member (but not directly
from such affiliated broker-dealer itself). Such conditions relate to the price
and amount of the securities purchased, the commission or spread paid and the
quality of the issuer. The rules further require that such purchases take place
in accordance with procedures adopted and reviewed periodically by the Board of
Directors of the Funds, particularly those directors who are not interested
persons of the Funds.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Company's directors may
determine, the investment adviser and sub-adviser may consider sales of shares
of the Funds as a factor in the selection of broker-dealers to execute the
Funds' securities transactions.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares,
which is equal to the net asset value per share, is summarized in the
Prospectus. The portfolio securities in which the Funds invest fluctuate in
value and hence the net asset value per share of each Fund also fluctuates. The
net asset value of each Fund's shares is determined on each day on which the New
York Stock Exchange is open, provided that the net asset value need not be
determined on days when no Fund shares are tendered for redemption and no order
for Fund shares is received. The New York Stock Exchange is not open for
business on the following holidays (or on the nearest Monday or Friday if the
holiday falls on a weekend): New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving
Day and Christmas Day.
The portfolio securities in which each Fund invests fluctuate in value
and hence the net asset value per share of each Fund also fluctuates. On October
31, 1997, the net asset value per share for each Fund was calculated as follows.
Intermediate Duration Portfolio
Net Assets ($34,921,969) = Net Asset Value Per Share ($10.04)
-------------------------------
Shares Outstanding (3,479,123)
Core Portfolio
Net Assets ($57,650,018) = Net Asset Value Per Share ($10.20)
------------------------
Shares Outstanding (5,649,349)
TAXES
To qualify under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") for tax treatment as a regulated investment company, each
Fund must, among other things: (a) distribute to its shareholders at least 90%
of its investment company taxable income (as that term is defined in the Code
determined without regard to the deduction for dividends paid) , and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. Government securities and securities of other regulated
investment companies, and other securities, with these other securities limited,
with respect to any one issuer, to an amount no greater than 5% of the Fund's
total assets and no greater than 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the market value of the Fund's total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of other regulated investment companies).
Each Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, each Fund must declare dividends by the end of the calendar year
representing 98% of the Fund's ordinary income for the calendar year and 98% of
its capital gain net income (long-term, mid-term and short-term gains) for the
12-month period ending on October 31 of such year. For purposes of this
requirement, any income with respect to which a Fund has paid corporate income
tax is deemed to have been distributed. Each Fund intends to make sufficient
distributions each year to avoid the payment of the excise tax.
When shares of a Fund are sold or otherwise disposed of, the Fund
shareholder will realize a capital gain or loss equal to the difference between
the purchase price and the sale price of the shares disposed of, if, as is
usually the case, the Fund shares are a capital asset in the hands of the Fund
shareholder. In addition, pursuant to a special provision in the Code, if Fund
shares with respect to which a long-term capital gain distribution has been made
are held for six months or less, any loss on the sale or other disposition of
such shares will be a long-term capital loss to the extent of such long-term
capital gain distribution. Certain deductions otherwise allowable to financial
institutions and property and casualty insurance companies will be eliminated or
reduced by reason of the receipt of certain exempt-interest dividends.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Pursuant to the Code, distributions of net investment income by a Fund
to a shareholder who, as to the U.S., is a nonresident alien individual,
nonresident alien fiduciary of a trust or estate, foreign corporation, or
foreign partnership (a "foreign shareholder") will generally be subject to U.S.
withholding tax (at a rate of 30% or lower treaty rate). Withholding will not
apply if a dividend paid by the Fund to a foreign shareholder is "effectively
connected" with a U.S. trade or business of such shareholder, in which case the
reporting and withholding requirements applicable to U.S. citizens or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding but, in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. income tax at a rate of 30% if the individual is physically present in the
U.S. for more than 182 days during the taxable year. Each Fund will report
annually to its shareholders the amount of any withholding. It is expected that
dividends paid by the Funds will not be eligible for the 70% deduction for
dividends received by corporations because the Funds' income will not consist of
dividends paid by U.S. corporations.
The foregoing relates only to federal income taxation and is a general
summary of the federal tax law in effect as of the date of this Statement of
Additional Information.
PERFORMANCE COMPARISONS
Advertisements and other sales literature for the Funds may refer to
"yield," "average annual total return," "cumulative total return" and "current
distribution rate." These amounts are calculated as described below. Certain
performance and financial information is provided for the Funds for periods
prior to May 1, 1997. Such information relates to the Voyageur Financial
Institutions Intermediate Duration Portfolio and Voyageur Financial Institutions
Core Portfolio (the "Predecessor VFI Funds"), the predecessors of the Funds
prior to the reorganization.
Yield
Yield is computed by dividing the net investment income per share
deemed earned during the computation period by the maximum offering price per
share on the last day of the period, according to the following formula:
6
YIELD = 2 (((a-b) + 1) - 1)
---
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
For the 30-day period ended October 31, 1997, Intermediate Duration
Portfolio and Core Portfolio had yields of 6.05% and 6.16%, respectively. Absent
voluntary expense reimbursements, the 30-day yield as of October 31, 1997 would
have been 6.04% and 6.15%, for Intermediate Duration Portfolio and Core
Portfolio, respectively.
Average Annual Total Return
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
n
P (1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the
end of the period of a hypothetical $1,000
payment made at the beginning of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The average annual total returns for one year and since inception
(March 27, 1996) for the periods ended October 31, 1997, for the Funds were:
Annual Average Total Returns
1 Year Since Inception
------ ---------------
Intermediate Duration Portfolio 6.58% 6.42%
Core Portfolio 8.50% 8.00%
The Sub-Adviser has paid certain expenses of the Funds, thereby increasing total
return and yield. These fees and expenses may or may not be reimbursed or paid
in the future in the Sub-Adviser's discretion. Absent any voluntary expense
reimbursements or fee waivers, the average annual total returns for one year and
since inception (March 27, 1996) for the periods ended October 31, 1997, for the
Funds were:
Average Annual Total Returns
(absent voluntary waivers and reimbursements)
1 Year Since Inception
------ ---------------
Intermediate Duration Portfolio 6.57% 6.41%
Core Portfolio 8.49% 8.00%
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 = ERV-P
----- 100
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of
a hypothetical $1,000 payment
made at the beginning of such period; and
P = initial payment of $1,000.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
The cumulative total returns for the period from inception (March 27,
1996) to October 31, 1997 were:
Cumulative Total Returns
Cumulative (absent voluntary fee waivers
Total Returns and expense reimbursements)
------------- ---------------------------
Intermediate Duration Portfolio 10.47% 10.46%
Core Portfolio 13.11% 13.10%
Distribution Rate
A Fund's current distribution rate as of a specified date is calculated
by determining the amount of distributions that would have been paid over the
twelve-month period ending on such date to the holder of one hypothetical Fund
share purchased at the beginning of such period, and dividing such amount by the
offering price per share as of the specified date.
The current distribution rates as of fiscal year end October 31, 1997
for the Funds were:
Distribution Rate
Distribution (absent voluntary fee waivers
Rate and expense reimbursements)
------------ ---------------------------
Intermediate Duration Portfolio 6.15% 6.14%
Core Portfolio 6.47% 6.46%
Performance Comparisons
Comparative performance information may be used from time to time in
advertising each Fund's shares, including data from Lipper Analytical Services,
Inc., Morningstar, Inc. and other entities or organizations which track the
performance of investment companies. Each Fund's performance also may be
compared to the performance of its Comparison Index, if any, as described in the
Prospectus, and to the performance of the following additional unmanaged
indices: Unmanaged indices generally do not reflect deductions for
administrative and management costs and expenses.
REDEMPTIONS
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said Exchange is restricted, (c) when an
emergency exists, as a result of which disposal by the Funds of securities owned
by them is not reasonably practicable, or it is not reasonably practicable for
the Funds fairly to determine the value of their net assets, or (d) during any
other period when the Securities and Exchange Commission, by order, so permits,
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist.
A signature guarantee is required if a redemption: (1) exceeds $50,000
(unless it is being wired to a pre-authorized bank account, in which case a
guarantee is not required), (2) is to be paid to someone other than the
registered shareholder or (3) is to be mailed to an address other than the
address of record or wired to an account other than the pre-authorized bank or
brokerage account. On joint account redemptions, each signature must be
guaranteed. A signature guarantee may not be provided by a notary public. Please
contact the Underwriter for instructions as to what institutions constitute
eligible signature guarantors. The Underwriter may waive certain of these
redemption requirements at its own risk, but also reserves the right to require
signature guarantees on all redemptions, in contexts perceived by the
Underwriter to subject a Fund to an unusual degree of risk.
ADDITIONAL INFORMATION
Information regarding certain record and beneficial ownership as of
February 1, 1998, which equals or exceeds 5% of the predecessor Funds is
available without charge by calling 800-553-2143.
Counsel; Independent Auditors
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, serves as general counsel for the Funds.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as the Funds' independent auditors.
Financial Statements
The audited financial statements of the Funds for the period ended
October 31, 1997, are incorporated herein by reference from the annual report of
each Fund as filed with the Securities and Exchange Commission. Please call
800-277-3862 to obtain a copy of the most recent annual report at no charge.
Shareholder Meetings
The Company is not required under Minnesota law or under the Company's
Articles of Incorporation to hold annual or periodically scheduled regular
meetings of shareholders. Regular and special shareholder meetings are held only
at such times and with such frequency as required by law. Minnesota law and the
Company's Articles of Incorporation provide for the Board of Directors to
convene shareholder meetings when it deems appropriate. Additionally, the 1940
Act requires shareholder votes for all amendments to fundamental investment
policies and restrictions and for all investment advisory contracts and
amendments thereto.
Limitation of Director Liability
Under Minnesota law, each director of the Company owes certain
fiduciary duties to each Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances). Minnesota corporations are authorized to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of the fiduciary duty of "care". Minnesota law does
not, however, permit a corporation to eliminate or limit the liability of
directors (i) for any breach of the directors' duty of "loyalty" to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for
authorizing a dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions of Minnesota
securities law, or (iv) for any transaction from which the directors derived an
improper personal benefit. The Articles of Incorporation of each of the Funds
limits the liability of such Funds' directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the 1940 Act (which Act prohibits any provisions which purport to
limit the liability of directors arising from such directors' willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers). Minnesota law does not permit elimination or limitation of
the availability of equitable relief, such as injunctive or rescissionary
relief. Further, Minnesota law does not permit elimination or limitation of a
director's liability under the 1933 Act or the Securities Exchange Act of 1934,
and it is uncertain whether and to what extent the elimination of monetary
liability would extend to violations of duties imposed on directors by the 1940
Act and the rules and regulations adopted thereunder.
Organization and Capitalization of the Funds
Each Fund has a fiscal year end of October 31.
As described in the text of the Prospectus following the caption
"General Information," shares of the Funds are entitled to one vote per share
(with proportional voting for fractional shares) on such matters as shareholders
are entitled to vote. There will normally be no meetings of shareholders for the
purpose of electing directors, except insofar as elections are required under
the 1940 Act in the event that (i) less than a majority of the directors have
been elected by shareholders, or (ii) if, as a result of a vacancy, less than
two-thirds of the directors have been elected by the shareholders, the vacancy
will be filled only by a vote of the shareholders.
The Funds were established in 1997, each as a separate series of VAM
Institutional Funds, Inc. (the "Company"), a Minnesota corporation incorporated
in January 1985, which currently offers its shares in three series. Effective
with the close of business on April 30, 1997, Intermediate Duration Portfolio
and Core Portfolio acquired the assets and assumed all liabilities of Voyageur
Financial Institutions Intermediate Duration Portfolio and Voyageur Financial
Institutions Core Portfolio, respectively, each a series of Voyageur Funds,
Inc., in a tax-free exchange by issuing new shares. The Funds had no assets or
liabilities prior to the acquisition. All shares of each series are
non-assessable and fully transferable when issued and paid for in accordance
with the terms thereof and possess no cumulative voting, preemptive or
conversion rights. The Company's Board is empowered to issue other series of
common stock without shareholder approval.
Each share of a series has one vote irrespective of the relative net
asset value of the shares. On some issues, such as the election of Board
members, all shares of the corporation vote together as one series of such
corporation. On an issue affecting only a particular series, the shares of the
affected series vote as a separate series. One such example would be a
fundamental investment restriction pertaining to only one series. Another
example is the voting on the Investment Advisory Agreements.
The assets received by the corporation for the issue or sale of shares
of each series, and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are allocated to such series and constitute the
underlying assets of such series. The underlying assets of each series are
required to be segregated on the books of account, and are to be charged with
the expenses in respect to such series and with a share of the general expenses
of the corporation or trust. Any general expenses of the corporation not readily
identifiable as belonging to a particular series shall be allocated among the
series, based upon the relative net assets of the series at the time such
expenses were accrued.
Organizational costs incurred by the Company, if any, in connection
with its start-up and initial registration will be amortized over 60 months on
an inverse acceleration (sum-of-the-years-digits) basis beginning on the date of
each Fund's initial effective date. If the Adviser redeems any or all of its
shares of any Fund prior to the end of such Fund's 60-month amortization period,
the redemption proceeds will be reduced by its pro rata portion of such Fund's
unamortized organizational costs. If a Fund liquidates prior to the date such
costs are fully amortized, the Adviser will bear all unamortized organizational
costs of such Fund.
PART C
VAM INSTITUTIONAL FUNDS, INC.
VAM Short Duration Total Return Fund
VAM Intermediate Duration Total Return Fund
VAM Core Total Return Fund
VAM Mid Cap Stock Fund
VAM Growth Stock Fund
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements - as filed.
(b) Exhibits
1 Amended and Restated Articles of Incorporation (1)
2 Bylaws, as amended (1)
2.2 Amendment to the Bylaws (2)
3 Not applicable
4 Not applicable
5 Investment Advisory Agreement (3)
6 Distribution Agreement (4)
7 Not applicable
8 Custodian Agreement for Series B-F (3)
9 Administrative Services Agreement (3)
10 Opinion and Consent of Dorsey & Whitney LLP with respect to
Series B-F (3)
11 Consent of KPMG Peat Marwick LLP (4)
12 Not applicable
13 Not applicable
14 Not applicable
15 Not applicable
16 Calculations of Yield (4)
17 Master Power of Attorney (1)
- ----------------
(1) Incorporated by reference to Post-Effective Amendment No. 23 to the
Registrant's Registration Statement on Form N-1A filed August 1, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 26 to the
Registrant's Registration Statement on Form N-1A filed April 30, 1997.
(3) Incorporated by reference to Post-Effective Amendment No. 28 to the
Registrant's Registration Statement on Form N-1A filed July 11, 1997.
(4) Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
Voyageur Asset Management LLC serves as investment manager to VAM
Institutional Funds, Inc., an open-end investment management company which
currently offers its shares in eight series, the following four of which have
commenced investment operations:
Segall Bryant & Hamill Growth and Income Fund
VAM Financial Institutions Intermediate Duration Portfolio
VAM Financial Institutions Core Portfolio
VAM Mid Cap Stock Fund
Item 26. Number of Holders of Securities
As of January 31, 1998, there was one record owner of common shares of
the Mid Cap Fund. No information is presented for the other Funds since they
have not yet commenced operations.
Item 27. Indemnification
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons, for such expenses and liabilities, in
such manner, under such circumstances, and to such extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereinafter amended, and any rules, regulations or releases promulgated
thereunder.
The Registrant may indemnify its officers and directors and other
"persons" acting in an "official capacity" (as such terms are defined in Section
302A.521) pursuant to a determination by the board of directors or shareholders
of the Registrant as set forth in Section 302A.521, by special legal counsel
selected by the board or a committee thereof for the purpose of making such a
determination, or by a Minnesota court upon application of the person seeking
indemnification. If a director is seeking indemnification for conduct in the
capacity of director or officer of the Registrant, then such director generally
may not be counted for the purpose of determining either the presence of a
quorum or such director's eligibility to be indemnified.
In any case, indemnification is proper only if the eligibility
determining body decides that the person seeking indemnification has (a) not
received indemnification for the same conduct from any other party or
organization; (b) acted in good faith; (c) received no improper personal
benefit; (d) in the case of criminal proceedings, had no reasonable cause to
believe the conduct was unlawful; (e) reasonably believed that the conduct was
in the best interest of the Registrant, or in certain contexts, was not opposed
to the best interest of the Registrant; and (f) had not otherwise engaged in
conduct which precludes indemnification under either Minnesota or Federal law
(including, but not limited to, conduct constituting willful misfeasance, bad
faith, gross negligence, or reckless disregard of duties as set forth in Section
17(h) and (i) of the Investment Company Act of 1940).
If a person is made or threatened to be made a party to a proceeding,
the person is entitled, upon written request to the Registrant, to payment or
reimbursement by the Registrant of reasonable expenses, including attorneys'
fees and disbursements, incurred by the person in advance of the final
disposition of the proceeding, (a) upon receipt by the Registrant of a written
affirmation by the person of a good faith belief that the criteria for
indemnification set forth in Section 302A.521 have been satisfied and a written
undertaking by the person to repay all amounts so paid or reimbursed by the
Registrant, if it is ultimately determined that the criteria for indemnification
have not been satisfied, and (b) after a determination that the facts then known
to those making the determination would not preclude indemnification under
Section 302A.521. The written undertaking required by clause (a) is an unlimited
general obligation of the person making it, but need not be secured and shall be
accepted without reference to financial ability to make the repayment.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant undertakes to comply with the indemnification
requirements of Investment Company Release 7221 (June 9, 1972) and Investment
Company Release 11330 (September 2, 1980).
Item 28. Business and Other Connections of Investment Adviser
Information on the business of the Adviser is described in the section
of the Prospectus, incorporated by reference in this Registration Statement,
entitled "Management" and in the section of the Statement of Additional
Information entitled "The Investment Adviser, Sub-Adviser, Administrative
Services, Expenses and Brokerage" filed as part of this Registration Statement.
The name and principal occupations(s) during the past two fiscal years of each
director and officer of the Adviser are set forth below. The business address of
each is 90 South Seventh Street, Suite 4300, Minneapolis, Minnesota 55402.
<TABLE>
<CAPTION>
Name and Address Position with Adviser Principal Occupation(s)
<S> <C> <C>
John G. Taft Director See biographical information in
Part B of the Registration Statement.
Frank C.Tonnemaker Director, Chairman Chief Executive Officer Chairman and
of the Board and Chief Executive Officer of the Adviser
since 1998; previously, Distribution
Representative with Delaware Management
Holdings, Co. from May 1997 to December
1997, President of Voyageur Fund Distributors,
Inc., predecessor of the Underwriter of the
Funds from 1995 to 1997, Executive Vice
President of Voyageur Fund Managers, Inc.,
predecessor of the Adviser of the Funds
from 1995 to 1997.
Gerald A. Kraut Director Director and Chairman of the Board of the
Adviser; Director, President and Chief Executive
Officer of DFG; Director and Chairman of the
Underwriter, Director, Chairman and Chief Executive
Officer of Dougherty Funding LLC, Chairman and
Director of Itasca Business Credit LLC, Director of
the Clifton Investment Management Group and a member
of Segall Bryant & Hamill management committee,
all since 1997.
Michael E. Dougherty Director See biographical information in Part B
of the Registration Statement.
James C. King Director See biographical information in Part B
of the Registration Statement.
Louis V. Nanne Director Director of the Adviser since 1998; Senior Vice
President of the Adviser since 1995; previously,
Senior Vice President with Piper Capital Management
from 1991 to 1995.
Thomas J. Abood Secretary See biographical information in Part B of the
Registration Statement.
Michelle M.Sandberg Director See biographical information in Part B of the
and Treasurer Registration Statement.
</TABLE>
Item 29. Principal Underwriters
(a) Dougherty Summit Securities LLC, the underwriter of the
Registrant's shares, is principal underwriter for the shares of all series of
VAM Institutional Funds, Inc.
(b) The directors of the Underwriter and the positions of these
individuals with respect to the Registrant are:
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
<S> <C> <C>
Gerald A. Kraut Chairman, and Director None
John G. Taft Director, President and President
Chief Executive Officer
Robert H. Paymar Director and Executive None
Vice President
G. James Spinner Director, Executive Vice None
President and Treasurer
Michael E. Dougherty Director Director
Thomas J. Abood Secretary Secretary
</TABLE>
The address of each of the executive officers is 90 South Seventh Street, Suite
4400, Minneapolis, Minnesota 55402.
(c) Not applicable.
Item 30. Location of Accounts and Records
The custodian for the Registrant is First Trust National Association,
180 East Fifth Street, St. Paul, Minnesota 55101. The dividend disbursing,
administrative and accounting services agent of Registrant is Voyageur Asset
Management LLC. The address of Voyageur Asset Management LLC and the Registrant
is 90 South Seventh Street, Suite 4300, Minneapolis, Minnesota 55402.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report of such series, and such Annual Report will be
furnished by the Registrant without charge.
PART C
VAM INSTITUTIONAL FUNDS, INC.
VAM Financial Institutions Intermediate Duration Portfolio
VAM Financial Institutions Core Portfolio
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements - as filed.
(b) Exhibits
1 Amended and Restated Articles of Incorporation (1)
1.1 Certificate of Designation of Series H, Series I and Series J (2)
2.1 Bylaws, as amended (1)
2.2 Amendment to the Bylaws (2)
3 Not applicable
4 Not applicable
5.1 Investment Advisory Agreement for Series H (2)
5.2 Investment Advisory and Management Agreement for Series I
and J(2)
5.3 Sub-Advisory Agreement for Series H (2)
5.4 Sub-Investment Advisory Agreement for Series I and J (2)
6.1 Distribution Agreement (5)
6.2 Form of Dealer Sales Agreement (1)
7 Not applicable
8.1 Custodian Agreement for Series H (3)
8.2 Custodian Agreement for Series I and Series J (4)
9.1 Administrative Services Agreement (2)
10.1 Opinion and Consent of Dorsey & Whitney LLP with respect to
Series H, I and J (2)
11 Consent of KPMG Peat Marwick LLP (5)
12 Not applicable
14 Not applicable
15.1 Plan of Distribution for Series H (2)
15.2 Service Plan for Series I and J (2)
16 Calculations of Yield (5)
17 Master Power of Attorney (1)
- ----------------
(1) Incorporated by reference to Post-Effective Amendment No. 23 to the
Registrant's Registration Statement on Form N-1A filed August 1, 1995.
(2) Incorporated by reference to Post-Effective Amendment No. 26 to the
Registrant's Registration Statement on Form N-1A filed April 30, 1997.
(3) Incorporated by reference to Post-Effective Amendment No. 17 to the
Registration Statement of Voyageur Funds, Inc. (File No. 33-16270) on Form N-1A
filed October 31, 1995.
(4) Incorporated by reference to Post-Effective Amendment No. 19 to the
Registration Statement of Voyageur Funds, Inc. (File No. 33-16270) on Form N-1A
filed March 15, 1996.
(5) Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
Voyageur Asset Management LLC serves as investment manager to VAM
Institutional Funds, Inc., an open-end investment management company which
currently offers its shares in eight series, the following four of which have
commenced investment operations:
Segall Bryant & Hamill Growth and Income Fund
VAM Financial Institutions Intermediate Duration Portfolio
VAM Financial Institutions Core Portfolio
VAM Mid Cap Stock Fund
Item 26. Number of Holders of Securities
As of January 31, 1998, the number of record owners of common shares of
each Fund was:
Fund Number of Record Holders
Intermediate Duration Portfolio 21
Core Portfolio 28
Item 27. Indemnification
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons, for such expenses and liabilities, in
such manner, under such circumstances, and to such extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereinafter amended, and any rules, regulations or releases promulgated
thereunder.
The Registrant may indemnify its officers and directors and other
"persons" acting in an "official capacity" (as such terms are defined in Section
302A.521) pursuant to a determination by the board of directors or shareholders
of the Registrant as set forth in Section 302A.521, by special legal counsel
selected by the board or a committee thereof for the purpose of making such a
determination, or by a Minnesota court upon application of the person seeking
indemnification. If a director is seeking indemnification for conduct in the
capacity of director or officer of the Registrant, then such director generally
may not be counted for the purpose of determining either the presence of a
quorum or such director's eligibility to be indemnified.
In any case, indemnification is proper only if the eligibility
determining body decides that the person seeking indemnification has (a) not
received indemnification for the same conduct from any other party or
organization; (b) acted in good faith; (c) received no improper personal
benefit; (d) in the case of criminal proceedings, had no reasonable cause to
believe the conduct was unlawful; (e) reasonably believed that the conduct was
in the best interest of the Registrant, or in certain contexts, was not opposed
to the best interest of the Registrant; and (f) had not otherwise engaged in
conduct which precludes indemnification under either Minnesota or Federal law
(including, but not limited to, conduct constituting willful misfeasance, bad
faith, gross negligence, or reckless disregard of duties as set forth in Section
17(h) and (i) of the Investment Company Act of 1940).
If a person is made or threatened to be made a party to a proceeding,
the person is entitled, upon written request to the Registrant, to payment or
reimbursement by the Registrant of reasonable expenses, including attorneys'
fees and disbursements, incurred by the person in advance of the final
disposition of the proceeding, (a) upon receipt by the Registrant of a written
affirmation by the person of a good faith belief that the criteria for
indemnification set forth in Section 302A.521 have been satisfied and a written
undertaking by the person to repay all amounts so paid or reimbursed by the
Registrant, if it is ultimately determined that the criteria for indemnification
have not been satisfied, and (b) after a determination that the facts then known
to those making the determination would not preclude indemnification under
Section 302A.521. The written undertaking required by clause (a) is an unlimited
general obligation of the person making it, but need not be secured and shall be
accepted without reference to financial ability to make the repayment.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant undertakes to comply with the indemnification
requirements of Investment Company Release 7221 (June 9, 1972) and Investment
Company Release 11330 (September 2, 1980).
Item 28. Business and Other Connections of Investment Adviser
Information on the business of the Adviser is described in the section
of the Prospectus, incorporated by reference in this Registration Statement,
entitled "Management" and in the section of the Statement of Additional
Information entitled "The Investment Adviser, Sub-Adviser, Administrative
Services, Expenses and Brokerage" filed as part of this Registration Statement.
The name and principal occupation(s) during the past two fiscal years of each
director and executive officer of Marquette Trust Company, N.A., Adviser to VAM
Financial Institutions Intermediate Duration Portfolio and VAM Financial
Institutions Core Portfolio, are set forth below. The business address of each
is 60 South Sixth Street, Suite 4040, Minneapolis, Minnesota 55402.
<TABLE>
<CAPTION>
Name and Address Position with Adviser Principal Occupation(s)
<S> <C> <C>
Thomas H. Jenkins Director President of Marquette Capital Bank since
June 1993; Senior Vice President of
Marquette Bancshares, Inc. since January
1993.
Jai L. Kim Director Vice President and Corporate Counsel
a/k/a Jay L. Kim Marquette Bancshares, Inc. since August
1993.
John G. Flesch President, Director and President and CEO of Marquette Trust Company
Chairman of the Board since 1996; previously President of IAI Trust
Company and Vice President at Piper Trust.
Jerry Hayes Director CEO, Search Corporation since May, 1996;
previously, President and CEO of Inter-Regional
Financial Group.
Doug Hile Director President, Marquette Bank, N.A. since January 1995;
Senior Vice President of MBI since January 1993.
Christie Haagensen Senior Vice President Senior Vice president of Trust Operations for
Resolution Officer Marquette Trust Company since 1996; previously,
and Assistant Secretary Director of Trust Operations at IAI and Trust
Operations Manager at Piper Trust.
James Hausman Senior Vice President Senior Vice President and Market Manager for the
Rochester office of Marquette Trust Company since 1995.
</TABLE>
The name and principal occupations(s) during the past two fiscal years
of each director and officer of the Sub-Adviser are set forth below. The
business address of each is 90 South Seventh Street, Suite 4300, Minneapolis,
Minnesota 55402.
<TABLE>
<CAPTION>
Name and Address Position with Sub-Adviser Principal Occupation(s)
<S> <C> <C>
John G. Taft Director See biographical information in Part B of the
Registration Statement.
Frank C.Tonnemaker Director, Chairman of the Chairman and Chief Executive Officer of the
Board and Chief Executive Adviser since 1998; previously, Distribution
Officer Representative with Delaware Management
Holdings, Co. from May 1997 to December 1997,
President of Voyageur Fund Distributors, Inc.,
predecessor of the Underwriter of the Funds
from 1995 to 1997, Executive Vice President of
Voyageur Fund Managers, Inc., predecessor of
the Adviser of the Funds from 1995 to 1997.
Gerald A. Kraut Director Director and Chairman of the Board of the Adviser;
Director, President and Chief Executive Officer of DFG;
Director and Chairman of the Underwriter, Director,
Chairman and Chief Executive Officer of Dougherty
Funding LLC, Chairman and Director of Itasca Business
Credit LLC, Director of the Clifton Investment Management
Group and a member of Segall Bryant & Hamill management
committee, all since 1997.
Michael E. Dougherty Director See biographical information in Part B of the
Registration Statement.
James C. King Director See biographical information in Part B of the
Registration Statement.
Louis V. Nanne Director Director of the Adviser since 1998; Senior Vice
President of the Adviser since 1995; previously,
Senior Vice President with Piper Capital Management
from 1991 to 1995.
Thomas J. Abood Secretary See biographical information in Part B of the
Registration Statement.
Michelle M. Sandberg Director and Treasurer See biographical information in Part B of the
Registration Statement.
</TABLE>
Item 29. Principal Underwriters
(a) Dougherty Summit Securities LLC, the underwriter of the
Registrant's shares, is principal underwriter for the shares of all series of
VAM Institutional Funds, Inc.
(b) The directors of the Underwriter and the positions of these
individuals with respect to the Registrant are:
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
<S> <C> <C>
Gerald A. Kraut Chairman, and Director None
John G. Taft Director, President and President
Chief Executive Officer
Robert H. Paymar Director and Executive None
Vice President
G. James Spinner Director, Executive Vice None
President and Treasurer
Michael E. Dougherty Director Director
Thomas J. Abood Secretary Secretary
</TABLE>
The address of each of the executive officers is 90 South Seventh Street, Suite
4400, Minneapolis, Minnesota 55402.
(c) Not applicable.
Item 30. Location of Accounts and Records
The custodian for the Intermediate Duration Portfolio and the Core
Portfolio series of the Registrant is Marquette Trust Company, N.A., 60 South
Sixth Street, Suite 4040, Minneapolis, Minnesota 55402. The dividend disbursing,
administrative and accounting services agent of Registrant is Voyageur Asset
Management LLC. The address of Voyageur Asset Management LLC and the Registrant
is 90 South Seventh Street, Suite 4300, Minneapolis, Minnesota 55402.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) Not applicable.
(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report of such series, and such Annual Report will be
furnished by the Registrant without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Minneapolis and State of
Minnesota on the 26th day of February 1998.
VAM INSTITUTIONAL FUNDS, INC.
By s/s John G. Taft
John G. Taft, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
/s/ John G. Taft President (Principal February 25, 1998
- ----------------------- Executive Officer)
John G. Taft
s/s Michelle M. Sandberg Treasurer (Principal February 25, 1998
- ----------------------- Financial and Accounting
Michelle M. Sandberg Officer)
James W. Nelson* Director
Robert J. Odegard* Director
Richard F. McNamara* Director
Thomas F. Madison* Director
/s/ Thomas J. Abood Attorney-in-Fact February 25, 1998
- -------------------------
Thomas J. Abood
(Pursuant to a Power of Attorney dated January 24, 1995)
VAM INSTITUTIONAL FUNDS, INC.
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 30th day of
September, 1997, by and between VAM Institutional Funds, Inc., a Minnesota
corporation (the "Company"), for and on behalf of each series of the Company
(each series is referred to hereinafter as a "Fund"), and Dougherty Summit
Securities LLC, a Delaware limited liability company (the "Underwriter"). This
Agreement shall apply to the following Funds, each of which currently offers a
single class of shares:
Segall Bryant & Hamill Growth and Income Fund
VAM Financial Institutions Intermediate Duration Portfolio
VAM Financial Institutions Core Portfolio
VAM Short Duration Total Return Fund
VAM Intermediate Duration Total Return Fund
VAM Core Total Return Fund
VAM Mid Cap Stock Fund
VAM Growth Stock Fund
WITNESSETH:
1. Underwriting Services. The Company, on behalf of each Fund, hereby
engages the Underwriter, and the Underwriter hereby agrees to act, as principal
underwriter for each Fund in the sale and distribution of the shares of such
Fund to the public, either through dealers or otherwise. The Underwriter agrees
to offer such shares for sale at all times when such shares are available for
sale and may lawfully be offered for sale and sold.
2. Sale of Shares. The shares of each Fund are to be sold only on the
following terms:
(a) All subscriptions, offers, or sales shall be subject to
acceptance or rejection by the Company. Any offer for or sale of shares
shall be conclusively presumed to have been accepted by the Company if
the Company shall fail to notify the Underwriter of the rejection of
such offer or sale prior to the computation of the net asset value of
such shares next following receipt by the Company of notice of such
offer or sale.
(b) No share of a Fund shall be sold by the Underwriter (i)
for any consideration other than cash or, pursuant to any exchange
privilege provided for by the applicable currently effective Prospectus
or Statement of Additional Information (hereinafter referred to
collectively as the "Prospectus"), shares of any other investment
company for which the Underwriter acts as an underwriter, or (ii)except
in instances otherwise provided for by the applicable currently
effective Prospectus, for any amount less than the public offering
price per share, which shall be determined in accordance with the
applicable currently effective Prospectus.
3. Registration of Shares. The Company agrees to make prompt and
reasonable efforts to effect and keep in effect, at its expense, the
registration or qualification of each Fund's shares for sale in such
jurisdictions as the Company may designate.
4. Information to be Furnished to the Underwriter. The Company agrees
that it will furnish the Underwriter with such information with respect to the
affairs and accounts of the Company (and each Fund) as the Underwriter may from
time to time reasonably require, and further agrees that the Underwriter, at all
reasonable times, shall be permitted to inspect the books and records of the
Company.
5. Allocation of Expenses. During the period of this Agreement, the
Company shall pay or cause to be paid all expenses, costs and fees incurred by
the Company which are not assumed by the Underwriter. The Underwriter agrees to
provide, and shall pay costs which it incurs in connection with providing,
administrative or accounting services to shareholders of each Fund (such costs
are referred to as "Shareholder Servicing Costs"). Shareholder Servicing Costs
include all expenses of the Underwriter incurred in connection with providing
administrative or accounting services to shareholders of each Fund, including,
but not limited to, an allocation of the Underwriter's overhead and payments
made to persons, including employees of the Underwriter, 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 applicable Fund's investment adviser or transfer agent. The
Underwriter shall also pay all costs of distributing the shares of each Fund
("Distribution Expenses"). Distribution Expenses include, but are not limited
to, initial and ongoing sales compensation (in addition to sales loads) paid to
investment executives of the Underwriter 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 Underwriter'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.
6. Compensation to the Underwriter
(a) With respect to each Fund, it is understood and agreed by
the parties hereto that the sale of Fund shares will benefit the
Underwriter, which is an affiliate of the Fund's investment adviser or
sub-adviser, and therefore the Underwriter will receive no additional
compensation for services it performs hereunder in connection with
sales of fund shares, except as follows:
(i) In connection with sales of shares of Growth and
Income Fund, pursuant to the Company's Plan of Distribution
adopted on behalf of such Fund in accordance with Rule 12b-1
under the 1940 Act (the "Rule 12b-1 Plan"), Class A of such
Fund (the only class of shares currently outstanding) is
obligated to pay the Underwriter a total fee in connection
with the servicing of shareholder accounts of such class and
in connection with distribution-related services provided in
respect of such class, calculated and payable quarterly, at
the annual rate of .25% of the value of the average daily net
assets of such class. All or any portion of such total fee may
be payable as a Shareholder Servicing Fee, and all or any
portion of such total fee may be payable as a Distribution
Fee, as determined from time to time by the Company's Board of
Directors. Until further action by the Board of Directors, all
of such fee shall be designated and payable as a Shareholder
Servicing Fee.
(ii) In connection with the Underwriter's ongoing
servicing and/or maintenance of shareholder accounts for VAM
Financial Institutions Intermediate Duration Portfolio and VAM
Financial Institutions Core Portfolio, each Fund is obligated,
pursuant to the Company's Service Plan, to pay the Underwriter
a service fee, calculated and payable monthly, at the annual
rate of .05% of the value of the average daily net assets of
such Fund.
(b) Average daily net assets shall be computed in accordance
with the applicable currently effective Prospectus. Amounts payable to
the Underwriter under the Rule 12b-1 Plan may exceed or be less than
the Underwriter's actual Distribution Expenses and Shareholder
Servicing Costs. Similarly, amounts payable to the Underwriter under
the Service Plan may exceed or be less than the Underwriter's actual
Shareholder Servicing Costs. In the event such costs exceed amounts
payable to the Underwriter under the Rule 12b-1 Plan or the Service
Plan, the Underwriter shall not be entitled to reimbursement by the
Company.
(c) In each year during which this Agreement remains in
effect, the Underwriter will prepare and furnish to the Board of
Directors of the Company, and the Board will review, on a quarterly
basis, written reports that set forth the amounts expended under this
Agreement, the Rule 12b-1 Plan and the Service Plan, and the purposes
for which those expenditures were made.
7. Limitation of the Underwriter's Authority. The Underwriter shall be
deemed to be an independent contractor and, except as specifically provided or
authorized herein, shall have no authority to act for or represent any Fund or
the Company.
8. Subscription for Shares--Refund for Canceled Orders. The Underwriter
shall subscribe for the shares of a Fund only for the purpose of covering
purchase orders already received by it or for the purpose of investment for its
own account. In the event that an order for the purchase of shares of a Fund is
placed with the Underwriter by a customer or dealer and subsequently canceled,
the Underwriter shall forthwith cancel the subscription for such shares entered
on the books of the Fund, and, if the Underwriter has paid the Fund for such
shares, shall be entitled to receive from the Fund in refund of such payment the
lesser of:
(a) the consideration received by the Fund for said shares; or
(b) the net asset value of such shares at the time of
cancellation by the Underwriter.
9. Indemnification of the Company. The Underwriter agrees to indemnify
each Fund and the Company against any and all litigation and other legal
proceedings of any kind or nature and against any liability, judgment, cost, or
penalty imposed as a result of such litigation or proceedings in any way arising
out of or in connection with the sale or distribution of the shares of such Fund
by the Underwriter. In the event of the threat or institution of any such
litigation or legal proceedings against any Fund, the Underwriter shall defend
such action on behalf of the Fund or the Company at the Underwriter's own
expense, and shall pay any such liability, judgment, cost, or penalty resulting
therefrom, whether imposed by legal authority or agreed upon by way of
compromise and settlement; provided, however, the Underwriter shall not be
required to pay or reimburse a Fund for any liability, judgment, cost, or
penalty incurred as a result of information supplied by, or as the result of the
omission to supply information by, the Company to the Underwriter, or to the
Underwriter by a director, officer, or employee of the Company who is not an
"interested person," as defined in the provisions of the 1940 Act, of the
Underwriter, unless the information so supplied or omitted was available to the
Underwriter or the Fund's investment adviser without recourse to the Fund or the
Company or any such person referred to above.
10. Freedom to Deal With Third Parties. The Underwriter shall be free
to render to others services of a nature either similar to or different from
those rendered under this contract, except such as may impair its performance of
the services and duties to be rendered by it hereunder.
11. Effective Date, Duration and Termination of Agreement.
(a) The effective date of this Agreement is set forth in the
first paragraph of this Agreement. Unless sooner terminated as
hereinafter provided, this Agreement shall continue in effect for a
period of one year after the date of its execution, and from year to
year thereafter, but only so long as such continuance is specifically
approved at least annually by a vote of the Board of Directors of the
Company, and of the directors who are not "interested persons" (as
defined in the provisions of the 1940 Act) of the Company and have no
direct or indirect financial interest in the operation of the Rule
12b-1 Plan or in any agreement related to the Rule 12b-1 Plan
(including, without limitation, this Agreement), cast in person at a
meeting called for the purpose of voting on this Agreement.
(b) This Agreement may be terminated at any time with respect
to any Fund without the payment of any penalty, by the vote of a
majority of the members of the Board of Directors of the Company who
are not "interested persons" (as defined in the provisions of the 1940
Act) of the Company and have no direct or indirect financial interest
in the operation of the Rule 12b-1 Plan or in any agreement related to
the Rule 12b-1 Plan (including, without limitation, this Agreement), or
by the vote of a majority of the outstanding voting securities of such
Fund, or by the Underwriter, upon 60 days' written notice to the other
party.
(c) This Agreement shall automatically terminate in the event
of its "assignment" (as defined by the provisions of the 1940 Act).
(d) Wherever referred to in this Agreement, the vote or
approval of the holders of a majority of the outstanding voting
securities of a Fund shall mean the lesser of (i) the vote of 67% or
more of the voting securities of such Fund present at a regular or
special meeting of shareholders duly called, if more than 50% of the
Fund's outstanding voting securities are present or represented by
proxy, or (ii) the vote of more than 50% of the outstanding voting
securities of such Fund.
12. Amendments to Agreement. No material amendment to this Agreement
shall be effective until approved by the Underwriter and by vote of a majority
of the Board of Directors of the Company who are not interested persons of the
Underwriter.
13. Notices. Any notice under this Agreement shall be in writing,
addressed, delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate in writing for receipt of such notice.
IN WITNESS WHEREOF, the Company and the Underwriter have caused this
Agreement to be executed by their duly authorized officers as of the day and
year first above written.
VAM INSTITUTIONAL FUNDS, INC.
By: ___/s/ Thomas J. Abood_____
Name: Thomas J. Abood
Title: Secretary
DOUGHERTY SUMMIT SECURITIES LLC
By: ____/s/ John G. Taft______
Name: John G. Taft
Title: President
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
VAM Institutional Funds, Inc.:
We consent to the use of our report incorporated herein by reference and to the
references to our Firm under the headings "FINANCIAL HIGHLIGHTS" in the
Prospectus and "ADDITIONAL INFORMATION - Custodian; Counsel; Independent
Auditors" in the Statement of Additoinal Information.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 25, 1998
Computation of Performance Quotations
VAM Institutional Funds, Inc.
Cumulative total return figures for the period ending October 31, 1997
are calculated as follows:
Formula: CTR = ERV - P * 100
-------
P
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment
made at the beginning of the period
P = initial payment of $1,000
VAM Mid Cap
Stock Fund
Class A (inception September 2, 1997):
P = 1,000
ERV = 969.00
CTR = -3.10
Computation of Performance Quotations
VAM Institutional Funds, Inc.
Average annual total return figures for the current one year period and
life of fund ending October 31, 1997, are calculated as follows:
1/n
Formula: P(1+T) = ERV or T = ERV/P -1
Where: P = hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period
Intermediate Core
Duration Portfolio Portfolio
Class A
One year period:
ERV = 1,065.81 1,084.98
n = 1 1
T = 6.58 8.50
P = 1,000 1,000
Life of Class A (since March 27, 1996):
ERV = 1,104.69 1,131.07
n = 1.6 1.6
T = 6.42 8.00
P = 1,000 1,000
Computation of Performance Quotations
VAM Institutional Funds, Inc.
Cumulative total return figures for the periods ending October 31, 1997
are calculated as follows:
Formula: CTR = ERV - P * 100
-------
P
Where: CTR = cumulative total return
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment
made at the beginning of the period
P = initial payment of $1,000
Intermediate Core
Duration Portfolio Portfolio
Class A (inception March 27, 1996):
P = 1,000 1,000
ERV = 1,104.69 1,131.07
CTR = 10.47 13.11
The 30 day SEC yield for the period ending October 31, 1997 is
calculated as follows:
6
Formula: 2(((a-b)+1) -1)
----
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
Intermediate Core
Duration Portfolio Portfolio
Class A
a = 182,758.96 307,256.68
b = 9,943.82 16,386.97
c = 3,454,147.9200 5,624,781.4072
d = 10.04 10.20
SEC Yield = 6.05 6.16
