SUPPLEMENT
[GRAPHIC OMITTED]
SUPPLEMENT DATED NOVEMBER 12, 1996 TO PROSPECTUS DATED AUGUST 29, 1996
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VOYAGEUR GROWTH AND INCOME FUND
VOYAGEUR GROWTH STOCK FUND
VOYAGEUR INTERNATIONAL EQUITY FUND
VOYAGEUR AGGRESSIVE GROWTH FUND
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The table entitled "CDSC as a % of Amount Redeemed for Investments of $1,000,000
or More" on page 22 of the Prospectus dated August 29, 1996 is hereby amended by
replacing it with the following:
CDSC as a % of Amount Redeemed
for Investments of $1,000,000 or More
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First year after purchase 1.0%
Second year after purchase 1.0
Thereafter 0.0
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PART B
VOYAGEUR GROWTH AND INCOME FUND
VOYAGEUR GROWTH STOCK FUND
VOYAGEUR INTERNATIONAL EQUITY FUND
VOYAGEUR AGGRESSIVE GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 29, 1996, AS SUPPLEMENTED NOVEMBER 12, 1996
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus of the Funds dated August 29, 1996, as
supplemented. A copy of the Prospectus or this Statement of Additional
Information may be obtained free of charge by contacting the Funds at 90 South
Seventh Street, Suite 4400, Minneapolis, Minnesota 55402. Telephone: (612)
376-7000 or Toll Free (800) 553-2143.
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TABLE OF CONTENTS
PAGE
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Investment Policies and Restrictions............................................................B-2
Directors and Executive Officers of the Company.................................................B-21
The Underwriter; Advisory, Sub-Advisory and Administrative
Services Agreement; Expenses; Distribution Expenses and Brokerage........................B-24
Distributions to Shareholders and Taxes.........................................................B-33
Net Asset Value and Public Offering Price.......................................................B-36
Special Purchase Plans..........................................................................B-37
Calculation of Performance Data.................................................................B-40
Monthly Cash Withdrawal Plan....................................................................B-42
Additional Information..........................................................................B-43
Appendix A - - Common Stock, Corporate Bond, Preferred Stock and Commercial
Paper Ratings...........................................................................A-1
Appendix B - - Stock Index Futures Contracts and Related Options.................................B-1
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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 August 29, 1996 (as supplemented November
12, 1996), and, if given or made, such information or representations may not be
relied upon as having been authorized by the Fund. This Statement of Additional
Information does not constitute an offer to sell securities in any state or
jurisdiction in which such offering may not lawfully be made. The delivery of
this Statement of Additional Information at any time shall not imply that there
has been no change in the affairs of a Fund since the date hereof.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives and policies of Voyageur Growth and Income Fund
("Growth and Income Fund"), Voyageur Growth Stock Fund ("Growth Stock Fund"),
Voyageur International Equity Fund ("International Equity Fund") and Voyageur
Aggressive Growth Fund (the "Aggressive Growth Fund") (collectively, the
"Funds") are set forth in the combined Prospectus relating to the Funds. Each
Fund is a series of Voyageur Mutual Funds III, Inc. (the "Company"), an open-end
investment company which currently offers its shares in five series.
Supplemental information is set out below concerning certain of the securities
and other instruments in which the Funds may invest, the investment techniques
and strategies that the Funds may utilize and certain risks involved with those
investments, techniques and strategies.
GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("Government Securities") 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 investment sub-adviser ("the
Sub-Adviser") (in the case of Growth and Income Fund and International Equity
Fund), or Voyageur Fund Managers, Inc., the Fund's investment adviser
("Voyageur" or the "Adviser"), determines that the instrumentality's credit risk
does not make its securities unsuitable for investment by a Fund.
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 "Investment Policies and Limitations--Illiquid
Investments," below.
ILLIQUID INVESTMENTS
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.
INVESTMENT TECHNIQUES AND STRATEGIES
Each Fund may purchase put and call options and engage in the writing of
covered call options and secured put options, and employ a variety of other
investment techniques. Specifically, each Fund may engage in the purchase and
sale of stock index future contracts, interest rate futures contracts, and
options on such futures, and International Equity Fund may engage in the
purchase and sale of foreign currency futures contracts, all as described more
fully below. Such investment policies and techniques may involve a greater
degree of risk than those inherent in more conservative investment approaches.
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.
The Funds will not engage in such options or futures transactions unless
they receive any necessary regulatory approvals permitting them to engage in
such transactions.
OPTIONS ON SECURITIES. To hedge against adverse market shifts, a Fund may
purchase put and call options on securities held in its portfolio. In addition,
a Fund may seek to increase its income in an amount designed to meet operating
expenses or may hedge a portion of its portfolio investments through writing
(that is, selling) "covered" put and call options. A put option provides its
purchaser with the right to compel the writer of the option to purchase from the
option holder an underlying security at a specified price at any time during or
at the end of the option period. In contrast, a call option gives the purchaser
the right to buy the underlying security covered by the option from the writer
of the option at the stated exercise price. A covered call option contemplates
that, for so long as the Fund is obligated as the writer of the option, it will
own (1) the underlying securities subject to the option or (2) securities
convertible into, or exchangeable without the payment of any consideration for,
the securities subject to the option. The value of the underlying securities on
which covered call options will be written at any one time by a Fund will not
exceed 25% of the Fund's total assets. A Fund will be considered "covered" with
respect to a put option it writes if, so long as it is obligated as the writer
of a put option, it deposits and maintains with its custodian cash, U.S.
Government securities or other liquid high-grade debt obligations having a value
equal to or greater than the exercise price of the option.
Each Fund may purchase options on securities that are listed on securities
exchanges or, with respect to Growth and Income, International Equity and
Aggressive Growth Funds, that are traded over-the-counter. As the holder of a
put option, a Fund has the right to sell the securities underlying the option
and as the holder of a call option, a Fund has the right to purchase the
securities underlying the option, in each case at the option's exercise price at
any time prior to, or on, the option's expiration date. A Fund may choose to
exercise the options it holds, permit them to expire or terminate them prior to
their expiration by entering into closing sale transactions. In entering into a
closing sale transaction, a Fund would sell an option of the same series as the
one it has purchased.
A Fund receives a premium when it writes call options, which increases the
Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. A Fund receives a premium when it
writes put options, which increases such Fund's return on the underlying
security in the event the option expires unexercised or is closed out at a
profit. By writing a put, a Fund limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise price
of the option for as long as the Fund's obligation as writer of the option
continues. Thus, in some periods, a Fund will receive less total return and in
other periods greater total return from its hedged positions than it would have
received from its underlying securities if unhedged.
In purchasing a put option, a Fund seeks to benefit from a decline in the
market price of the underlying security, whereas in purchasing a call option, a
Fund seeks to benefit from an increase in the market price of the underlying
security. If an option purchased is not sold or exercised when it has remaining
value, or if the market price of the underlying security remains equal to or
greater than the exercise price, in the case of a put, or remains equal to or
below the exercise price, in the case of a call, during the life of the option,
the Fund will lose its investment in the option. For the purchase of an option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
OVER-THE-COUNTER ("OTC") OPTIONS. Each of Growth and Income, International
Equity and Aggressive Growth Funds may purchase OTC options. OTC options differ
from exchange-traded options in several respects. They are transacted directly
with dealers and not with a clearing corporation, and there is a risk of
non-performance by the dealer. However, the premium is paid in advance by the
dealer. OTC options are available for a greater variety of securities and
foreign currencies, and in a wider range of expiration dates and exercise prices
than exchange-traded options. Since there is no exchange, pricing is normally
done by reference to information from a market maker, which information is
carefully monitored or caused to be monitored by Voyageur or the Sub-Adviser, as
the case may be, and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily
only by entering into a closing transaction. In the case of OTC options, there
can be no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which it originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security or foreign currency until the option expires or the
option is exercised. Therefore, the writer of a covered OTC call option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, the writer of a covered OTC put option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
A Fund may purchase and write over-the-counter ("OTC") put and call options
in negotiated transactions. The staff of the Securities and Exchange Commission
has previously taken the position that the value of purchased OTC options and
the assets used as "cover" for written OTC options are illiquid securities and,
as such, are to be included in the calculation of a Fund's 15% limitation on
illiquid securities. However, the staff has eased its position somewhat in
certain limited circumstances. A Fund will attempt to enter into contracts with
certain dealers with which it writes OTC options. Each such contract will
provide that the Fund has the absolute right to repurchase the options it writes
at any time at a repurchase price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of such formula may vary among
contracts, the formula will generally be based upon a multiple of the premium
received by the Fund for writing the option, plus the amount, if any, of the
option's intrinsic value. The formula will also include a factor to account for
the difference between the price of the security and the strike price of the
option. If such a contract is entered into, the Fund will count as illiquid only
the initial formula price minus the option's intrinsic value.
A Fund will enter into such contracts only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York. Moreover,
such primary dealers will be subject to the same standards as are imposed upon
dealers with which the Fund enters into repurchase agreements.
SECURITIES INDEX OPTIONS. In seeking to hedge all or a portion of its
investment, a Fund may purchase and write put and call options on securities
indexes listed on securities exchanges, which indexes include securities held in
the Fund's portfolio.
A securities index measures the movement of a certain group of stocks or
debt securities by assigning relative values to the securities included in the
index. Options on securities indexes are generally similar to options on
specific securities. Unlike options on specific securities, however, options on
securities indexes do not involve the delivery of an underlying security; the
option in the case of an option on a stock index represents the holder's right
to obtain from the writer in cash a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying stock index on the exercise date.
When a Fund writes an option on a securities index, it will establish a
segregated account with its custodian, or a designated sub-custodian, in which
the Fund will deposit cash, U.S. Government Securities or other liquid high
grade debt obligations in an amount equal to the market value of the option, and
will maintain the account while the option is open.
Securities index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. If a Fund
writes a securities index option, it may terminate its obligation by effecting a
closing purchase transaction, which is accomplished by purchasing an option of
the same series as the option previously written. The ability of a Fund to
engage in closing purchase transactions with respect to securities index options
depends on the existence of a liquid secondary market. Although a Fund generally
purchases or writes securities index options only if a liquid secondary market
for the options purchased or sold appears to exist, no such secondary market may
exist, or the market may cease to exist at some future date, for some options.
No assurance can be given that a closing purchase transaction can be effected
when the Fund desires to engage in such a transaction.
RISKS RELATING TO PURCHASE AND SALE OF OPTIONS ON STOCK INDEXES. Purchase
and sale of options on stock indexes by a Fund are subject to certain risks that
are not present with options on securities. Because the effectiveness of
purchasing or writing stock index options as a hedging technique depends upon
the extent to which price movements in the Fund's portfolio correlate with price
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss on the purchase or writing of an
option on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by a Fund of options on indexes will be subject to
the ability of Voyageur or the Sub-Adviser, as the case may be, to correctly
predict movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks. In the event a Fund's
adviser is unsuccessful in predicting the movements of an index, such Fund could
be in a worse position than had no hedge been attempted.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, a Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to such Fund. However, it will be each Fund's
policy to purchase or write options only on indexes which include a sufficient
number of stocks so that the likelihood of a trading halt in the index is
minimized.
SHORT SALES AGAINST THE BOX. Each Fund may sell securities "short against
the box." Whereas a short sale is the sale of a security the Fund does not own,
a short sale is "against the box" if at all times during which the short
position is open, the Fund owns at least an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short. Short sales against
the box are typically used by sophisticated investors to defer recognition of
capital gains or losses.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Fund may purchase
and sell stock index futures contracts. The purpose of the acquisition or sale
of a futures contract by a Fund is to hedge against fluctuations in the value of
its portfolio without actually buying or selling securities. The futures
contracts in which a Fund may invest have been developed by and are traded on
national commodity exchanges. Stock index futures contracts may be based upon
broad-based stock indexes such as the S&P500 or upon narrow-based stock
indexes. A buyer entering into a stock index futures contract will, on a
specified future date, pay or receive a final cash payment equal to the
difference between the actual value of the stock index on the last day of the
contract and the value of the stock index established by the contract. The Fund
may assume both "long" and "short" positions with respect to futures contracts.
A long position involves entering into a futures contract to buy a commodity,
whereas a short position involves entering into a futures contract to sell a
commodity.
The purpose of trading futures contracts is to protect a Fund from
fluctuations in value of its investment securities without necessarily buying or
selling the securities. Because the value of a Fund's investment securities will
exceed the value of the futures contracts sold by a Fund, an increase in the
value of the futures contracts could only mitigate, but not totally offset, the
decline in the value of the Fund's assets. No consideration is paid or received
by a Fund upon trading a futures contract. Upon trading a futures contract, a
Fund will be required to deposit in a segregated account with its custodian, or
designated sub-custodian, an amount of cash, short-term Government Securities or
other U.S. dollar-denominated, high-grade, short-term money market instruments
equal to approximately 1% to 10% of the contract amount (this amount is subject
to change by the exchange on which the contract is traded and brokers may charge
a higher amount). This amount is known as "initial margin" and is in the nature
of a performance bond or good faith deposit on the contract that is returned to
the Fund upon termination of the futures contract, assuming that all contractual
obligations have been satisfied; the broker will have access to amounts in the
margin account if the Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, a Fund may elect to close a position by taking
an opposite position, which will operate to terminate the Fund's existing
position in the contract.
Each short position in a futures or options contract entered into by a Fund
is secured by the Fund's ownership of underlying securities. The Funds do not
use leverage when they enter into long futures or options contracts; each Fund
places in a segregated account with its custodian, or designated sub-custodian,
with respect to each of its long positions, cash or money market instruments
having a value equal to the underlying commodity value of the contract.
The Funds may trade stock index futures contracts to the extent permitted
under rules and interpretations adopted by the Commodity Futures Trading
Commission (the "CFTC"). U.S. futures contracts have been designed by exchanges
that have been designated as "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.
The Funds intend to comply with CFTC regulations and avoid "commodity pool
operator" status. These regulations require that a Fund use futures and options
positions (a) for "bona fide hedging purposes" (as defined in the regulations)
or (b) for other purposes so long as aggregate initial margins and premiums
required in connection with non-hedging positions do not exceed 5% of the
liquidation value of the Fund's portfolio. The Funds currently do not intend to
engage in transactions in futures contracts or options thereon for speculation,
but will engage in such transactions only for bona fide hedging purposes.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
HOLDING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several risks in
using stock index futures contracts as hedging devices. First, all participants
in the futures market are subject to initial margin and variation margin
requirements. Rather than making additional variation margin payments, investors
may close the contracts through offsetting transactions which could distort the
normal relationship between the index or security and the futures market.
Second, the margin requirements in the futures market are lower than margin
requirements in the securities market, and as a result the futures market may
attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in stock indexes or
securities and movements in the prices of futures contracts, even a correct
forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to stock index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable stock index. It is
possible that a Fund might sell stock index futures contracts to hedge its
portfolio against a decline in the market, only to have the market advance and
the value of securities held in the Fund's portfolio decline. If this occurred,
the Fund would lose money on the contracts and also experience a decline in the
value of its portfolio securities. While this could occur, Voyageur and the
Sub-Advisers believe that over time the value of a Fund's portfolio will tend to
move in the same direction as the market indexes and will attempt to reduce this
risk, to the extent possible, by entering into futures contracts on indexes
whose movements they believe will have a significant correlation with movements
in the value of the Fund's portfolio securities sought to be hedged.
Successful use of futures contracts by a Fund is subject to the ability of
Voyageur or the Sub-Adviser, as the case may be, to predict correctly movements
in the direction of interest rates or the 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 would lose part or all of the benefit of the
increased value of its security which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
a 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. A 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, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISKS AND SPECIAL CONSIDERATIONS OF OPTIONS ON FUTURES CONTRACTS. The use
of options on interest rate and stock index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to a Fund because the maximum amount at risk is the premium paid for the
options (plus transactions costs). The writing of a call option on a futures
contract generates a premium which may partially offset a decline in the value
of a Fund's portfolio assets. By writing a call option, a Fund becomes obligated
to sell a futures contract, which may have a value higher than the exercise
price. Conversely, the writing of a put option on a futures contract generates a
premium, but the Fund becomes obligated to purchase a futures contract, which
may have a value lower than the exercise price. Thus, the loss incurred by a
Fund in writing options on futures contracts may exceed the amount of the
premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when Voyageur or
the Sub-Adviser deems it desirable to do so. Although a Fund will enter into an
option position only if Voyageur, or the Sub-Adviser, as the case may be,
believes that a liquid secondary market exists for such option, there is no
assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price. The 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 on futures contracts will
be based upon predictions as to anticipated interest rates or market trends by
Voyageur or the Sub-Adviser, which could prove to be inaccurate. Even if the
expectations of the adviser or sub-adviser are correct, there may be an
imperfect correlation between the change in the value of the options and of the
Fund's portfolio securities.
Investments in futures contracts and related options by their nature tend
to be more short-term than other equity investments made by the Funds. Each
Fund's ability to make such investments, therefore, may result in an increase in
such Fund's portfolio activity and thereby may result in the payment of
additional transaction costs.
The Internal Revenue Code of 1986, as amended (the "Code"), forbids each
Fund from earning more than 30% of its gross income from the sale or other
disposition of certain investments, including futures contracts and options
thereon, which are owned for less than three months. The likelihood of violating
this 30% test is increased by the amount of investing a Fund does in futures
contracts and related options. Additionally, the Code requires each Fund to
diversify its investment holdings. The Internal Revenue Service position
regarding the treatment of futures contracts and related options for
diversification purposes is not clear, and the extent to which a Fund may engage
in these transactions may be limited by this requirement. The Code also provides
that, with respect to certain futures contracts and options held by a Fund at
the end of its taxable year, unrealized gain or loss on such contracts may have
to be recognized for tax purposes under a special system within the Code. The
actual gain or loss recognized by the Fund in an eventual disposition of such
contract, however, will be adjusted by the amount of the gain or loss recognized
earlier under the Code's system. See "Distributions to Shareholders and Taxes."
For more information on stock index futures contracts and related options, see
Appendix B.
FOREIGN CURRENCY TRANSACTIONS
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded directly
between currency traders (usually large commercial banks) and their customers.
International Equity Fund will not enter into such forward contracts or
maintain a net exposure in such contracts where it would be obligated to deliver
an amount of foreign currency in excess of the value of its portfolio securities
and other assets denominated in that currency. The Sub-Adviser believes that it
is important to have the flexibility to enter into such forward contracts when
it determines that to do so is in the Fund's best interests.
A foreign currency option provides the option buyer with the right to buy
or sell a stated amount of foreign currency at the exercise price at a specified
date or during the option period. A call option gives its owner the right, but
not the obligation, to buy the currency, while a put option gives its owner the
right, but not the obligation, to sell the currency. The option seller (writer)
is obligated to fulfill the terms of the option sold if it is exercised.
However, either seller or buyer may close its position during the option period
for such options any time prior to expiration.
LENDING PORTFOLIO SECURITIES.
Although International Equity Fund has no current intention to do so, the
Fund may lend its portfolio securities to member firms of the New York Stock
Exchange and commercial banks with assets of one billion dollars or more,
provided the value of the securities loaned from the Fund will not exceed 10% of
the Fund's assets. Any such loans must be secured continuously in the form of
cash or cash equivalents such as U.S. Treasury bills, the amount of the
collateral must on a current basis equal or exceed the market value of the
loaned securities, and the Fund must be able to terminate such loans upon notice
at any time. The Fund will exercise its right to terminate a securities loan in
order to preserve its right to vote upon matters of importance affecting holders
of the securities.
The advantage of such loans is that the Fund continues to receive the
equivalent of the interest earned or dividends paid by the issuers on the loaned
securities while at the same time earning interest on the cash equivalent
collateral which may be invested in accordance with the Fund's investment
objective, policies and restrictions.
Securities loans are usually made to broker-dealers and other financial
institutions to facilitate their delivery of such securities. As with any
extension of credit, there may be risks of delay in recovery and possibly loss
of rights in the loaned securities should the borrower of the loaned securities
fail financially. However, the Fund will make loans of its portfolio securities
only to those firms the Adviser or Sub-Adviser deems creditworthy and only on
such terms the Adviser or Sub-Adviser believes should compensate for such risk.
On termination of the loan the borrower is obligated to return the securities to
the Fund. The Fund will realize any gain or loss in the market value of the
securities during the loan period. The Fund may pay reasonable custodial fees in
connection with the loan.
FOREIGN SECURITIES
International Equity Fund invests primarily in foreign securities.
Additional costs may be incurred which are related to any international
investment, since foreign brokerage commissions and the custodial costs
associated with maintaining foreign portfolio securities are generally higher
than in the United States. Fee expense may also be incurred on currency
exchanges when the Fund changes investments from one country to another or
converts foreign securities holdings into U.S. dollars. Foreign companies and
foreign investment practices are not subject to uniform accounting, auditing and
financial reporting standards and practices or regulatory requirements
comparable to those applicable to United States companies. There may be less
public information available about foreign companies.
United States Government policies have at times in the past, through
imposition of interest equalization taxes and other restrictions, discouraged
United States investors from making certain investments abroad. While such taxes
or restrictions are not presently in effect they may be reinstituted from time
to time as a means of fostering a favorable United States balance of payments.
In addition, foreign countries may impose withholding and taxes on dividends and
interest. See "Risk Factors and Special Considerations" in the Prospectus.
CREDIT QUALITY
Any bond in which the Funds invest will be rated investment grade. As has
been the industry practice, this determination of credit quality is made at the
time a Fund acquires the bond. However, because it is possible that subsequent
downgrades could occur, if a bond held by a Fund is later downgraded, Voyageur
or the Fund's Sub-Adviser, as the case may be, under the supervision of the
Board of Directors, will consider whether it is in the best interest of the
Fund's shareholders to hold or to dispose of the bond. Among the criteria that
may be considered by Voyageur or the Sub-Adviser, as the case may be, and the
Board are the probability that the bonds will be able to make scheduled interest
and principal payments in the future, the extent to which any devaluation of the
bond has already been reflected in the Fund's net asset value, and the total
percentage, if any, of bonds currently rated below investment grade held by the
Fund. In no event, however, will a Fund invest more than 5% of its net assets in
bonds rated lower than investment grade.
Non-investment grade securities have moderate to poor protection of
principal and interest payments and have speculative characteristics. They
involve greater risk of default or price declines due to changes in the issuer's
creditworthiness than investment-grade debt securities. Because the market for
lower-rated securities may be thinner and less active than for higher-rated
securities, there may be market price volatility for these securities and
limited liquidity in the resale market. Market prices for these securities may
decline significantly in periods of general economic difficulty or rising
interest rates.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions. Certain of these
restrictions are fundamental policies of a Fund. Under the Investment Company
Act of 1940, as amended (the "1940 Act"), a fundamental policy may not be
changed without the vote of a majority of the outstanding voting securities of
the Fund, as defined in the 1940 Act.
The following investment restrictions have been adopted by each of the
Aggressive Growth and Growth and Income Funds as fundamental policies:
1. The Fund will not borrow money, except that the Fund may borrow
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests and cash payments of dividends and
distributions that might otherwise require the untimely disposition of
securities, in an amount not to exceed 20% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the total assets of the Fund,
the Fund will not make any additional investments.
2. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
3. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include the government of
any country other than the United States, but not the U.S. Government.
4. The Fund will not purchase or sell real estate or real estate
limited partnership interests, except that the Fund may purchase and sell
securities of companies that deal in real estate or interests in real
estate.
5. The Fund will not purchase or sell commodities or commodity
contracts, except futures contracts and related options and other similar
contracts.
6. The Fund will not act as an underwriter of securities, except that
the Fund may acquire securities under circumstances in which, if the
securities were sold, the Fund might be deemed to be an underwriter for
purposes of the Securities Act of 1933, as amended.
Aggressive Growth and Growth and Income Funds have adopted the following
operating (i.e. non-fundamental) investment policies and restrictions which may
be changed by the Board of Directors without shareholder approval. In each case:
1. The Fund will not invest in oil, gas or other mineral leases or
exploration or development programs.
2. The Fund will not purchase any investment company security, other
than a security acquired pursuant to a plan of reorganization or an offer
of exchange, if as a result of the purchase (a) the Fund would own more
than 3% of the total outstanding voting securities of any investment
company, (b) more than 5% of the value of the Fund's total assets would be
invested in securities of any one investment company or (c) more than 10%
or the Fund's total assets would be invested in securities issued by
investment companies.
3. The Fund will not participate on a joint or joint-and-several basis
in any securities trading account.
4. The Fund will not make investments for the purpose of exercising
control or management.
5. The Fund will not purchase any security, if as a result of the
purchase, the Fund would then have more than 5% of its total assets
invested in securities of companies (including predecessors) that have been
in continuous operation for fewer than three years.
6. The Fund will not purchase or retain securities of any issuer if,
to the knowledge of the Fund, any of the Company's Directors or officers or
any officer or director of the Adviser or Sub-Adviser individually owns
more than 0.5% of the outstanding securities of the company and together
they own beneficially more than 5% of the securities.
7. The Fund will not invest in warrants (other than warrants acquired
by the Fund as part of a unit or attached to securities at the time of
purchase) if, as a result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Fund's net assets of which not
more than 2% of the Fund's net assets may be invested in warrants not
listed on a recognized foreign or domestic stock exchange.
8. The Fund will not purchase securities on margin, except that the
Fund may obtain any short-term credits necessary for the clearance of
purchases and sales of securities. For purposes of this restriction, the
deposit or payment of initial or variation margin in connection with
futures contracts or options on futures contracts will not be deemed to be
a purchase of securities on margin.
9. The Fund will not make short sales of securities or maintain a
short position, unless at all times when a short position is open, the Fund
owns an equal amount of the securities or securities convertible into or
exchangeable for, without payment of any further consideration, securities
of the same issue as, and equal in amount to, the securities sold short.
In addition, subject to the Aggressive Growth Fund's investment policies
and restrictions as set forth in the Prospectus and in this Statement of
Additional Information, as a nonfundamental policy, the Fund may not invest more
than 15% of its assets, collectively, in illiquid investments and securities of
foreign issuers which are not listed on a recognized domestic or foreign
securities exchange.
The Growth Stock Fund has adopted the following investment restrictions as
fundamental policies. The Growth Stock Fund may not:
1. Invest more than 5% of the value of its total assets in the
securities of any one issuer (other than securities of the U. S. Government
or its agencies or instrumentalities).
2. Purchase more than 10% of any class of securities of any one issuer
(taking all preferred stock issues of an issuer as a single class and all
debt issues of an issuer as a single class) or acquire more than 10% of the
outstanding voting securities of an issuer.
3. Concentrate its investments in any particular industry; however, it
may invest up to 25% of the value of its total assets in the securities of
issuers conducting their principal business activities in any one industry.
4. Invest more than 5% of the value of its total assets in the
securities of any issuers which, with their predecessors, have a record of
less than three years' continuous operation. (Securities of such issuers
will not be deemed to fall within this limitation if they are guaranteed by
an entity in continuous operation for more than three years.)
5. Issue any senior securities (as defined in the 1940 Act), except to
the extent that using options and futures contracts may be deemed to
constitute issuing a senior security.
6. Borrow money, except from banks for temporary or emergency purposes
in an amount not exceeding 5% of the value of the Fund's total assets.
7. Mortgage, pledge or hypothecate its assets except in an amount not
exceeding 10% of the value of its total assets, to secure temporary or
emergency borrowing. For purposes of this policy, collateral arrangements
for margin deposits on futures contracts or with respect to the writing of
options are not deemed to be a pledge of assets.
8. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it
may be deemed to be an underwriter under federal securities laws.
9. Purchase or sell real estate or real estate mortgage loans, except
the Fund may purchase or sell securities issued by companies owning real
estate or interests therein.
10. Purchase or sell oil, gas or other mineral leases, rights or
royalty contracts, except the Fund may purchase or sell securities of
companies investing in the foregoing.
11. Purchase or sell commodities or commodities futures contracts,
except that it may enter into financial futures contracts and engage in
related options transactions.
12. Purchase or retain the securities of any issuer, if, to the Fund's
knowledge, those officers or directors of the Fund or its affiliates or of
its investment adviser or sub-adviser who individually own beneficially
more than 0.5% of the outstanding securities of such issuer, together own
beneficially more than 5% of such outstanding securities.
13. Make loans to other persons, except to the extent that repurchase
agreements are deemed to be loans under the 1940 Act, and except that it
may purchase debt securities as described in the Prospectus under
"Investment Objectives and Policies." The purchase of a portion of an issue
of bonds, debentures or other debt securities distributed to the public or
to financial institutions will not be considered the making of a loan.
14. Purchase securities on margin, except that it may obtain such
short-term credits as may be necessary for the clearance of purchases or
sales of securities and except that it may make margin deposits in
connection with futures contracts.
15. Participate on a joint or a joint and several basis in any
securities trading account.
16. Write, purchase or sell puts, calls or combinations thereof,
except that it may (a) purchase or write put and call options on stock
indexes listed on national securities exchanges, (b) write and purchase put
and call options with respect to the securities in which it may invest and
(c) engage in financial futures contracts and related options transactions.
17. Make short sales except where, by virtue of ownership of other
securities, it has the right to obtain without payment of further
consideration, securities equivalent in kind and amount to those sold.
18. Invest for the purpose of exercising control or management.
19. Invest more than 5% of the value of its total assets in the
securities of any single investment company or more than 10% of the value
of its total assets in the securities of two or more investment companies
except as part of a merger, consolidation or acquisition of assets.
20. Invest more than 15% of its net assets in illiquid investments.
International Equity Fund has adopted the following restrictions as
fundamental policies. International Equity Fund may not:
1. Concentrate 25% or more of the value of its assets in any one
industry; provided, however that there is no limitation with respect to
investments in obligations issued or guaranteed by the United States
Government or its agencies and instrumentalities, and repurchase agreements
secured thereby.
2. Make loans, except through loaned portfolio securities, the
purchase of debt obligations in which the Fund may invest in accordance
with its investment objective and policies or repurchase agreements.
3. 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. Borrow money, except from banks for temporary or emergency purposes
and then only in an amount up to 20% of the value of the Fund's total
assets. In order to secure any permitted borrowings under this section, the
Fund may pledge, mortgage or hypothecate its assets.
5. Issue any senior securities, as defined in the 1940 Act, other than
as set forth in restriction #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. Invest in commodities, commodities futures contracts, or real
estate, although it may invest in securities which are secured by real
estate or real estate mortgages and securities of issuers which invest or
deal in commodities, commodity futures, real estate or real estate
mortgages and provided that it may purchase or sell stock index futures,
foreign currency futures, interest rate futures and options thereon.
The Fund has adopted the following operating (i.e., non-fundamental)
investment policies and restrictions which may be changed by the Board of
Directors without shareholder approval. The Fund may not:
1. Purchase the securities of any issuer with less than three years'
continuous operation if, as a result, more than 5% of the value of its
total assets would be invested in securities of such issuers.
2. Purchase illiquid securities if more than 15% of the value of the
Fund's net assets would be invested in such securities. The Fund may buy
and sell securities outside the U.S. that are not registered with the
Securities and Exchange Commission or marketable in the U.S.
3. Purchase or retain securities of any issuer if the officers and
directors of the Fund or its Adviser and Sub-Adviser, owning beneficially
more than 1/2 of 1% of the securities of such issuer, together own
beneficially more than 5% of such issuer's securities.
4. Invest in warrants if more than 5% of the value of the Fund's net
assets would be invested in such securities or if more than 2% of the
Fund's net assets would be invested in warrants not listed on a recognized
foreign or domestic stock exchange.
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 program.
6. Invest more than 5% of its total assets in securities of any single
investment company, or more than 10% of its total assets in securities of
two or more investment companies, except as part of a merger, consolidation
or acquisition of assets.
7. Purchase any securities on margin except that the Fund may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Fund of initial or
maintenance margin in connection with financial futures contracts or
related transactions is not considered the purchase of a security on
margin.
8. Invest for the purpose of exercising control or management of
another issuer.
9. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open it
owns an equal amount of such securities or owns securities which, without
payment of any further consideration, are convertible into or exchangeable
for securities of the same issue as, and equal in amount to, the securities
sold short.
Each Fund may make commitments more restrictive than the restrictions
listed above so as to permit the sale of the Fund's shares in certain states.
Should a Fund determine that a commitment is no longer in the best interests of
the Fund and its shareholders, the Fund will revoke the commitment by
terminating the sale of the Fund's shares in the state involved.
For purposes of a Fund's concentration policy, each Fund intends to comply
with the SEC staff position that securities issued or guaranteed as to principal
and interest by any single foreign government are considered to be securities of
issuers in the same industry.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the applicable percentage occurs immediately after an acquisition of
securities or utilization of assets and such excess results therefrom.
DIVERSIFICATION
Each Fund intends to operate as a "diversified" management investment
company, as defined in the 1940 Act, which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables), U.S.
Government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
such Fund and to not more than 10% of the outstanding voting securities of such
issuer.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities by a Fund to the average monthly value of portfolio
securities owned by such 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 such 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 Fund's investment adviser or sub-adviser, as the case
may be. 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. In addition to the occupations
set forth below, the Directors and officers also serve as directors or officers
of various closed-end and open-end investment companies managed by Voyageur.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION PAST FIVE YEARS AND OTHER AFFILIATIONS
- ---------------------- -------- --------------------------------------
<S> <C> <C>
Clarence G. Frame, 78 Director Of counsel, Briggs & Morgan law firm. Mr. Frame currently
First National Bank Building, serves on the board of directors of Tosco Corporation (an
W-875 oil refining and marketing company), Milwaukee Land Company,
332 Minnesota Street and Independence One Mutual Funds.
St. Paul, Minnesota 55101
Richard F. McNamara, 63 Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle #200 Minneapolis-based holding company consisting of seventeen
Minneapolis, Minnesota 55439 companies in industrial plastics, sheet metal, automotive
aftermarket, construction supply, electronics and financial
services, since 1966. Mr. McNamara currently serves on the
board of directors of Rimage (electronics manufacturing) and
Interbank.
Thomas F. Madison, 60 Director President and CEO of MLM Partners, Inc. since January 1993;
200 South Fifth Street previously, Vice Chairman--Office of the CEO, The Minnesota
Suite 2100 Mutual Life Insurance Company from February to September
Minneapolis, Minnesota 55402 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, Lutheran Health Systems, Communications
Holdings, Inc., Alexander and Alexander (insurance and risk
management), Span Link Communications (telecommunications),
Medical Benefits Administrators, D&D Farms, AetherWorks
(software applications), Digital River (digital data
provider) and various civic and educational organizations.
James W. Nelson, 54 Director Chairman and Chief Executive Officer of Eberhardt Holding
81 South Ninth Street Company and its subsidiaries.
Suite 400
Minneapolis, Minnesota 55440
Robert J. Odegard, 75 Director Special Assistant to the President of the University of
University of Minnesota Minnesota.
Foundation
1300 South Second Street
Minneapolis, Minnesota 55454
John G. Taft, 42 President President and Director (since 1993) of the
90 South Seventh Street Adviser; Director (since 1993) and Executive Vice President
Suite 4400 (since 1995) of the Underwriter; President of the
Minneapolis, Minnesota 55402 Underwriter from 1991 to 1995; Management committee member
of the Adviser from 1991 to 1993.
Jane M. Wyatt, 41 Executive Chief Investment Officer (since 1993) and Portfolio Manager
90 South Seventh Street Vice (since 1989) of the Adviser; Director of the Adviser and the
Suite 4400 President Underwriter since 1993; Executive Vice President and
Minneapolis, Minnesota 55402 Portfolio Manager of the Adviser from 1992 to 1993; Vice
President and Portfolio Manager from 1989 to 1992.
Andrew M. McCullagh, Jr., 47 Executive Senior Tax-Exempt Portfolio Manager of the Adviser;
717 Seventeenth Street Vice previously, Director of the Adviser and the Underwriter
Denver, Colorado 80202 President from 1993 to 1995.
Elizabeth H. Howell, 34 Vice Senior Tax Exempt Portfolio Manager of the Adviser.
90 South Seventh Street President
Suite 4400
Minneapolis, Minnesota 55402
James C. King, 55 Vice Senior Equity Portfolio Manager of the Adviser since 1993;
90 South Seventh Street President previously, Director of the Adviser and the Underwriter from
Suite 4400 1993 to 1995.
Minneapolis, Minnesota 55402
Steven P. Eldredge, 40 Vice Senior Tax Exempt Portfolio Manager of the Adviser since
90 South Seventh Street President 1995; previously, portfolio manager for ABT Funds, Palm
Suite 4400 Mutual Beach, Florida, from 1989 to Minneapolis,
Minnesota 55402 1995.
Kenneth R. Larsen, 33 Treasurer Treasurer of the Adviser and the Underwriter; previously,
90 South Seventh Street Director, Secretary and Treasurer of the Adviser and the
Suite 4400 Underwriter from 1993 to 1995.
Minneapolis, Minnesota 55402
Thomas J. Abood, 32 Secretary Senior Vice President and General Counsel of Dougherty
90 South Seventh Street Financial Group, Inc. since 1995, the indirect parent of the
Suite 4400 Adivser; Senior Vice President (since 1995) of the Adviser,
Minneapolis, Minnesota 55402 the Underwriter and Voyageur Companies, Inc.; 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>
The Company does not compensate its officers. Each director (who is not an
employee of Voyageur or any of its affiliates) received a total annual fee of
$26,000 for serving as a director or trustee for each of the open-end and
closed-end investment companies (the "Fund Complex") for which Voyageur acts as
investment adviser, plus a $500 fee for each special in-person meeting attended
by such director. These fees are allocated among each series or fund in the Fund
Complex based on the relative average net asset value of each series or fund.
Currently the Fund Complex consists of ten open-end investment companies
comprising 33 series or funds and six closed-end investment companies. In
addition, each director who is not an employee of Voyageur 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 April 30, 1996, as well
as the total compensation received by each director from the Company and all
other registered investment companies managed by the Adviser, Sub-Advisers or
affiliates of the Adviser during the calendar year ended December 31, 1995.
Directors who are officers or employees of the Adviser or Sub-Advisers or any of
their affiliates did not receive any such compensation and are not included in
the table.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
DIRECTOR FROM THE COMPANY FROM FUND COMPLEX
- -------- ---------------- -----------------
<S> <C> <C>
Clarence G. Frame $379 $24,500
Richard F. McNamara $379 $24,500
Thomas F. Madison $379 $24,500
James W. Nelson $379 $24,500
Robert J. Odegard $379 $24,500
</TABLE>
THE UNDERWRITER; ADVISORY, SUB-ADVISORY AND ADMINISTRATIVE
SERVICES AGREEMENT; EXPENSES; DISTRIBUTION EXPENSES AND
BROKERAGE
UNDERWRITER
Voyageur Fund Distributors, Inc. (the "Underwriter") is the principal
distributor of each Fund's shares. With regard to the Underwriter, Mr. Frank
Tonnemaker is the President and a director and Mr. Taft and Ms. Wyatt are each
executive vice presidents and directors. Mr. Abood is senior vice president and
Mr. Larsen is treasurer.
INVESTMENT ADVISORY AGREEMENT
Pursuant to the Advisory Agreement, each Fund has engaged Voyageur to act
as investment adviser for such Fund. As compensation for Voyageur's services,
each Fund is obligated to pay to Voyageur a monthly investment advisory fee
equivalent on an annual basis to (i) 1% of its average daily net assets with
respect to Growth Stock, Aggressive Growth and International Equity Funds and
(ii) 0.75% of its average daily net assets with respect to Growth and Income
Fund. The percentage fee is based on the average daily value of the Fund's net
assets at the close of each business day. For purposes of calculating average
daily net assets, as such term is used in the Advisory Agreement, each Fund's
net assets equal its total assets minus its total liabilities. The Advisory
Agreement requires Voyageur to furnish, at its own expense, office facilities,
equipment and personnel for servicing the investments of the Funds. Voyageur has
agreed to arrange for officers and employees of Voyageur to serve without
compensation from the Funds as Directors, officers or employees of the Funds if
duly elected to such positions by the shareholders or Directors of the Funds.
The Advisory Agreement continues from year to year with respect to a Fund
only if approved annually (a) by the Company's Board of Directors or by a vote
of a majority of the outstanding voting securities of the Fund and (b) by vote
of a majority of Directors of the Company who are not parties to such Advisory
Agreement or interested persons (as defined in the 1940 Act) of any such party,
cast in person at a meeting of the Board of Directors of the Company called for
the purpose of voting on such approval. The Advisory Agreement may be terminated
with respect to any Fund by either party on 60 days' notice to the other party
and terminates automatically upon its assignment. The Advisory Agreement also
provides that amendments to the Agreement may be effected if approved by the
Board of Directors of the Company (including a majority of the Directors who are
not interested persons of Voyageur or the Company), unless the 1940 Act requires
that any such amendment must be submitted for approval by the Funds'
shareholders and that all proposed assignments of such agreement are subject to
approval by the Company's Board of Directors (unless the Act otherwise requires
shareholder approval thereof).
SUB-ADVISORY AGREEMENTS
Segall Bryant & Hamill ("Segall Bryant") is the Sub-Adviser to the Growth
and Income Fund. Its business office is located at 10 South Wacker Drive, Suite
2150, Chicago, IL 60606. Segall Bryant is a Minnesota partnership which is 50%
owned by Voyageur Advisory Services, Inc. an affiliate of Voyageur. Voyageur
International Asset Managers Ltd. ("Voyageur International") is the Sub-Adviser
to the International Equity Fund. Its business office in the U.S. is the same as
Voyageur's. Voyageur International is owned 65% by Voyageur Companies, Inc., the
indirect parent of Voyaguer, and 17.5% each by Mr. Neil Dunn and Mr. Edward J.
Kohler. Each Sub-Adviser manages the investment and reinvestment of the assets
of the relevant Fund, although Voyageur monitors and evaluates the performance
and investment style of each Sub-Adviser.
The Sub-Advisory Agreement between Voyageur and Voyageur International
provides that Voyageur International is entitled to a sub-advisory fee of .50%
of the International Equity Fund's average daily net assets managed by Voyageur
International. The Sub-Advisory Agreement between Voyageur and Segall Bryant
provides that Segall Bryant is entitled to a sub-advisory fee of .75% of Growth
and Income Fund's average daily net assets managed by Segall Bryant. Each
Sub-Adviser's fee is paid by the Adviser, not the Fund. Under each Sub-Advisory
Agreement, the Sub-Adviser determines investment selections for its respective
Fund and is responsible for the placement of brokerage transactions in
connection therewith. Under each Sub-Advisory Agreement, the Sub-Adviser is
required, among other things, to report to the Adviser or the Board of Directors
regularly at such times and in such detail as the Adviser or the Board of
Directors may from time to time request in order to permit the Adviser and the
Board of Directors to determine the adherence of the respective Fund to its
investment objective, policies and restrictions. The Sub-Advisory Agreements
also require the Sub-Advisers to provide all office space, personnel and
facilities necessary and incident to their performance of services under the
Sub-Advisory Agreements. George D. Bjurman & Associates acted as Sub-Adviser for
the Aggressive Growth Fund through April 30, 1995. Murray Johnstone
International Ltd. acted as Sub-Adviser for International Equity Fund through
August 15, 1996.
Since December 31, 1991, Voyageur has served as Growth Stock Fund's
investment adviser. From September 1, 1990 to December31, 1991,
Wilke/Thompson Capital Management ("Wilke/Thompson") served as Growth Stock
Fund's sub-adviser and, prior to September1, 1990, Investment Advisers,
Inc. ("IAI") served as the Growth Stock Fund's investment adviser.
ADMINISTRATIVE SERVICES AGREEMENT
Voyageur 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 Voyageur
and the Company. Pursuant to the Administrative Services Agreement, Voyageur
provides to a Fund all dividend disbursing, transfer agency, administrative and
accounting services required by the Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of the Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of the Fund's
shares or the receipt of redemption requests with respect to the Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon the Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of the Fund to be received by
each shareholder of the Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of the Fund as the Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of the Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
the Fund and Voyageur may from time to time agree upon.
As compensation for these services, each Fund pays Voyageur a monthly fee
based upon the Fund's average daily net assets and the number of shareholder
accounts then existing. With respect to Growth and Income, Growth Stock and
Aggressive Growth Funds, this fee is equal to the sum of (i) $1.25 per
shareholder account per month, (ii) $1,000 per month if the Fund's average daily
net assets do not exceed $50 million, $1,250 per month if the Fund's average
daily net assets are greater than $50 million but do not exceed $100 million,
and $1,500 per month if the Fund's average daily net assets exceed $100 million
and (iii) 0.11% per annum of the first $20 million of the Fund's average daily
net assets, 0.06% per annum of the next $80 million of the Fund's average daily
net assets, and 0.035% per annum of average daily net assets in excess of $100
million. With respect to International Equity Fund, this fee is equal to the sum
of (i) $1.33 per shareholder account per month, (ii) $3,000 per month if the
Fund's average daily net assets do not exceed $50 million, $4,000 per month if
the Fund's average daily net assets are greater than $50 million but do not
exceed $100 million, and $5,000 per month if the Fund's average daily net assets
exceed $100 million and (iii) 0.11% per annum of the first $50 million of the
Fund's average daily net assets, 0.06% per annum of the next $100 million of the
Fund's average daily net assets, 0.035% per annum of the next $250 million of
the Fund's average daily net assets, 0.03% per annum of the next $300 million of
the Fund's average daily net assets and 0.02% per annum of average daily net
assets in excess of $700 million. For purposes of calculating average daily net
assets, as such term is used in the Administrative Services Agreement, a Fund's
net assets equal its total assets minus its total liabilities. The Funds also
reimburses Voyageur for its out-of-pocket expenses in connection with Voyageur's
provision of services under the Funds' Administrative Services Agreements.
The Funds' Administrative Services Agreement is renewable from year to year
if the Directors (including a majority of the disinterested Directors) approve
the continuance of the Agreement. The Company or Voyageur can terminate the
Administrative Services Agreement with respect to any Fund on 60 days' notice to
the other party. The Administrative Services Agreement also provides that
amendments to the Agreement may be effected if approved by the Board of
Directors (including a majority of the Directors who are not interested persons
of Voyageur or the Company), unless the 1940 Act requires that any such
amendment must be submitted for approval by the Fund's shareholders, and that
all proposed assignments of such agreement are subject to approval by the Board
of Directors (unless the Act otherwise requires shareholder approval thereof).
EXPENSES OF THE FUNDS
Voyageur reserves the right to voluntarily waive its fees in whole or part
and to voluntarily absorb certain other of a Fund's expenses. The Adviser
intends to reimburse expenses to the extent set forth in the Prospectus and
reserves the right to discontinue expense reimbursements.
All costs and expenses (other than those expressly assumed by Voyageur or
the Underwriter) incurred in the operation of a Fund are borne by such Fund.
These expenses include, among others, fees of the Directors who are not
employees of Voyageur or any of its affiliates, expenses of Directors' and
shareholders' meetings, including the cost of printing and mailing proxies,
expenses of insurance premiums for fidelity and other coverage, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not borne by the Underwriter under its agreement with the Fund), expenses of
printing and mailing stock certificates representing shares of such Fund,
association membership dues, charges of a 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.
Set forth below is certain information regarding the investment advisory
and administrative services fees incurred by each Fund during the indicated
fiscal periods.
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND
----------------------
INVESTMENT ADMINISTRATIVE FEES ABSORBED
ADVISORY FEES SERVICES FEES OR WAIVED
------------- ------------- ---------
<S> <C> <C> <C>
9/7/95 - 4/30/96 $14,256(3) $16,750 $25,000
GROWTH STOCK FUND
-----------------
INVESTMENT ADMINISTRATIVE FEES ABSORBED
ADVISORY FEES SERVICES FEES OR WAIVED
------------- ------------- ---------
5/1/95 - 4/30/96 $222,957 $79,034 $25,000
5/1/94 - 4/30/95 123,185 74,127 --
5/1/93 - 4/30/94 153,121 92,006 --
5/1/92 - 4/30/93 114,840 67,071 --
INTERNATIONAL EQUITY FUND
-------------------------
INVESTMENT ADMINISTRATIVE FEES ABSORBED
ADVISORY FEES SERVICES FEES OR WAIVED
------------- ------------- ---------
5/1/95 - 4/30/96 $23,307(1) $50,336 $70,000
5/16/94 - 4/30/95 15,991(1) 41,580 57,571
AGGRESSIVE GROWTH FUND
----------------------
INVESTMENT ADMINISTRATIVE FEES ABSORBED
ADVISORY FEES SERVICES FEES OR WAIVED
------------- ------------- ---------
5/1/95 - 4/30/96 $34,256 $20,406 $25,000
5/16/94 - 4/30/95 16,102(2) 21,447 37,549
</TABLE>
(1) Voyageur paid $11,654 and $7,996 in sub-advisory fees under the
Sub-Advisory Agreement with Murray Johnstone for the fiscal periods ended
April 30, 1996 and 1995, respectively.
(2) Voyageur paid $12,077 in sub-advisory fees under the Sub-Advisory Agreement
with George D. Bjurman & Associates for the fiscal period ended April 30,
1995.
(3) Voyageur paid $14,256 in sub-advisory fees under the Sub-Advisory Agreement
with Segall Bryant and Hamill for the fiscal period ended April 30, 1996.
PLAN OF DISTRIBUTION AND DISTRIBUTION AGREEMENT
The Company has adopted a Plan of Distribution on behalf of each Fund
relating to the payment of certain expenses pursuant to Rule 12b-1 under the
1940 Act. Rule12b-1(b) provides that any payments made by a Fund in
connection with the distribution of its shares may only be made pursuant to a
written plan describing all material aspects of the proposed financing of
distribution and also requires that all agreements with any person relating to
implementation of the plan must be in writing. In addition, Rule 12b-1(b)(1)
requires that such plan be approved by a vote of at least a majority of the
Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and the Directors who are not interested persons of the Company and
have no direct or indirect financial interest in the operation of the plan or in
any agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreements. Rule 12b-1(b)(3) requires that the
plan or agreement provide, in substance: (1) that it shall continue in effect
for a period of more than one year from the date of its execution or adoption
only so long as such continuance is specifically approved at least annually in
the manner described in paragraph (b)(2) of Rule 12b-1; (2) that any person
authorized to direct the disposition of monies paid or payable by a Fund
pursuant to its plan or any related agreement shall provide to the Board of
Directors, and the Directors shall review, at least quarterly, a written report
of the amount so expended and the purposes for which such expenditures were
made; and (3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the Board of Directors who are not
interested persons of the Company and have no direct or indirect financial
interest in the operation of the plan or in any agreements related to the plan
or by vote of a majority of the outstanding voting securities of the Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule12b-1. Rule 12b-1(c) provides that
the Company may rely upon Rule 12b-1(b) only if selection and nomination of the
Company's disinterested Directors are committed to the discretion of such
disinterested Directors. Rule 12b-1(e) provides that a Fund may implement or
continue a plan pursuant to Rule 12b-1(b) only if the Directors who vote to
approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under state
law, and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable
likelihood that the plan will benefit the Fund and its shareholders.
The Company has entered into a Distribution Agreement (on behalf of each
Fund) with the Underwriter, pursuant to which the Underwriter acts as the
principal underwriter of each Fund's shares. The Distribution Agreement and Plan
provide that the Underwriter agrees to provide, and shall pay costs which it
incurs in connection with providing, administrative or accounting services to
shareholders of the Funds (such costs are referred to as "Shareholder Servicing
Expenses") and that the Underwriter shall also pay all costs of distributing the
shares of the Fund ("Distribution Expenses"). Shareholder Servicing Expenses
include all expenses of the Underwriter incurred in connection with providing
administrative or accounting services to shareholders of a 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 Fund's investment adviser or transfer agent. Distribution Expenses include,
but are not limited to, initial and ongoing sales compensation (in addition to
sales loads) paid to investment executives of the 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.
Pursuant to the provisions of the Distribution Agreement, the Underwriter
is entitled to receive a total fee each quarter at an annual rate of .25% of the
average daily net assets attributable to each Fund's Class A shares, 1.00% of
the average daily net assets attributable to each Fund's Class B shares and
1.00% of the average daily net assets attributable to each Fund's Class C shares
to pay distribution expenses. As determined from time to time by the Board, a
portion of such fees shall be designated as a "shareholder servicing fee" and a
portion shall be designated as a "distribution fee." The Board has determined
that all of the fee payable with respect to Class A shares shall be designated a
shareholder servicing fee. With respect to fees payable with respect to Class B
shares and Class C shares, that portion of the fee equal to .25% of average
daily net assets attributable to a Fund's Class B shares or Class C shares is
designated a shareholder servicing fee and that portion of the fee equal to .75%
of average daily net assets attributable to a Fund's Class B shares or Class C
shares is designated a distribution fee. Amounts payable to the Underwriter
under the Distribution Agreement may exceed or be less than the Underwriter's
actual distribution expenses and shareholder servicing expenses. In the event
such distribution expenses and shareholder servicing expenses exceed amounts
payable to the Underwriter under the Plan, the Underwriter shall not be entitled
to reimbursement by the Funds. In addition to being paid shareholder servicing
and distribution fees, the Underwriter also receives for its services the sales
charge on sales of Fund shares set forth in each Prospectus.
The Distribution Agreement is renewable from year to year if the Company's
Directors approve such Plan and Distribution Agreement. The Company or the
Underwriter can terminate the Distribution Agreement on 60 days' notice to the
other party, and the Distribution Agreement terminates automatically upon its
assignment. In the Distribution Agreement, the Underwriter agrees to indemnify
each Fund against all costs of litigation and other legal proceedings and
against any liability incurred by or imposed on the Fund in any way arising out
of or in connection with the sale or distribution of the Fund's shares, except
to the extent that such liability is the result of information which was
obtainable by the Underwriter only from persons affiliated with the Fund but not
the Underwriter.
For the fiscal periods ended April 30, 1996, 1995, and 1994, the Funds paid
the following Rule 12b-1 fees and the Underwriter waived the following Rule
12b-1 fees:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
AMOUNT
12B-1 FEE 12B-1 FEE 12B-1 FEE WAIVED
--------- --------- --------- ------
Growth and Income Fund
<S> <C> <C> <C> <C>
Class A $4,743 N/A N/A N/A
Class B 36 N/A N/A N/A
Growth Stock Fund
Class A 112,282 246,598 306,242 37,127
Class B 1,442 N/A N/A N/A
Class C 281 N/A N/A N/A
International Equity Fund
Class A 5,720 3,979 N/A N/A
Class B 66 N/A N/A N/A
Class C 239 83 N/A N/A
Aggressive Growth Fund
Class A 8,033 3,885 N/A N/A
Class B -- N/A N/A N/A
Class C 1,417 562 N/A N/A
</TABLE>
The following table sets forth the aggregate dollar amount of underwriting
commissions paid by each Fund for the fiscal periods indicated and the amount of
such commissions retained by the Underwriter.
<TABLE>
<CAPTION>
UNDERWRITING COMMISSIONS
TOTAL UNDERWRITING COMMISSIONS RETAINED BY UNDERWRITER
------------------------------ -----------------------
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR YEAR YEAR
4/30/96 4/30/95 4/30/94 4/30/96 4/30/95 4/30/94
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Growth and Income Fund $1,481 N/A N/A -- N/A N/A
Growth Stock Fund 44,067 34,138 96,624 6,662 5,137 14,237
International Equity Fund 9,027 6,234 N/A 1,358 979 N/A
Aggressive Growth Fund 4,299 8,965 N/A 608 1,297 N/A
</TABLE>
PORTFOLIO TRANSACTION AND ALLOCATION OF BROKERAGE
Pursuant to conditions set forth in the rules of the Securities and
Exchange Commission, each Fund may effect brokerage transactions in its
portfolio securities with a broker or dealer affiliated directly or indirectly
with the Adviser or the Fund's Sub-Adviser, as the case may be. In determining
the commissions to be paid to an affiliated broker-dealer acting as an agent on
behalf of a Fund, it is the policy of each Fund that such commissions will, in
the judgment of the Adviser or Sub-Adviser, subject to review by the Board of
Directors, be both (i) at least as favorable as those which would be charged by
other qualified brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time, and (ii) at least as favorable as commissions
contemporaneously charged by such affiliated broker-dealers on comparable
transactions for their most favored comparable unaffiliated customers. While the
Funds do not deem it practicable and in their best interest to solicit
competitive bids for commission rates on each transaction, consideration will
regularly be given to posted commission rates as well as to other information
concerning the level of commissions charged on comparable transactions by other
qualified brokers.
Decisions with respect to placement of a Fund's portfolio transactions are
made by the Adviser or the Fund's Sub-Adviser, as the case may be. In selecting
brokers to execute portfolio transactions, the Adviser and the Sub-Advisers each
seeks to obtain the best price and execution of orders. Commission rates, being
a component of price, are considered together with other relevant factors. When
consistent with these criteria, business may be placed with broker-dealers who
furnish investment research services to the Sub-Advisers or the Adviser;
provided, however, that the provision of research and brokerage services may not
be considered in selecting dealers to execute futures contracts and related
options. Such research services include advice, both directly and in writing, as
to the value of securities, the advisability of investing in, purchasing, or
selling securities, and the availability of securities or purchasers or sellers
of securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts. This allows each of the Adviser and the Sub-Advisers 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, each of the Adviser and Sub-Advisers receives a benefit, not
capable of evaluation in dollar amounts, without providing any direct monetary
benefit to the Funds from these transactions. The Adviser and Sub-Advisers may,
from time to time, maintain an informal list of broker-dealers which may be used
as a general guide in the placement of Fund business in order to encourage
certain broker-dealers to provide research services. Because the list is merely
a general guide which is to be used only after the primary criteria for the
selection of broker-dealers (discussed above) have been met, substantial
deviations from the list are permissible and may be expected to occur. The
Adviser and Sub-Advisers will authorize a Fund to pay to a broker-dealer an
amount of commission for effecting a securities transaction in excess of the
amount of commission another broker-dealer would have charged only if the
Adviser or Sub-Advisers determines in good faith that such amount of commission
is reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer viewed in terms of either that particular
transaction or their overall responsibilities with respect to the accounts as to
which the Adviser or Sub-Adviser exercise investment discretion.
It is expected each Fund will purchase most foreign equity securities in
the over-the-counter markets or stock exchanges located in the countries in
which the respective principal offices of the issuers of the various securities
are located if that is the best available market. The fixed commissions paid in
connection with most such foreign stock transactions generally are higher than
negotiated commission on United States transactions. There generally is less
governmental supervision and regulation of foreign stock exchanges than in the
United States. Foreign securities settlements may in some instances be subject
to delays and related administrative uncertainties.
Foreign equity securities may be held in the form of American Depositary
Receipts, or ADRs, Global Depositary Receipts, or GDRs, or securities
convertible into foreign equity securities. ADRs and GDRs may be listed on stock
exchanges or traded in the over-the-counter markets in the United States or
overseas, as the case may be. ADRs, like other securities traded in the United
States, will be subject to negotiated commission rates. The foreign and domestic
debt securities and money market instruments in which the Funds may invest are
generally traded in over-the-counter markets.
Voyageur believes that most research services obtained by Voyageur or the
Sub-Advisers will generally benefit one or more of the investment companies
which they manage and will also benefit accounts which they manage. Normally
research services obtained through commissions paid by the managed funds and
accounts investing in debt securities would primarily benefit such funds and
accounts; similarly, services obtained from transactions in common stocks would
be of greater benefit to the managed funds and accounts investing in common
stocks.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to the policies set forth above and such
other policies as the Funds' directors may determine, Voyageur or the
Sub-Advisers may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
Pursuant to conditions set forth in rules of the Securities and Exchange
Commission, each Fund may purchase securities from an underwriting syndicate of
which an affiliated broker-dealer is a member (but not directly from such
affiliated broker-dealer itself). Such conditions relate to the price and amount
of the securities purchased, the commission or spread paid and the quality of
the issuer. The rules further require that such purchases take place in
accordance with procedures adopted and reviewed periodically by the Board of
Directors, particularly those Directors who are not interested persons of the
Company.
When two or more clients of the Adviser or Sub-Advisers are simultaneously
engaged in the purchase or sale of the same security, the prices and amounts are
allocated in accordance with a formula considered by the Adviser or Sub-Adviser
to be equitable to each client. In some cases, this system could have a
detrimental effect on the price or volume of the security as far as each client
is concerned. In other cases, however, the ability of the clients to participate
in volume transactions will produce better executions for each client.
The following table presents certain commission payment information with
respect to the Funds:
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS PAID
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Growth and Income Fund $7,303 N/A N/A
Growth Stock Fund 28,893 29,040 35,427
Aggressive Growth Fund 6,872 4,740 N/A
International Equity Fund 12,967 15,290 N/A
</TABLE>
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
It is each Fund's policy to distribute annually all net investment income.
Each Fund distributes annually all net realized capital gains, if any, after
offsetting any capital loss carryovers. Distributions are payable in full and
fractional shares of the Fund based upon the next determined net asset value on
the payment date for each distribution. A shareholder may, however, elect by
written application received by the Underwriter or such shareholder's financial
institution on or prior to the record date to receive net investment income
distributions or both net investment income and net capital gains distributions
in cash.
Under the Internal Revenue Code of 1986, as amended (the "Code") each Fund
will be subject to a non-deductible excise tax equal to 4% of the excess, if
any, of the amount required to be distributed for each calendar year over the
amount actually distributed. In order to avoid the imposition of this excise
tax, each Fund generally must declare dividends by the end of a calendar year
representing 98% of the Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long-term and short-term capital gains) for
the 12-month period ending October 31 of the calendar year. The 4% excise tax
does not apply to amounts with respect to which each Fund has paid a
corporate-level income tax.
For individuals, long-term capital gains are subject to a maximum tax rate
of 28% while ordinary income is generally subject to a maximum effective rate in
excess of 39.6% (resulting from a combination of a nominal 39.6% rate, a
phase-out of personal exemptions for individuals filing single returns with
adjusted gross income in excess of $114,700 and for married couples filing joint
returns with adjusted gross income in excess of $172,500, and a partial
disallowance of itemized deductions for individuals with adjusted gross income
in excess of $114,700). For corporations, both ordinary income and capital gains
are currently subject to a maximum rate of 35%.
Ordinarily, distributions and redemption proceeds earned by a Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of Fund distributions and redemption proceeds may be withheld upon the
occurrence of certain events specified in Section 3406 of the Code and
regulations promulgated thereunder. These events include the failure of a Fund
shareholder to supply the Fund or its agent with such shareholder's taxpayer
identification number. Withholding may also occur if a Fund shareholder who is
otherwise exempt from withholding fails to properly document such shareholder's
status as an exempt recipient.
If a taxpayer exchanges shares in a Fund for shares in another fund managed
by Voyageur pursuant to the exchange privilege (see "Exchange Privilege" in the
Prospectus), the exchange is a taxable event that may give rise to capital gain
or loss. Furthermore, if a shareholder uses the exchange privilege within 90
days of investing shares in the Fund, the shareholder may not take the sales
charge paid on purchase of the Fund shares into account in determining gain or
loss on the exchange (to the extent that the sales charge on the latter purchase
was reduced). Similarly, if a taxpayer redeems shares in the Fund within 90 days
of purchasing them and then repurchases shares in the Fund pursuant to the
reinstatement privilege (see "Reinstatement Privilege" in the Prospectus), the
shareholder may not take the sales charge paid on the initial purchase of Fund
shares into account in determining gain or loss on the sale of the first
acquired shares. However, in both cases the amount of the disallowed sales
charge may be taken into account in determining gain or loss on the eventual
disposition of the later acquired shares.
Each Fund intends to qualify each year as a "regulated investment company"
under Subchapter M of the Code. To qualify as a regulated investment company the
Fund must, among other things, receive at least 90% of its gross income each
year from dividends, interest, gains from the sale or other disposition of
securities and certain other types of income, including income from options and
futures contracts.
The Code forbids a regulated investment company from earning 30% or more of
its gross income from the sale or other disposition of stock, securities,
options, futures, and certain foreign currencies held less than three months.
This restriction may limit the extent to which a Fund may purchase futures
contracts and options. To the extent a Fund engages in short-term trading and
enters into futures and options transactions, the likelihood of violating this
30% requirement is increased.
The Code also requires a regulated investment company to diversify its
holdings. The Internal Revenue Service has not made its position clear regarding
the treatment of futures contracts and options for purposes of the
diversification test, and the extent to which a Fund could buy or sell futures
contracts and options may be limited by this requirement.
Gain or loss on futures contracts and options is taken into account when
realized by entering into a closing transaction or by exercise. In addition,
with respect to many types of futures contracts and options held at the end of a
Fund's taxable year, unrealized gain or loss on such contracts is taken into
account at the then current fair market value thereof under a special
"marked-to-market, 60/40 system," and such gain or loss is recognized for tax
purposes. The gain or loss from such futures contracts and options (including
premiums on certain options that expire unexercised) is treated as 60% long-term
and 40% short-term capital gain or loss, regardless of their holding period. The
amount of any capital gain or loss actually realized by a Fund in a subsequent
sale or other disposition of such futures contracts will be adjusted to reflect
any capital gain or loss taken into account by such Fund in a prior year as a
result of the constructive sale under the "marked-to-market, 60/40 system."
Code Section988 may apply for forward currency contracts.
Under Section988, each foreign currency gain or loss is generally
computed separately and treated as ordinary income or loss. In the case
of overlap between Sections1256 and 988, special provisions determine the
character and timing of any income, gain or loss. The Fund will attempt
to monitor Section988 transactions to avoid an adverse tax impact.
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 October31, and any such net foreign currency loss will be treated
as arising on the first day of the following taxable year.
Pursuant to the Code, distributions of net investment income by 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 a 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.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the net asset value of Fund shares is summarized
in the Funds' prospectus in "Determination of Net Asset Value." The public
offering price of Class A shares is the net asset value of Fund shares plus the
applicable front end sales charge, if any. The maximum front end sales charge is
4.99% of the net asset value. The public offering price of Class B and Class C
shares is the net asset value of Fund shares. The portfolio securities in which
a Fund invests fluctuate in value, and, therefore, the net asset value per share
of a Fund also fluctuates.
As of April 30, 1996, the net asset value per share of each Fund was
calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Growth and Income Fund
Class A
NET ASSETS ($3,962,412 = Net Asset Value Per Share ($11.24)
-----------------------
Shares Outstanding (352,525)
Class B
NET ASSETS ($11,144) = Net Asset Value Per Share ($11.21)
--------------------
Shares Outstanding (994)
Growth Stock Fund
Class A
NET ASSETS ($28,956,425) = Net Asset Value Per Share ($23.66)
------------------------
Shares Outstanding (1,223,980)
Class B
NET ASSETS ($453,968) = Net Asset Value Per Share ($23.39)
---------------------
Shares Outstanding (19,405)
Class C
NET ASSETS ($104,122) = Net Asset Value Per Share ($23.43)
---------------------
Shares Outstanding (4,443)
International Equity Fund
Class A
NET ASSETS ($2,792,376) = Net Asset Value Per Share ($10.41)
-----------------------
Shares Outstanding (268,131)
Class B
NET ASSETS ($23,777) = Net Asset Value Per Share ($10.40)
--------------------
Shares Outstanding (2,287)
Class C
NET ASSETS ($29,327) = Net Asset Value Per Share ($10.29)
--------------------
Shares Outstanding (2,850)
Aggressive Growth Fund
Class A
NET ASSETS ($4,334,167) = Net Asset Value Per Share ($13.08)
-----------------------
Shares Outstanding (331,381)
Class B
NET ASSETS ($328.96) = Net Asset Value Per Share ($13.06)
--------------------
Shares Outstanding (25.189)
Class C
NET ASSETS ($149,857) = Net Asset Value Per Share ($12.88)
---------------------
Shares Outstanding (11,633)
</TABLE>
SPECIAL PURCHASE PLANS
AUTOMATIC INVESTMENT PLAN. As a convenience to investors, shares may be
purchased through a preauthorized automatic investment plan. Such preauthorized
investments (at least $100) may be used to purchase shares of the Fund at the
public offering price next determined after the Fund receives the investment
(normally the 20th of each month, or the next business day thereafter). Further
information is available from the Underwriter.
COMBINED PURCHASE PRIVILEGE. The following persons (or groups of persons)
may qualify for reductions from the front end sales charge ("FESC") schedule for
Class A shares set forth in the Funds' Prospectus by combining purchases of any
class of shares of any one or more of the Voyageur funds which bears a FESC
(and, in certain circumstances purchases of FESC shares of certain other
open-end investment companies) if the combined purchase of all such funds totals
at least $50,000:
(i) an individual, or a "company" as defined in Section 2(a)(8) of the
1940 Act;
(ii) an individual, his or her spouse and their children under age 21,
purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust) created pursuant to a plan qualified under
Section 401 of the Code;
(iv) tax-exempt organizations enumerated in Section 501(c)(3) of the
Code;
(v) employee benefit plans of a single employer or of affiliated
employers;
(vi) any organized group which has been in existence for more than six
months, provided that it is not organized for the purpose of buying
redeemable securities of a registered investment company, and provided that
the purchase is made through a central administration, or through a single
dealer, or by other means which result in economy of sales effort or
expense. An organized group does not include a group of individuals whose
sole organizational connection is participation as credit cardholders of a
company, policyholders of an insurance company, customers of either a bank
or broker-dealer, or clients of an investment adviser.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). A purchase of Class A
shares may qualify for a Cumulative Quantity Discount. The applicable FESC will
then be based on the total of:
(i) the amount of the current purchase; and
(ii) the amount previously invested (valued at the time of investment)
in shares of any class of one or more Voyageur funds which has a FESC owned
by the investor; and
(iii) the amount previously invested (valued at the time of
investment) in shares of any class of one or more Voyageur funds which has
a FESC owned by another shareholder eligible to participate with the
investor in a "Combined Purchase Privilege" (see above).
For example, if an investor owned shares worth $25,000 at the then current
net asset value and purchased an additional $40,000 of shares, the sales charge
for the $40,000 purchase would be at the rate applicable to a single $65,000
purchase.
To qualify for the Combined Purchase Privilege or to obtain the Cumulative
Quantity Discount on a purchase through an investment dealer, when each purchase
is made the investor or dealer must provide the Fund with sufficient information
to verify that the purchase qualifies for the privilege or discount.
LETTER OF INTENTION. Investors may also obtain the reduced front end sales
charges for Class A shares shown in the Prospectus by means of a written Letter
of Intention, which expresses the investor's intention to invest at least
$50,000 (including certain "credits," as described below) within a period of 13
months in any one or more of the Voyageur funds which has a FESC. Each purchase
of shares under a Letter of Intention will be made at the public offering price
applicable at the time of such purchase to a single transaction of the dollar
amount indicated in the Letter. A Letter of Intention may include purchases of
shares made not more than 90 days prior to the date that an investor signs a
Letter; however, the 13-month period during which the Letter is in effect will
begin on the date of the earliest purchase to be included. Investors qualifying
for the Combined Purchase Privilege described above may purchase shares under a
single Letter of Intention.
If, for example, on the date an investor signs a Letter of Intention to
invest at least $50,000 as set forth above and the investor and the investor's
spouse and children under age 21 have previously invested $30,000 in shares
which are still held by such persons, it will only be necessary to invest a
total of $20,000 during the 13 months following the first date of purchase of
such shares in order to qualify for the sales charges, on the $20,000 purchase,
applicable to investments of $50,000.
The Letter of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intention is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased. When the full amount indicated has been purchased, the escrow will be
released. To the extent that an investor purchases more than the dollar amount
indicated on the Letter of Intention and qualifies for further reduced sales
charges, the sales charges will be adjusted for the entire amount purchased at
the end of the 13-month period. The difference in sales charges will be used to
purchase additional shares at the then current offering price applicable to the
actual amount of the aggregate purchases.
Investors electing to take advantage of the Letter of Intention should
carefully review the appropriate provisions on the authorization form attached
to the Prospectus.
Shares of other open-end investment companies bearing a FESC will be
included with Voyageur fund shares bearing a FESC in a Combined Purchase
Privilege, Cumulative Quantity Discount or Letter of Intention only if such
shares are owned by customers of dealers that Voyageur or the Underwriter has
engaged to provide administration or accounting services to Fund omnibus
accounts in connection with the offering of the Fund as part of such other
investment companies' family of funds. Additionally, the maximum reduction of
the Fund's FESC that may result from the inclusion of shares of such other
investment companies in a Combined Purchase Privilege, Cumulative Quantity
Discount or Letter of Intention shall be a reduction to the front-end sales
charge applicable to purchases of $500,000 but less than $1,000,000 (as set
forth in the sales charge table in the Prospectus).
OTHER INFORMATION
CONVERSION OF CLASS B SHARES. In addition to information regarding
conversion set forth in the prospectus, the conversion of Class B shares to
Class A shares is subject to the continuing availability of a ruling from the
Internal Revenue Service or an opinion of counsel that payment of different
dividends by each of the classes of shares does not result in the Funds'
dividends or distributions constituting "preferential dividends" under the Code
and that such conversions do not constitute taxable events for Federal tax
purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion will not be available. In such event, Class B shares
would continue to be subject to higher expenses than Class A shares for an
indefinite period.
SIGNATURE GUARANTY. In addition to information regarding redemption of
shares and signature guaranty set forth in the Prospectus, a signature guaranty
will be required when redemption proceeds: (1) exceed $50,000 (unless proceeds
are being wired to a pre-authorized bank account, in which case a guarantee is
not required), (2) are to be paid to someone other than the registered
shareholder or (3) are to be mailed to an address other than the address of
record or wired to an account other than the pre-authorized bank or brokerage
account. On joint account redemptions of the type previously listed, each
signature must be guaranteed. A signature guarantee may not be provided by a
notary public. Please contact your investment executive for instructions as to
what institutions constitute eligible signature guarantors.
VALUATION OF PORTFOLIO SECURITIES. Generally, trading in certain securities
such as tax-exempt securities, corporate bonds, U.S. Government securities and
money market instruments is substantially completed each day at various times
prior to the primary close of trading on the Exchange. The values of such
securities used in determining the net asset value of Fund shares are computed
as of such times. Occasionally events affecting the value of such securities may
occur between such times and the primary close of trading on the Exchange which
are not reflected in the computation of net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities are valued at their fair market value as determined in good faith by
Voyageur in accordance with procedures adopted by the Board.
BANK PURCHASES. Banks, acting as agents for their customers and not for the
Funds or the Underwriter, from time to time may purchase Fund shares for the
accounts of such customers. Generally, the Glass-Steagall Act prohibits banks
from engaging in the business of underwriting, selling or distributing
securities. Should the activities of any bank, acting as agent for its customers
in connection with the purchase of any Fund's shares, be deemed to violate the
Glass-Steagall Act, management will take whatever action, if any, is appropriate
in order to provide efficient services for the Funds. Management does not
believe that a termination in the relationship with a bank would result in any
material adverse consequences to the Funds. In addition, state securities laws
on this issue may differ and banks and financial institutions may be required to
register as dealers pursuant to state law. Fund 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.
CALCULATION OF PERFORMANCE DATA
AVERAGE ANNUAL TOTAL RETURN. Advertisements and other sales literature for
a Fund may refer to "average annual total return." Average annual total return
figures are computed by finding the average annual compounded rates of return
over the periods indicated in the advertisement ending April 30, 1996 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 gains
distributions are reinvested at net asset value on the appropriate reinvestment
dates as described in the Prospectus and includes all recurring fees, such as
investment advisory and management fees, charged to all shareholder accounts.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------
ABSENT VOLUNTARY
FEE WAIVERS AND
ACTUAL EXPENSE REIMBURSEMENT
------ ---------------------
1 5 10 SINCE 1 5 10 SINCE
YEAR YEAR YEAR INCEPTION YEAR YEAR YEAR INCEPTION
---- ---- ---- --------- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Growth and Income Fund
Class A (Inception 9/7/95) N/A N/A N/A 7.29% N/A N/A N/A 6.62%
Class B (Inception 12/28/95) N/A N/A N/A 4.36% N/A N/A N/A 0.98%
Growth Stock Fund
Class A (Inception 8/1/85) 19.06% 11.75% 12.82% 15.06% 18.92% 11.55% 11.69% 14.85%
Class B (Inception 9/8/95) N/A N/A N/A 10.37% N/A N/A N/A 10.33%
Class C (Inception 10/21/95) N/A N/A N/A 8.72% N/A N/A N/A 8.72%
International Equity Fund
Class A (Inception 5/16/94) 5.48% N/A N/A (0.33)% 4.67% N/A N/A (1.90%)
Class B (Inception 1/16/96) N/A N/A N/A 0.31% N/A N/A N/A 0.01%
Class C (Inception 5/20/94) 9.94% N/A N/A 1.53% 9.72% N/A N/A 0.92%
Aggressive Growth Fund
Class A (Inception 5/16/94) 24.80% N/A N/A 14.26% 23.87% N/A N/A 13.26%
Class B (Inception 4/16/96) N/A N/A N/A 5.66% N/A N/A N/A 5.66%
Class C (Inception 5/20/94) 29.96% N/A N/A 16.27% 28.78% N/A N/A 15.21%
</TABLE>
CUMULATIVE TOTAL RETURN. Cumulative total return is computed by finding the
cumulative compounded rate of return over the period indicated in the
advertisement from inception date through April 30, 1996 that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
CRT = (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.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN SINCE INCEPTION
---------------------------------------
ABSENT VOLUNTARY FEE
WAIVERS AND EXPENSE
ACTUAL REIMBURSEMENTS
------ --------------
Growth and Income Fund
<S> <C> <C>
Class A (Inception 9/7/95) 7.29% 6.62%
Class B (Inception 12/20/95) 1.36% 0.98%
Growth Stock Fund
Class A (Inception 8/1/85) 351.99% 348.24%
Class B (Inception 9/8/95) 10.37% 10.33%
Class C (Inception 10/21/95) 8.72% 8.72%
International Equity Fund
Class A (Inception 5/16/94) (0.64)% (3.69%)
Class B (Incpeiotn 1/16/96) 0.31% 0.01%
Class C (Inception 5/20/94) 3.00% 1.80%
Aggressive Growth Fund
Class A (Inception 5/16/94) 29.79% 27.64%
Class B (Inception 4/16/96) 5.66% 5.66%
Class C (Inception 5/20/94) 34.25% 31.78%
</TABLE>
This calculation deducts the maximum sales charge from the initial
hypothetical $1,000 investment, assumes all dividends and capital gain
distributions are reinvested at net asset value on the appropriate reinvestment
dates as described in the Prospectus and includes all recurring fees, such as
investment advisory and management fees, charged to all shareholder accounts.
MONTHLY CASH WITHDRAWAL PLAN
Any investor who owns or buys shares of any Fund valued at $10,000 or more
at the current offering price may open a Withdrawal Plan and have a designated
sum of money paid monthly to the investor or another person. Shares are
deposited in a Withdrawal Plan account and all distributions are reinvested in
additional shares of such Fund at net asset value. Shares in a Withdrawal Plan
account are then redeemed at net asset value to make each withdrawal payment.
Deferred sales charges may apply to monthly redemptions of Class B or Class C
shares (or to redemptions of Class A shares in connection with initial purchases
of $1,000,000 or more which were not subject to a FESC). Redemptions for the
purpose of withdrawal are made on the 25th of the month (or on the preceding
business day if the 25th falls on a weekend or is a holiday) at that day's
closing net asset value and checks are mailed on the next business day. Payments
will be made to the registered shareholder. As withdrawal payments may include a
return on principal, they cannot be considered a guaranteed annuity or actual
yield of income to the investor. The redemption of shares in connection with a
Withdrawal Plan may result in a gain or loss for tax purposes. Continued
withdrawals in excess of income will reduce and possibly exhaust invested
principal, especially in the event of a market decline. The maintenance of a
Withdrawal Plan concurrently with purchases of additional Class A shares of a
Fund normally be disadvantageous to the investor because of the FESC payable on
such purchases. For this reason, an investor may not maintain a plan for the
accumulation of Class A shares of a Fund (other than through reinvestment of
distributions) and a Withdrawal Plan at the same time. The cost of administering
the Withdrawal Plan is borne by each Fund as an expense of all shareholders.
Each Fund or the Underwriter may terminate or change the terms of the Withdrawal
Plan at any time. The Withdrawal Plan is fully voluntary and may be terminated
by the shareholder at any time without the imposition of any penalty.
Since the Withdrawal Plan may involve invasion of capital, investors should
consider carefully with their own financial advisers whether the Withdrawal Plan
and the specified amounts to be withdrawn are appropriate in their
circumstances. The Funds make no recommendations or representations in this
regard.
ADDITIONAL INFORMATION
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A., Sixth Street & Marquette Avenue, Minneapolis,
Minnesota 55479, acts as custodian of each Fund's assets and portfolio
securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota 55402,
serves as Counsel for the Company.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402,
serves as the Company's independent auditors.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director of the Company owes certain fiduciary
duties to the Funds and to their shareholders. Minnesota law provides that a
director "shall discharge the duties of the position of director in good faith,
in a manner the director reasonably believes to be in the best interest of the
corporation, and with the care an ordinarily prudent person in a like position
would exercise under similar circumstances." Fiduciary duties of a director of a
Minnesota corporation include, therefore, both a duty of "loyalty" (to act in
good faith and act in a manner reasonably believed to be in the best interests
of the corporation) and a duty of "care" (to act with the care an ordinarily
prudent person in a like position would exercise under similar circumstances).
Minnesota corporations are authorized to eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of the fiduciary duty of "care". Minnesota law does not,
however, permit a corporation to eliminate or limit the liability of a director
(i) for any breach of the directors' duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation of
Minnesota law or for violation of certain provisions of Minnesota securities
law, or (iv) for any transaction from which the director derived an improper
personal benefit. The Company's Articles of Incorporation limit the liability of
it's directors to the fullest extent permitted by Minnesota statutes, except to
the extent that such liability cannot be limited as provided in the 1940 Act
(which prohibits any provisions which purport to limit the liability of
directors arising from such directors' willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of their
role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the 1940 Act and the rules and regulations
adopted thereunder.
SHAREHOLDER MEETINGS
The Company is not required under Minnesota law to hold annual or
periodically scheduled regular meetings of shareholders. Regular and special
shareholder meetings are held only at such times and with such frequency as
required by law. Minnesota corporation law provides for the Board of Directors
to convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, a shareholder or shareholders holding three percent or
more of the voting shares of the Company may demand a regular meeting of
shareholders by written notice of demand given to the chief executive officer or
the chief financial officer of the Company. Within ninety days after receipt of
the demand, a regular meeting of shareholders must be held at the expense of the
Company. Additionally, the 1940 Act requires shareholder votes for all
amendments to fundamental investment policies and restrictions and for all
amendments to investment advisory contracts and Rule 12b-1 distribution plans.
ORGANIZATION AND CAPITALIZATION OF THE FUNDS
Each Fund is a series of Voyageur Mutual Funds III, Inc. which was
incorporated under the laws of the State of Minnesota in January 1985.
Each Fund's fiscal year ends on April 30 of each year.
APPENDIX A
COMMON STOCK, CORPORATE BOND, PREFERRED STOCK AND
COMMERCIAL PAPER RATINGS
EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
STANDARD & POORS RATINGS SERVICES. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, Standard & Poor's
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. The rankings,
however, do not pretend to reflect all of the factors, tangible or intangible,
that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection for
principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements in
establishing Standard & Poor's earnings and dividend rankings for common stocks,
which are designed to capsulize the nature of this record in a single symbol. It
should be noted, however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in general,
corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the stock
is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S RATINGS SERVICES. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
MOODY'S INVESTORS SERVICE, INC. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations.
Prime-2 Strong capacity for repayment of short-term promissory obligations.
Prime-3 Acceptable capacity for repayment of short-term promissory
obligations.
CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS SERVICES. Its ratings for corporate bonds have
the following definitions:
INVESTMENT GRADE:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE:
Debt rated "BB," "B," "CCC" and "CC" and "C" is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
MOODY'S INVESTORS SERVICE, INC. Its ratings for corporate bonds include the
following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Bonds which are rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
PREFERRED STOCK RATING
STANDARD& POOR'S RATINGS SERVICES. Its ratings for preferred stock have the
following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rate "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MOODY'S INVESTORS SERVICE, INC. Its ratings for preferred stock include the
following:
An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
An issue which is rate "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
An issue which is rated "baa" is considered to be medium-grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "c" is the lowest rated class of preferred or preference
stock. Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
APPENDIX B
STOCK INDEX FUTURES CONTRACTS AND RELATED OPTIONS
STOCK INDEX FUTURES CONTRACTS
To the extent described in the Prospectus and Statement of Additional
Information, each Fund may purchase and sell stock index futures contracts,
options thereon and options on stock indexes. Stock index futures contracts are
commodity contracts listed on commodity exchanges. They presently include
contracts on the Standard & Poor's 500 Stock Index (the "S&P 500 Index") and
such other broad stock market indexes as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index, as well as narrower
"sub-indexes" such as the S&P 100 Energy Stock Index and the New York Stock
Exchange Utilities Stock Index. A stock index assigns relative values to common
stocks included in the index and the index fluctuates with the value of the
common stocks so included. A futures contract is a legal agreement between a
buyer or seller and the clearing house of a futures exchange in which the
parties agree to make a cash settlement on a specified future date in an amount
determined by the stock index on the last trading day of the contract. The
amount is a specified dollar amount (usually $100 or $500) times the difference
between the index value on the last trading day and the value on the day the
contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks, most
of which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the common stocks included in the Index, and the Index
fluctuates with changes in the market values of those common stocks. In the case
of S&P 500 Index futures contracts, the specified multiple is $500. Thus, if the
value of the S&P 500 Index were 150, the value of one contract would be $75,000
(150 x $500). Unlike other futures contracts, a stock index futures contract
specifies that no delivery of the actual stocks making up the index will take
place. Instead, settlement in cash must occur upon the termination of the
contract with the settlement amount being the difference between the contract
price and the actual level of the stock index at the expiration of the contract.
For example (excluding any transaction costs), if a Fund enters into one futures
contract to buy the S&P 500 Index at a specified future date at a contract value
of 150 and the S&P 500 Index is at 154 on that future date, the Fund will gain
$500 x (154-150) or $2,000. If a Fund enters into one futures contract to sell
the S&P 500 Index at a specified future date at a contract value of 150 and the
S&P 500 Index is at 152 on that future date, the Fund will lose $500 x (152-150)
or $1,000.
Unlike the purchase or sale of an equity security, no price would be paid
or received by a Fund upon entering into stock index futures contracts. Upon
entering into a contract, a Fund would be required to deposit with its custodian
in a segregated account in the name of the futures broker an amount of cash or
U.S. Treasury bills equal to a portion of the contract value. This amount is
known as "initial margin." The nature of initial margin in futures transactions
is different from that of margin in security transactions in that futures
contract margin does not involve borrowing funds by the Fund to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract that is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied.
Subsequent payments, called "variation margin," to and from the broker
would be made on a daily basis as the price of the underlying stock index
fluctuates, making the long and short positions in the contract more or less
valuable, a process known as "marking to the market." For example, when a Fund
enters into a contract in which it benefits from a rise in the value of an index
and the price of the underlying stock index has risen, such Fund will receive
from the broker a variation margin payment equal to that increase in value.
Conversely, if the price of the underlying stock index declines, such Fund would
be required to make a variation margin payment to the broker equal to the
decline in value.
Each Fund intends to use stock index futures contracts and related options
for hedging and not for speculation. Hedging permits a Fund to gain rapid
exposure to or protect itself from changes in the market. For example, a Fund
may find itself with a high cash position at the beginning of a market rally.
Conventional procedures of purchasing a number of individual issues entail the
lapse of time and the possibility of missing a significant market movement. By
using futures contracts, the Fund can obtain immediate exposure to the market
and benefit from the beginning stages of a rally. The buying program can then
proceed, and once it is completed (or as it proceeds), the contracts can be
closed. Conversely, in the early stages of a market decline, market exposure can
be promptly offset by entering into stock index futures contracts to sell units
of an index and individual stocks can be sold over a longer period under cover
of the resulting short contract position.
Each Fund may enter into contracts with respect to any stock index or
sub-index. To hedge a Fund's portfolio successfully, however, such Fund must
enter into contracts with respect to indexes or sub-indexes whose movements will
have a significant correlation with movements in the prices of such Fund's
portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS
To the extent described in the Prospectus and Statement of Additional
Information each Fund may purchase and sell put and call options on stock index
futures contracts which are traded on a recognized exchange or board of trade as
a hedge against changes in the market, and will enter into closing transactions
with respect to such options to terminate existing positions. An option on a
stock index futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the option.
A call option gives the purchaser of such option the right to buy, and it
obliges its writer to sell, a specified underlying futures contract at a
specified exercise price at any time prior to the expiration date of the option.
A purchaser of a put option has the right to sell, and the writer has the
obligation to buy, such contract at the exercise price during the option period.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's future margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. If an option is exercised on the last trading day prior
to the expiration date of the option, the settlement will be made entirely in
cash equal to the difference between the exercise price of the option and the
closing price of the stock index futures contract on the expiration date. Each
Fund will pay a premium for purchasing options on stock index futures contracts.
Because the value of the option is fixed at the point of sale, there are no
daily cash payments to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset value of a Fund. In connection with the writing of
options on stock index futures contracts, a Fund will make initial margin
deposits and make or receive maintenance margin payments that reflect changes in
the market value of such options. Premiums received from the writing of an
option are included in initial margin deposits.
PURCHASE OF PUT OPTIONS ON FUTURES CONTRACTS. Each Fund will purchase put
options on futures contracts if the Fund's investment adviser or sub-adviser
anticipates a market decline. A put option on a stock index futures contract
becomes more valuable as the market declines. By purchasing put options on stock
index futures contracts at a time when a Fund's investment adviser or
sub-adviser expects the market to decline, such Fund will seek to realize a
profit to offset the loss in value of its portfolio securities.
PURCHASE OF CALL OPTIONS ON FUTURES CONTRACTS. A Fund will purchase call
options on stock index futures contracts if the Fund's investment adviser
anticipates a market rally. The purchase of a call option on a stock index
futures contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. A call option on such a contract becomes more
valuable as the market appreciates. A Fund will purchase a call option on a
stock index futures contract to hedge against a market advance when the Fund is
holding cash. A Fund can take advantage of the anticipated rise in the value of
equity securities without actually buying them until the market is stabilized.
At that time, the options can be liquidated and the Fund's cash can be used to
buy portfolio securities.
WRITING CALL OPTIONS ON FUTURES CONTRACTS. A Fund will write call options
on stock index futures contracts if the Fund's investment adviser anticipates a
market decline. As the market declines, a call option on such a contract becomes
less valuable. If the futures contract price at expiration of the option is
below the exercise price, the option will not be exercised and the Fund will
retain the full amount of the option premium. Such amount provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
securities.
WRITING PUT OPTIONS ON FUTURES CONTRACTS. A Fund will write put options on
stock index futures contracts if the Fund's investment adviser anticipates a
market rally. As the market appreciates, a put option on a stock index futures
contract becomes less valuable. If the futures contract price at expiration of
the option has risen due to market appreciation and is above the exercise price,
the option will not be exercised and the Fund will retain the full amount of the
option premium. Such amount can then be used by a Fund to buy portfolio
securities when the market has stabilized.
RISKS RELATING TO OPTIONS ON STOCK INDEX FUTURES CONTRACTS. Compared to the
purchase or sale of futures contracts, the purchase of call or put options on
futures contracts involves less potential risk to a Fund because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when a purchase of a call or put option on a
futures contract would result in a loss to a Fund when the purchase or sale of a
futures contract would not result in a loss, such as when there is no movement
in the underlying index.
The writing of a put or call option on a futures contract involves risks
similar to those relating to transactions in futures contracts as described in
the Prospectus and Statement of Additional Information. By writing a call
option, a Fund, in exchange for the receipt of a premium, becomes obligated to
sell a futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, but the Fund becomes obligated to purchase a futures contract, which
may have a value lower than the exercise price. The loss incurred by the Fund in
writing options on futures contracts may exceed the amount of the premium
received.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option of the same series. There
is no guarantee that such closing transactions can be effected. A Fund's ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Finally, a Fund's purchase or sale of put or call options on stock index
futures contracts will be based upon predictions as to anticipated market trends
by the Fund's investment adviser or sub-adviser, which could prove to be
inaccurate. Even if the expectations of the Fund's investment adviser or
sub-adviser are correct, there may be an imperfect correlation between the
change in the value of the options and of the Fund's portfolio securities.
