THORNBURG INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
for
THORNBURG INTERMEDIATE MUNICIPAL FUNDS
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501
Thornburg Intermediate Municipal Funds (the "Funds") are series of
Thornburg Investment Trust (the "Trust"), each with a separate investment
portfolio and each having one or more classes of shares:
Thornburg Alabama Intermediate Municipal Fund ("Intermediate Alabama Fund")
Thornburg Arizona Intermediate Municipal Fund ("Intermediate Arizona Fund")
Thornburg Florida Intermediate Municipal Fund ("Intermediate Florida Fund")
Thornburg Intermediate Municipal Fund ("Intermediate National Fund")
Thornburg New Mexico Intermediate Municipal Fund
("Intermediate New Mexico Fund")
Thornburg Pennsylvania Intermediate Municipal Fund
("Intermediate Pennsylvania Fund")
Thornburg Tennessee Intermediate Municipal Fund
("Intermediate Tennessee Fund")
Thornburg Texas Intermediate Municipal Fund ("Intermediate Texas Fund")
Thornburg Utah Intermediate Municipal Fund ("Intermediate Utah Fund")
The Funds' investment adviser is Thornburg Management Company, Inc. ("TMC").
This Statement of Additional Information relates to the investments
proposed to be made by the Funds, investment policies governing the Funds,
the Funds' management, and other issues of interest to a prospective
purchaser of shares in the Funds.
This Statement of Additional Information is not a prospectus but should
be read in conjunction with the Funds' Prospectus dated February 1, 1996. A
copy of the Prospectus may be obtained at no charge by writing to the
distributor of the Funds' shares, Thornburg Securities Corporation ("TSC"),
at 119 East Marcy Street, Suite 202, Santa Fe, New Mexico 87501.
The Trust's name was "Thornburg Income Trust" until October 1, 1995.
The date of this Statement of Additional Information is February 1,
1996.
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVES AND POLICIES. . . . . . . . . 1
Municipal Obligations. . . . . . . . . . . . . 3
Ratings . . . . . . . . . . . . . . . . . . . . 6
Municipal Notes. . . . . . . . . . . . . . . . 7
Tax-Exempt Demand Bonds. . . . . . . . . . . . 7
Commercial Paper . . . . . . . . . . . . . . . 7
Temporary Investments. . . . . . . . . . . . . 8
Repurchase Agreements. . . . . . . . . . . . . 8
U.S. Government Obligations. . . . . . . . . . 9
INVESTMENT LIMITATIONS. . . . . . . . . . . . . . . 9
YIELD AND RETURN COMPUTATION:
Performance and Portfolio Information. . . . . 12
Computation of Yield and Return - In General . 12
Additional Portfolio and Performance Information 13
REPRESENTATIVE PERFORMANCE INFORMATION. . . . . . . 14
Thornburg Intermediate Municipal Fund
(Classes A and C). . . . . . . . . . . . . . . 14
Standardized Method of Computing Yield . . . . 14
Non-standardized Method of Computing Yield . . 14
Taxable Equivalent Yield . . . . . . . . . . . 14
Average Annual Total Return. . . . . . . . . . 15
Thornburg New Mexico Intermediate Municipal Fund
(Classes A and C). . . . . . . . . . . . . . . 15
Standardized Method of Computing Yield . . . . 15
Non-standardized Method of Computing Yield . . 15
Taxable Equivalent Yield . . . . . . . . . . . 16
Average Annual Total Return. . . . . . . . . . 16
Thornburg Florida Intermediate Municipal Fund
(Classes A and C). . . . . . . . . . . . . . . 17
Standardized Method of Computing Yield . . . . 17
Non-standardized Method of Computing Yield . . 17
Taxable Equivalent Yield . . . . . . . . . . . 17
Average Annual Total Return. . . . . . . . . . 18
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . 19
Distributions. . . . . . . . . . . . . . . . . 19
Federal Income Tax Matters . . . . . . . . . . 19
State and Local Tax Aspects. . . . . . . . . . 22
Accounts of Shareholders . . . . . . . . . . . 23
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT 23
SERVICE AND DISTRIBUTION PLANS. . . . . . . . . . . 26
Service Plans - Both Classes . . . . . . . . . 26
Class C Distribution Plan. . . . . . . . . . . 26
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . 28
MANAGEMENT AND HOLDERS OF SECURITIES. . . . . . . . 29
HOW TO PURCHASE FUND SHARES . . . . . . . . . . . . 32
NET ASSET VALUE . . . . . . . . . . . . . . . . . . 35
REDEMPTION OF SHARES. . . . . . . . . . . . . . . . 36
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . 36
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 37
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of each of the Funds is to provide for
its shareholders as high a level of current income exempt from Federal income
tax as is consistent, in the view of the Funds' investment adviser, TMC, with
preservation of capital. The Alabama, Arizona, New Mexico, Pennsylvania and
Tennessee Funds also seek to provide as high a level of current income exempt
from state individual income taxes as is consistent, in the view of TMC, with
preservation of capital. The Florida and Pennsylvania Funds seek exemption
from those states' imposition of taxes on intangible personal property. A
secondary investment objective of the Funds is reducing fluctuations in net
asset value per share relative to long-term municipal bond portfolios, by
maintaining a portfolio with a dollar-weighted average maturity that will
normally not exceed three to ten years. There is a risk in all investments,
however, and there can be no assurance that the Funds' objectives will be
achieved. The objective of preservation of capital may preclude the Funds
from obtaining the highest available yields. The National, New Mexico and
Texas Funds were organized on June 4, 1991. The Arizona Fund was organized
on January 24, 1994. The other Funds were organized on October 4, 1993.
The New Mexico Fund commenced investment operations on June 21, 1991,
and the National Fund commenced investment operations on July 23, 1991. The
Florida Fund commenced investment operations on February 1, 1994.
The dollar-weighted average effective maturity of the Funds' portfolios
normally will not exceed three to ten years. Price changes in the Funds'
shares therefore can be expected to be more moderate than the per share
fluctuations of portfolios with longer-term bonds.
The Intermediate National Fund will seek to achieve its objectives by
investing in a diversified portfolio of obligations issued by state and local
governments. Each single state Fund will acquire Municipal Obligations
issued principally by the state having the same name as the Fund, and the
political subdivisions and the agencies thereof. Any Fund may invest in
obligations of United States possessions and territories or their agencies
and instrumentalities. Each single state Fund may invest more than 5% of its
portfolio assets in the securities of a single issuer provided that it may
not purchase any security (other than certain United States Government
securities) if, as a result, more than 5% of the Trust's total assets would
be invested in securities of a single issuer. See the discussion under the
caption "Investment Limitations."
Each Fund's assets will normally consist of (1) Municipal Obligations or
participation interests therein that are rated at the time of purchase within
the four highest grades Aaa, Aa, A, Baa by Moody's Investors Service
("Moody's"), or AAA, AA, A, BBB of Standard & Poor's Corporation ("S&P"), or
Fitch Investors Service ("Fitch"), (2) Municipal Obligations or participation
interests therein that are not rated by a rating agency, but are issued by
obligors that either have other comparable debt obligations that are rated
within the four highest grades by Moody's S&P or Fitch, or, in the case of
obligors whose obligations are unrated, are deemed by TMC to be comparable
with issuers having such debt ratings, and (3) a small amount of cash or
equivalents. In normal conditions, the Funds will hold cash pending
investment in portfolio securities or anticipated redemption requirements.
For an explanation of these ratings, please see "Ratings," page 9. to the
extent that unrated Municipal Obligations may be less liquid, there may be
somewhat greater risk in purchasing unrated Municipal Obligations than in
purchasing comparable, rated Municipal Obligations. If a Fund experienced
unexpected net redemptions, it could be forced to sell such unrated Municipal
Obligations at disadvantageous prices without regard to the Obligations'
investment merits, depressing the Fund's net asset value and possibly
reducing the Fund's overall investment performance.
Except to the extent that the Funds are invested in temporary
investments for defensive purposes, each Fund will, under normal conditions,
invest 100% of its net assets in Municipal Obligations and normally will not
invest less than 80% of its net assets in Municipal Obligations. This 80%
policy is a fundamental investment policy of the Funds and may be changed
only with the approval of a majority of the outstanding voting securities of
a given series of the Fund. Under normal conditions, each single state Fund
will attempt to invest 100%, and as a matter of fundamental policy, will
invest at least 65% of its net assets in Municipal Obligations which
originate in the state having the same name as the Fund.
The ability of the Funds to achieve their investment objectives is
dependent upon the continuing ability of issuers of Municipal Obligations in
which the Funds invest to meet their obligations for the payment of interest
and principal when due. In addition to using information provided by the
rating agencies, TMC will subject each issue under consideration for
investment to its own credit analysis in an effort to assess each issuer's
financial soundness. This analysis is performed on a continuing basis for
all issues held by the Funds. TMC subjects each issue under consideration
for investment to the same or similar credit analysis that TMC applies to
rated issues.
Credit ratings are helpful in evaluating bonds, but are relevant
primarily to the safety of principal and interest payments under the bonds.
These ratings do not reflect the risk that market values of bonds will
fluctuate with changes in interest rates. Additionally, credit rating
agencies may fail to change credit ratings in a timely fashion to reflect
events subsequent to initial ratings. The Funds' investment adviser, TMC,
reviews data respecting the issuers of the Funds' portfolio assets on an
ongoing basis, and may dispose of portfolio securities upon a change in
ratings or adverse events not reflected in ratings.
The Funds have reserved the right to invest up to 20% of each Fund's net
assets in "temporary investments" in taxable securities (of comparable
quality to the above tax-exempt investments) that would produce interest not
exempt from Federal income tax. Such temporary investments, which may
include repurchase agreements with dealers, banks or recognized financial
institutions that in the opinion of TMC represent minimal credit risk, may be
made due to market conditions, pending investment of idle funds or to afford
liquidity. See "Temporary Investments," at page 8. Such investments are,
like any investment, subject to market risks and fluctuations in value. In
addition, each Fund's temporary taxable investments may exceed 20% of its net
assets when made for defensive purposes during periods of abnormal market
conditions. The Funds do not expect to find it necessary to make temporary
investments in taxable investments.
No Fund will purchase securities if, as a result, more than 25% of the
Fund's total assets would be invested in any one industry. However, this
restriction will not apply to purchase of (i) securities of the United States
Government and its agencies, instrumentalities and authorities, or (ii) tax
exempt securities issued by other governments or political subdivisions,
because these issuers are not considered to be members of any industry. This
restriction may not be changed as to any Fund unless approved by a majority
of the outstanding shares of the Fund.
The Funds' investment objectives and policies, unless otherwise
specified, are not fundamental policies and may be changed by the Trustees
without shareholder approval.
Municipal Obligations
Municipal Obligations include debt and lease obligations issued by
states, cities and local authorities to obtain funds for various public
purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
Municipal Obligations may be issued include the refunding of outstanding
obligations, the procurement of funds for general operating expenses and the
procurement of funds to lend to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately-operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Municipal Obligations have
also been issued to finance single-family mortgage loans and to finance
student loans. Such obligations are included within the term "Municipal
Obligations" if the interest paid thereon is exempt from federal income tax.
The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a specific revenue source. Industrial development bonds
are in most cases revenue bonds and are generally not secured by the pledge
of the credit or taxing power of the issuer of such bonds. There are, of
course, variations in the security of Municipal Obligations, both within a
particular classification and between classifications, depending on numerous
factors.
The Funds may invest in a variety of types of Municipal Obligations,
including but not limited to bonds, notes (such as tax anticipation and
revenue anticipation notes), commercial paper and variable rate demand
instruments. Variable rate demand instruments are Municipal Obligations or
participations therein, either publicly underwritten and traded or privately
purchased, that provide for a periodic adjustment of the interest rate paid
on the instrument and permit the holder to demand payment of the unpaid
principal amount and accrued interest upon not more than seven days' notice
either from the issuer or by drawing on a bank letter of credit, a guarantee
or insurance issued with respect to such instrument. Such Letters of Credit,
guarantees or insurance will be considered in determining whether a Municipal
Obligation meets a Fund's investment criteria. See the Prospectus under the
caption "Investment Objectives and Policies - Municipal Obligations." The
issuer of a variable rate demand instrument may have the corresponding right
to prepay the principal amount prior to maturity.
The Funds also may purchase fixed rate municipal demand instruments
either in the public market or privately. Such instruments may provide for
periodic adjustment of the interest rate paid to the holder. The "demand"
feature permits the holder to demand payment of principal and interest prior
to their final stated maturity, either from the issuer or by drawing on a
bank letter of credit, a guarantee or insurance issued with respect to the
instrument. In some cases these demand instruments may be in the form of
units, each of which consists of (i) a Municipal Obligation and (ii) a
separate put option entitling the holder to sell to the issuer of such option
the Municipal Obligation in such unit, or an equal aggregate principal amount
of another Municipal Obligation of the same issuer, issue and maturity as
such Municipal Obligation, at a fixed price on specified dates during the
term of the put option. In those cases, each unit taken as a whole will be
considered a Municipal Obligation, based upon an accompanying opinion of
counsel. A Fund will invest in a fixed rate municipal demand instrument only
if the instrument or the associated letter of credit, guarantee or insurance
is rated within the three highest grades of a nationally recognized rating
agency, or, if unrated, is deemed by TMC to be of comparable quality with
issues having such debt ratings. The credit quality of such investments will
be determined on a continuing basis by TMC under the supervision of the
Trustees.
A Fund also may purchase and sell Municipal Obligations on a when-issued
or delayed delivery basis. When-issued and delayed delivery transactions
arise when securities are purchased or sold with payment and delivery beyond
the regular settlement date. (When-issued transactions normally settle
within 30-45 days.) On such transactions the payment obligation and the
interest rate are fixed at the time the buyer enters into the commitment.
The commitment to purchase securities on a when-issued or delayed delivery
basis may involve an element of risk because the value of the securities is
subject to market fluctuation, no interest accrues to the purchaser prior to
settlement of the transaction, and at the time of delivery the market value
may be less than cost. At the time a Fund makes the commitment to purchase
a Municipal Obligation on a when-issued or delayed delivery basis, it will
record the transaction and reflect the value of the security in determining
its net asset value. That Fund also will maintain liquid assets at least
equal in value to commitments for when-issued or delayed delivery securities,
such assets to be segregated by State Street Bank & Trust Co., the Fund's
custodian, specifically for the settlement of such commitments. The value of
the segregated assets will be marked to the market daily so that the Fund
will at all times maintain assets in the segregated account equal in value to
the amount of these commitments. The Funds will only make commitments to
purchase Municipal Obligations on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Funds
reserve the right to sell these securities before the settlement date if it
is deemed advisable. If a when-issued security is sold before delivery any
gain or loss would not be tax-exempt.
TMC will evaluate the liquidity of each Municipal Lease upon its
acquisition and periodically while it is held based upon factors established
by the Trustees, including (i) the frequency of trades and quotes for the
obligation, (ii) the number of dealers who will buy or sell the obligation
and the potential buyers for the obligation, (iii) the willingness of dealers
to make a market for the obligation, and (iv) the nature and timing of
marketplace trades. An unrated Municipal Lease with non-appropriation risk
that is backed by an irrevocable bank letter of credit or an insurance
policy, issued by a bank or insurer deemed by TMC to be of high quality and
minimal credit risk, will not be deemed to be "illiquid" solely because the
underlying Municipal Lease is unrated, if TMC determines that the Municipal
Lease is readily marketable because it is backed by such letter of credit or
insurance policy.
The Funds will seek to reduce further the special risks associated with
investment in Municipal Leases by investing in Municipal Leases only where,
in TMC's opinion, certain factors established by the Trustees have been
satisfied, including (i) the nature of the leased equipment or property is
such that its ownership or use is deemed essential to a governmental function
of the governmental issuer, (ii) the Municipal Lease has a shorter term to
maturity than the estimated useful life of the leased property and the lease
payments will commence amortization of principal at an early date,
(iii) appropriate covenants will be obtained from the governmental issuer
prohibiting the substitution or purchase of similar equipment for a specified
period (usually 60 days or more) in the event payments are not appropriated,
(iv) the underlying equipment has elements of portability or use that enhance
its marketability in the event foreclosure on the underlying equipment was
ever required, and (v) the governmental issuer's general credit is adequate.
The enforceability of the "non-substitution" provisions referred to in (iii)
above has not been tested by the courts. Investments not meeting certain of
these criteria (such as the absence of a non-substitution clause) may be made
if the Municipal Lease is subject to an agreement with a responsible party
(such as the equipment vendor) providing warranties to the Funds that satisfy
such criteria.
Municipal Leases usually grant the lessee the option to purchase the
leased property prior to maturity of the obligation by payment of the unpaid
principal amount of the obligation and, in some cases, a prepayment fee.
Such prepayment may be required in the case of loss or destruction of the
property. The prepayment of the obligation may reduce the expected yield on
the invested funds if interest rates have declined below the level prevailing
when the obligation was purchased.
A Fund will not invest in illiquid securities if, as a result of the
investment, more than 10% of its net assets will be invested in illiquid
securities. For purposes of this limitation, "illiquid securities" shall be
deemed to include (1) Municipal Leases subject to non-appropriation risk
which are not rated at the time of purchase within the four highest grades by
Moody's or S&P and not subject to remarketing agreements (or not currently
subject to remarketing, pursuant to the conditions of any such agreement then
in effect, with a responsible remarketing party, deemed by TMC to be capable
of performing its obligations), (2) repurchase agreements maturing in more
than seven days, (3) securities which the Funds are restricted from selling
to the public without registration under the Securities Act of 1933, and
(4) other securities or participations not considered readily marketable by
the Funds, provided that for purposes of the foregoing an unrated Municipal
Lease which is backed by an irrevocable bank letter of credit or an insurance
policy, issued by a bank or insurer deemed by TMC to be of high quality and
minimal credit risk, will not be deemed to be illiquid.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption
for interest on municipal securities. Similar proposals may be introduced in
the future. These proposals, if enacted, may have the effect of reducing the
availability of investments for the Funds. Moreover, the value of the Funds'
portfolios may be affected. The Funds could be compelled to reevaluate their
investment objectives and policies and submit possible changes in the
structure of the Funds for the approval of their respective shareholders.
The yields on Municipal Obligations are dependent on a variety of
factors, including the condition of the general market and the Municipal
Obligation market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Moody's, S&P and
Fitch represent their opinions as to the quality of the Municipal Obligations
which they undertake to rate. See "Ratings." It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields, while Municipal Obligations of the same maturity
and coupon with different ratings may have the same yield. The market value
of outstanding Municipal Obligations will vary with changes in prevailing
interest rate levels and as a result of changing evaluations of the ability
of their issuers to meet interest and principal payments. Such variations in
market value of Municipal Obligations held in a Fund's portfolio arising from
these or other factors will cause changes in the net asset value of the
Fund's shares.
Ratings
Tax-Exempt Bonds. The four highest ratings of Moody's for tax-exempt
bonds are Aaa, Aa, A and Baa. Tax-exempt bonds rated Aaa are judged to be of
the "best quality." The rating of Aa is assigned to tax-exempt bonds which
are of "high quality by all standards," but as to which margins of protection
or other elements make long-term risks appear somewhat larger than Aaa rated
tax-exempt bonds. The Aaa and Aa rated tax-exempt bonds comprise what are
generally known as "high grade bonds." Tax-exempt bonds which are rated A by
Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations." Factors giving security to principal and
interest of A rated tax-exempt bonds are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Tax-exempt bonds rated Baa are considered "medium grade"
obligations. They are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such tax-exempt bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well. The foregoing ratings are sometimes presented in parentheses preceded
with "Con." indicating the bonds are rated conditionally. Bonds for which
the security depends upon the completion of some act or the fulfillment of
some condition are rated conditionally. These are bonds secured by (a)
earnings of projects under construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
The parenthetical rating denotes the probable credit status upon completion
of construction or elimination of the basis of the condition.
The four highest ratings of S&P and Fitch for tax-exempt bonds are AAA,
AA, A, and BBB. Tax-exempt bonds rated AAA bear the highest rating assigned
by S&P and Fitch to a debt obligation and indicates an extremely strong
capacity to pay principal and interest. Tax-exempt bonds rated AA also
qualify as high-quality debt obligations. Capacity to pay principal and
interest is very strong, and in the majority of instances they differ from
AAA issues only in small degree. Bonds rated A have a strong capacity to pay
principal and interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions. The BBB
rating, which is the lowest "investment grade" security rating by S&P or
Fitch, indicates an adequate capacity to pay principal and interest.
Whereas BBB rated Municipal Obligations they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay principal and interest
for bonds in this category than for bonds in the A category. The foregoing
ratings are sometimes followed by a "p" indicating that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion.
Municipal Notes. The ratings of Moody's for municipal notes are MIG 1,
MIG 2, MIG 3 and MIG 4. Notes bearing the designation MIG 1 are judged to be
of the best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established and broad-based access to
the market for refinancing, or both. Notes bearing the designation MIG 2 are
judged to be of high quality, with margins of protection ample although not
so large as in the preceding group. Notes bearing the designation of MIG 3
are judged to be of favorable quality, with all security elements accounted
for but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
Notes bearing the designation MIG 4 are judged to be of adequate quality,
carrying specific risk but having protection commonly regarded as required of
an investment security and not distinctly or predominantly speculative.
The S&P ratings for municipal notes are SP-1+, SP-1, SP-2 and SP-3.
Notes bearing an SP-1+ rating are judged to possess overwhelming safety
characteristics, with either a strong or very strong capacity to pay
principal and interest. Notes rated SP-1 are judged to have either a strong
or very strong capacity to pay principal and interest but lack the
overwhelming safety characteristics of notes rated SP-1+. Notes bearing an
SP-2 rating are judged to have a satisfactory capacity to pay principal and
interest, and notes rated SP-3 are judged to have a speculative capacity to
pay principal and interest.
Tax-Exempt Demand Bonds. The rating agencies may assign dual ratings to
all long term debt issues that have as part of their provisions a demand or
multiple redemption feature. The first rating addresses the likelihood of
repayment of principal and interest as due and the second rating addresses
only the demand feature. The long term debt rating symbols are used for
bonds to denote the long term maturity and the commercial paper rating
symbols are used to denote the put option (for example, "AAA/A-1+"). For
newer "demand notes" maturing in 3 years or less, the respective note rating
symbols, combined with the commercial paper symbols, are used (for example.
"SP-1+/A-1+").
Commercial Paper. The ratings of Moody's for issuers of commercial
paper are Prime-1, Prime-2 and Prime-3. Issuers rated Prime-1 are judged to
have superior ability for repayment which is normally evidenced by (i)
leading market positions in well established industries, (ii) high rates of
return on funds employed, (iii) conservative capitalization structures with
moderate reliance on debt and ample asset protection, (if) broad margins in
earnings coverage of fixed financial charges and high internal cash
generation, and (v) well established access to a range of financial markets
and assured sources of alternate liquidity. Issuers rated Prime-2 are judged
to have a strong capacity for repayment which is normally evidenced by many
of the characteristics cited under the discussion of issuers rated Prime-1
but to a lesser degree. Earnings trends, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may
be more affected by external conditions. Adequate liquidity is maintained.
Issuers rated Prime-3 are judged to have an acceptable capacity for
repayment. The effect of industry characteristics and market composition may
be more pronounced. Variability of earnings and profitability may result in
changes in the level of debt-protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
The ratings of S&P for commercial paper are A (which is further
delineated by Categories A-1+, A-1, A-2 and A-3), B, C and D. Commercial
paper rated A is judged to have the greatest capacity for timely payment.
Commercial paper rated A-1+ is judged to possess overwhelming safety
characteristics. Commercial paper rated A-1 is judged to possess an
overwhelming or very strong degree of safety. Commercial paper rated A-2 is
judged to have a strong capacity for payment although the relative degree of
safety is not as high as for paper rated A-1. Commercial paper rated A-3 is
judged to have a satisfactory capacity for timely payment but is deemed to be
somewhat more vulnerable to the adverse changes in circumstances than paper
carrying the higher ratings. Commercial paper rated B is judged to have an
adequate capacity for timely payment but such capacity may be impaired by
changing conditions or short-term adversities.
Temporary Investments
Each Fund has reserved the right to invest up to 20% of its net assets
in "temporary investments" in taxable securities that would produce interest
not exempt from federal income tax. See "Distributions and Tax Matters."
Such temporary investments may be made due to market conditions, pending
investment of idle funds or to afford liquidity. These investments are
limited to the following short-term, fixed-income securities (maturing in one
year or less from the time of purchase): (i) obligations of the United
States government or its agencies, instrumentalities or authorities; (ii)
prime commercial paper within the two highest ratings of Moody's or S&P;
(iii) certificates of deposit of domestic banks with assets of $1 billion or
more; and (iv) repurchase agreements with respect to the foregoing types of
securities. Repurchase agreements will be entered into only with dealers,
domestic banks or recognized financial institutions that in the opinion of
TMC represent minimal credit risk. Investments in repurchase agreements are
limited to 5% of a Fund's net assets. See "Repurchase Agreements." In
addition, temporary taxable investments may exceed 20% of a Fund's net assets
when made for defensive purposes during periods of abnormal market
conditions. The Funds do not expect to find it necessary to make such
temporary investments.
Repurchase Agreements
Any Fund may enter into repurchase agreements with respect to taxable
securities constituting "temporary investments" in its portfolio. A
repurchase agreement is a contractual agreement whereby the seller of
securities agrees to repurchase the same security at a specified price on a
future date agreed upon by the parties. The agreed upon repurchase price
determines the yield during the Fund's holding period. Repurchase agreements
may be viewed as loans collateralized by the underlying security that is the
subject of the repurchase agreement. A Fund will not enter into a repurchase
agreement if, as a result, more than 5% of the value of its net assets would
then be invested in repurchase agreements. The Funds will enter into
repurchase agreements only with dealers, banks or recognized financial
institutions that in the opinion of TMC represent minimal credit risk. The
risk to a Fund is limited to the ability of the seller to pay the agreed upon
repurchase price on the delivery date; however, although the value of the
underlying collateral at the time the transaction is entered into always
equals or exceeds the agreed upon repurchase price, if the value of the
collateral declines there is a risk of loss of both principal and interest if
the seller defaults. In the event of a default, the collateral may be sold.
A Fund might incur a loss if the value of the collateral has declined, and
the Fund might incur disposition costs or experience delays in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon the
collateral by the Fund may be delayed or limited. The Funds' investment
adviser will monitor the value of the collateral at the time the transaction
is entered into and at all subsequent times during the term of the repurchase
agreement in an effort to determine that the value always equals or exceeds
the agreed upon repurchase price. In the event the value of the collateral
declines below the repurchase price, the investment adviser will demand
additional collateral from the seller to increase the value of the collateral
to at least that of the repurchase price.
U.S. Government Obligations
The Funds' temporary investments in taxable securities may include
obligations of the U.S. government. These include bills, certificates of
indebtedness, notes and bonds issued or guaranteed as to principal or
interest by the United States or by agencies or authorities controlled or
supervised by and acting as instrumentalities of the U.S. government and
established under the authority granted by Congress, including, but not
limited to, the Government National Mortgage Association, the Tennessee
Valley Authority, the Bank for Cooperatives, the Farmers Home Administration,
Federal Home Loan Banks, Federal Intermediate Credit Banks, Federal Land
Banks, Farm Credit Banks and the Federal National Mortgage Association. Some
obligations of U.S. government agencies, authorities and other
instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the right of the issuer to borrow from the Treasury;
others only by the credit of the issuing agency, authority or other
instrumentality. In the case of securities not backed by the full faith and
credit of the United States, the investor must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment, and may not be
able to assert a claim against the United States itself in the event the
agency or instrumentality does not meet its commitments.
INVESTMENT LIMITATIONS
The Funds have adopted the following fundamental investment policies
which may not be changed unless approved by a majority of the outstanding
shares of each Fund or "series" of shares that would be affected by such
change. Under the Investment Company Act of 1940 (the "Act"), a "vote of the
majority of the outstanding voting securities" of a particular series means
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of such series or (2) 67% or more of the shares of such series present
at a shareholders' meeting if more than 50% of the outstanding shares of such
series are represented at the meeting in person or by proxy.
A Fund may not:
(1) Invest in securities other than Municipal Obligations (including
participations therein) and temporary investments within the percentage
limitations specified in the Prospectus under the caption "Investment
Objective and Policies";
(2) The Intermediate National Fund may not purchase any security if, as
a result, more than 5% of its total assets would be invested in securities of
any one issuer, excluding obligations of, or guaranteed by, the United States
government, its agencies, instrumentalities and authorities. Any single
state Fund may invest more than 5% of its portfolio assets in the securities
of a single issuer provided that it may not purchase any security (other than
securities issued or guaranteed as to principal or interest by the United
States or its instrumentalities) if, as a result, more than 5% of the Trust's
total assets would be invested in securities of a single issuer;
(3) Borrow money, except for temporary or emergency purposes and not
for investment purposes, and then only in an amount not exceeding 5% of the
value of the Fund's total assets at the time of borrowing;
(4) Pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by subparagraph (3) above;
(5) Issue senior securities as defined in the Investment Company Act of
1940, except insofar as either Fund may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b)
purchasing any securities on a when-issued or delayed delivery basis; or (c)
borrowing money in accordance with the restrictions described above;
(6) Underwrite any issue of securities, except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under the federal securities laws;
(7) Purchase or sell real estate and real estate mortgage loans, but
this shall not prevent the Funds from investing in Municipal Obligations
secured by real estate or interests therein;
(8) Purchase or sell commodities or commodity futures contracts or oil,
gas or other mineral exploration or development programs;
(9) Make loans, other than by entering into repurchase agreements and
through the purchase of Municipal Obligations or temporary investments in
accordance with its investment objectives, policies and limitations;
(10) Make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary for the clearance
of transactions;
(11) Write or purchase puts, calls, straddles, spreads or other
combinations thereof, except to the extent that securities subject to a
demand obligation or to a remarketing agreement may be purchased as set forth
in the Prospectus under the captions "Investment Objectives and Policies --
Municipal Obligations";
(12) Invest more than 5% of its total assets in securities of unseasoned
issuers which, together with their predecessors, have been in operation for
less than three years excluding (i) obligations of, or guaranteed by, the
United States government, its agencies, instrumentalities and authorities and
(ii) obligations secured by the pledge of the faith, credit and taxing power
of any entity authorized to issue Municipal Obligations;
(13) Invest more than 5% of its total assets in securities which the
Fund are restricted from selling to the public without registration under the
Securities Act of 1933;
(14) Purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of any such issuer
to be held by either Fund;
(15) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
(16) Purchase securities (other than securities of the United States
government, its agencies, instrumentalities and authorities) if, as a result,
more than 25% of a Fund's total assets would be invested in any one industry;
(17) Purchase or retain the securities of any issuer other than the
securities issued by that Fund itself if, to the Fund's knowledge, those
officers and directors of the Fund, or those officers and directors of TMC,
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities; or
(18) Purchase the securities of any issuer if as a result more than 10%
of the value of the Fund's net assets would be invested in restricted
securities, unmarketable securities and other illiquid securities (including
repurchase agreements of more than seven days maturity and other securities
which are not readily marketable).
(19) For the purpose of applying the limitations set forth in paragraphs
(2) and above, an issuer shall be deemed a separate issuer when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a
nongovernmental user, such as an industrial corporation or a privately owned
or operated hospital, if the security is backed only by the assets and
revenues of the nongovernmental user, then such nongovernmental user would be
deemed to be the sole issuer. Where a security is also guaranteed by the
enforceable obligation of another entity it shall also be included in the
computation of securities owned that are issued by such other entity. In
addition, for purposes of paragraph (2) above, a remarketing party entering
into a remarketing agreement with the Fund as described in the Prospectus
under the caption "Investment Objective and Policies -- Municipal
Obligations" shall not be deemed an "issuer" of a security or a "guarantor"
pursuant to such agreement.
With respect to temporary investments, in addition to the foregoing
limitations neither Fund will enter into a repurchase agreement if, as a
result thereof, more than 5% of its net assets would be subject to repurchase
agreements.
Although the Funds have the right to pledge, mortgage or hypothecate
their assets in order to comply with certain state statutes on investment
restrictions, the Funds will not, as a matter of operating policy (which
policy may be changed by the Trustees without shareholder approval), pledge,
mortgage or hypothecate their portfolio securities to the extent that at any
time the percentage of pledged securities will exceed 10% of its total
assets.
In the event the Funds acquire disposable assets as a result of the
exercise of a security interest relating to Municipal Obligations, they will
dispose of such assets as promptly as possible.
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act or applicable state law, or otherwise,
to the holder of the outstanding voting securities of series investment
companies such as the Funds shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each series affected by such matter. Rule 18f-2 further provides
that a series shall be deemed to be affected by a such a matter unless it is
clear that the interests of each series in the matter are substantially
identical or that the matter does not affect any interest of such series
deemed not to be affected. However, the Rule exempts the selection of
independent public accountants, the approval of principal distribution
contracts and the election of directors and trustees from the separate voting
requirements of the Rule.
YIELD AND RETURN COMPUTATION:
Performance and Portfolio Information
Computation of Yield and Return - In General
The return or yield of any Fund (or class of any Fund) of the Trust may,
from time to time, be quoted in reports, sales literature and advertisements
published by a Fund, the Funds' principal underwriter, or investment dealers
offering shares issued by the Trust. Any such quotation must include a
standardized calculation which computes yield for a 30-day or one month
period by dividing a portfolio's net investment income per share during the
period by the maximum offering price on the last day of the period. The
standardized calculation may include the effect of semiannual compounding and
will reflect amortization of premiums for those bonds which have a market
value in excess of par. New schedules based on market value will be computed
each month for amortizing premiums. Provided that any such quotation also is
accompanied by the standardized calculation referred to above, any Fund of
the Trust also may quote non-standardized performance data of its classes for
a specified period by dividing the net investment income per share for that
period by either the Fund's average public offering price per share for that
same period or the offering price per share on the first or last day of the
period, and multiplying the result by 365 divided by the number of days in
the specified period. For purposes of this non-standardized calculation net
investment income will include accrued interest income plus or minus any
amortized purchases discount or premium less accrued expenses. The primary
differences between the yield calculations obtained using the standardized
performance measure and any non-standardized performance measure will be
caused by the following factors: (1) The non-standardized calculation may
cover periods other than the 30-day or one month period required by the
standardized calculation; (2) The non-standardized calculation may reflect
amortization of premium based upon historical cost rather than market value.
Amortization of premium based upon historical cost is required by the
Internal Revenue Service for tax reporting purposes; (3) The non-standardized
calculation may reflect the average offering price per share for the period
of the beginning offering price per share for the period, whereas the
standardized calculation will always reflect the maximum offering price per
share on the last day of the period; (4) the non-standardized calculation may
reflect an offering price per share other than the maximum offering price;
provided that any time any Fund's performance is quoted in reports, sales
literature or advertisements using a public offering price, the performance
computed by using the Fund's maximum public offering price also will be
quoted in the same piece; (5) The non-standardized performance quotation may
include the effective return obtained by compounding the monthly dividends.
Any performance computation also must include average annual total
return quotations for the 1, 5 and 10 year periods ended on the date of the
most recent balance sheet included in the registration statement, computed by
finding the average annual compounded rates of return over such periods which
would equate the initial amount invested at the maximum public offering price
to the ending redeemable value. To the extent that a Fund or a class has
been in operation less than 1, 5 and 10 years, the time period during which
the Fund or the class has been in operation will be substituted for any 1, 5
or 10 year period for which a total return quotation is not obtainable.
Yield or total return quotations described in this section also may be
quoted on a "taxable equivalent yield" basis, provided that the following
information is furnished: (1) a standardized taxable equivalent yield based
on a 30-day or one month period ended on the date of the most recent balance
sheet included in the registration statement; (2) the length of and the last
day of the base period used in computing the quotation; and (3) a description
of the method by which the quotation is computed.
Additional Portfolio and Performance Information
Any of the Funds also may illustrate performance or the characteristics
of its investment portfolio or classes of the Fund through graphs, tabular
data or other displays which describe (i) the average portfolio maturity of
the Fund's portfolio securities relative to the maturities of other
investments, (ii) the relationship of yield and maturity of the Fund to the
yield and maturity of other investments (either as a comparison through use
of standard bench marks or indices such as the Treasury yield curve), (iii)
changes in the Fund's share price or net asset value relative to changes in
the value of other investments, and (iv) the relationship over time of
changes in the Fund's (or other investments') net asset value or price and
the Fund's (or other investments') investment return.
REPRESENTATIVE PERFORMANCE INFORMATION
Thornburg Intermediate Municipal Fund (Classes A and C)
THE FOLLOWING DATA FOR INTERMEDIATE MUNICIPAL FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
Standardized Method of Computing Yield. The yields of the Intermediate
National Fund Class A and Class C shares for the one month period ended
September 30, 1995, computed in accordance with the standardized calculation
described above, were 4.72% and 4.23% for Class A shares and Class C shares,
respectively. This method of computing yield does not take into account
changes in net asset value.
Non-standardized Method of Computing Yield. The Intermediate National
Fund's nonstandardized yields, for Class A and Class C shares computed in
accordance with its non-standardized method for the 7-day period ended
September 30, 1995, were 5.01% and 4.54% for Class A shares and Class C
shares, respectively. This nonstandardized method differs from the
standardized method of computing yield in that the nonstandardized yield is
computed for the 7-day period rather than a 30-day or one month period, the
nonstandardized yield reflects amortization of premium based upon historical
cost rather than market value, and the nonstandardized yield is computed by
compounding dividends monthly rather than semiannually. This method of
computing performance does not take into account changes in net asset value.
Taxable Equivalent Yield. The Intermediate National Fund's taxable
equivalent yields for Class A and Class C shares, computed in accordance with
the methods described above using a maximum federal tax rate of 39.6%, were
as shown below for the indicated periods ending September 30, 1995:
<TABLE>
Taxable
Equivalent
Yield Yield
----- ----------
<S> <C> <C>
Standardized Method
30 days ended 09/30/95
Class A 4.72% 7.81%
Class C 4.23% 7.00%
Non-standardized Method
7 days ended 09/30/95
Class A 5.01% 8.29%
Class C 4.54% 7.52%
30 days ended 09/30/95
Class A 5.01% 8.29%
Class C 4.54% 7.52%
</TABLE>
The nonstandardized method of computation differs from the standardized
method in that the nonstandardized yield for the 7-day period is computed on
a basis of seven days rather than the standard 30-day or one month period,
the nonstandardized yield reflects amortization of premium based upon
historical cost rather than market value, and the nonstandardized yield is
computed by compounding dividends monthly rather than semiannually. The
standardized and nonstandardized methods of computing yield and taxable
equivalent yield do not take into account changes in net asset value.
Average Annual Total Return. The Intermediate National Fund's Class A
and Class C total return figures are set forth below for the period shown
ending September 30, 1995. Class A shares were first offered on July 23,
1991, and Class C shares were first offered on September 1, 1994. The data
for Class A shares reflect deduction of the maximum sales charge of 3.50%
upon purchase. The data for Class C shares relate to Class C shares sold
before October 2, 1995. Class C shares sold on or after October 2, 1995 are
subject to a contingent deferred sales charge of .60% if redeemed within one
year of purchase. These data also assume reinvestment of all dividends at
net asset value.
1 Year 5 Years 10 Years Since Inception
------ ------- -------- ---------------
Class A 5.34% N/A N/A 7.16%
Class C 8.60% N/A N/A 6.96%
Thornburg New Mexico Intermediate Municipal Fund (Classes A and C)
THE FOLLOWING DATA FOR INTERMEDIATE NEW MEXICO FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
Standardized Method of Computing Yield. The yields of the Intermediate
New Mexico Fund Class A and Class C shares for the one month period ended
September 30, 1995, computed in accordance with the standardized calculation
described above, were 4.18% and 3.88% for Class A shares and Class C shares,
respectively. This method of computing yield does not take into account
changes in net asset value.
Non-standardized Method of Computing Yield. The Intermediate New Mexico
Fund's nonstandardized yields, computed in accordance with a non-standardized
method, for the 7-day period ended September 30, 1995, were 4.61% and 4.13%
for Class A shares and Class C shares, respectively. This nonstandardized
method differs from the standardized method of computing yield in that the
nonstandardized yield is computed for the 7-day period rather than a 30-day
or one month period, the nonstandardized yield reflects amortization of
premium based upon historical cost rather than market value, and the
nonstandardized yield is computed by compounding dividends monthly rather
than semiannually. This method of computing performance does not take into
account changes in net asset value.
Taxable Equivalent Yield. The Intermediate New Mexico Fund's taxable
equivalent yields for Class A shares and Class C shares, computed in
accordance with the methods described above using a maximum federal tax rate
of 39.6% and a maximum New Mexico tax rate of 8.5%, were as shown below for
the indicated periods ending on September 30, 1995:
Taxable
Equivalent
Yield Yield
----- ----------
Standardized Method
30 days ended 09/30/95
Class A 4.18% 7.57%
Class C 3.88% 7.02%
Non-standardized Method
7 days ended 09/30/95
Class A 4.61% 8.35%
Class C 4.13% 7.48%
30 days ended 03/31/95
Class A 4.62% 8.36%
Class C 4.13% 7.48%
The nonstandardized method of computation differs from the standardized
method in that the nonstandardized yield for the 7-day period is computed on
a basis of seven days rather than the standard 30-day or one month period,
the nonstandardized yield reflects amortization of premium based upon
historical cost rather than market value, and the nonstandardized yield is
computed by compounding dividends monthly rather than semiannually. The
standardized and nonstandardized methods of computing yield and taxable
equivalent yield do not take into account changes in net asset value.
Average Annual Total Return. The Intermediate New Mexico Fund's Class
A and Class C total return figures are set forth below for the periods shown
ending September 30, 1995. Class A shares were first offered on June 21,
1991, and Class C shares were first offered on September 1, 1994. The data
for Class A shares reflect deduction of the maximum sales charge of 3.50%
upon purchase. The data for Class C shares relate to Class C shares sold
before October 2, 1995. Class C shares sold on or after October 2, 1995 are
subject to a contingent deferred sales charge if redeemed within one year of
purchase. These data also assume reinvestment of all dividends at net asset
value.
1 Year 5 Years 10 Years Since Inception
Class A 4.31% N/A N/A 6.50%
Class C 7.48 N/A N/A 6.02%
Thornburg Florida Intermediate Municipal Fund (Classes A and C)
THE FOLLOWING DATA FOR INTERMEDIATE FLORIDA FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
Standardized Method of Computing Yield. The yields of the Intermediate
Florida Fund Class A and Class C shares for the one month period ended
September 30, 1995, computed in accordance with the standardized calculation
described above, were 5.02% and 4.64% for Class A shares and Class C shares,
respectively. This method of computing yield does not take into account
changes in net asset value.
Non-standardized Method of Computing Yield. The Intermediate Florida
Fund's nonstandardized yields, computed in accordance with a non-standardized
method for the 7-day period ending September 30, 1995, were 5.10% and 4.64%
for Class A shares and Class C shares, respectively. The nonstandardized
method differs from the standardized method of computing yield in that the
nonstandardized yield is computed for the 7-day period rather than a 30-day
or one month period, the nonstandardized yield reflects amortization of
premium based upon historical cost rather than market value, and the
nonstandardized yield is computed by compounding dividends monthly rather
than semiannually. This method of computing performance does not take into
account changes in net asset value.
Taxable Equivalent Yield. The Intermediate Florida Fund's taxable
equivalent yields for Class A shares and Class C shares, computed in
accordance with the methods described above using a maximum federal tax rate
of 39.6%, were as shown below for the indicated periods ending on September
30, 1995:
Taxable
Equivalent
Yield Yield
----- -----------
Standardized Method
30 days ended 09/30/95
Class A 5.02% 8.52%
Class C 4.64% 7.87%
Non-standardized Method
7 days ended 09/30/95
Class A 5.10% 8.65%
Class C 4.64% 7.87%
30 days ended 09/30/95
Class A 5.12% 8.68%
Class C 4.65% 7.89%
The nonstandardized method of computation differs from the standardized
method in that the nonstandardized yield for the 7-day period is computed on
a basis of seven days rather than the standard 30-day or one month period,
the nonstandardized yield reflects amortization of premium based upon
historical cost rather than market value, and the nonstandardized yield is
computed by compounding dividends monthly rather than semiannually. The
standardized and nonstandardized methods of computing yield and taxable
equivalent yield do not take into account changes in net asset value.
Average Annual Total Return. The Intermediate Florida Fund's Class A
and Class C total return figures are set forth below for the periods shown
ending September 30, 1995. Class A shares were first offered on February 1,
1994, and Class C shares were first offered on September 1, 1994. The data
for Class A shares reflect deduction of the maximum sales charge of 3.50%
upon purchase. The data for Class C shares relate to Class C shares sold
before October 2, 1995. Class C shares sold on or after October 2, 1995 are
subject to a contingent deferred sales charge if redeemed within one year of
purchase. These data also assume reinvestment of all dividends at net asset
value.
1 Year 5 Years 10 Years Since Inception
------ ------- -------- ---------------
Class A 4.44% N/A N/A 2.05
Class C 7.74 N/A N/A 6.05%
Any quoted yield or return should not be considered a representation of
the yield or return in the future because neither the yield nor the return
are fixed. Actual performance will depend not only on the type, quality and
maturities of the investments held by the Funds and changes in interest rates
on those investments, but also on changes in a Fund's expenses during the
period. In addition, any change in a Fund's net asset value will affect its
yield and return.
DISTRIBUTIONS AND TAXES
Distributions
All of the net income of the Funds is declared daily as a dividend on
shares for which they have received payment. Net income of a Fund consists
of all interest income accrued on portfolio assets less all expenses of that
Fund. Expenses of the Funds are accrued each day. Dividends are paid
monthly and are reinvested in additional shares of the Funds at the net asset
value per share at the close of business on the dividend payment date or, at
the shareholder's option, paid in cash. Net realized capital gains, if any,
will be distributed annually and reinvested in additional shares of the Fund
at the net asset value per share at the close of business on the distribution
date, or, at the shareholder's option, paid in cash. See "Accounts of
Shareholders."
Federal Income Tax Matters
Each of the National, New Mexico and Florida Funds is qualified and
intends to continue its qualification under Subchapter M of the Internal
Revenue Code (the "Code") for tax treatment as a regulated investment
company. The other Funds intend to qualify for treatment under Subchapter M.
This tax treatment relieves the Funds from paying federal income tax on
income which is currently distributed to its shareholders. Each of the Funds
also intends to satisfy conditions (including requirements as to the
proportion of its assets invested in Municipal Obligations) which will enable
it to designate distributions from the interest income generated by its
investments in Municipal Obligations, which are exempt from federal income
tax when received by the Funds, as Exempt Interest Dividends. Shareholders
receiving Exempt Interest Dividends will not be subject to federal income tax
on the amount of those dividends, except to the extent the alternative
minimum tax may be applicable.
Under the Code, interest on indebtedness incurred or continued to
purchase or carry shares is not deductible. Under rules issued by the
Department of the Treasury for determining when borrowed funds are considered
used for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds
even though the borrowed funds are not directly traceable to the purchase of
shares. Investors with questions regarding this issue should consult with
their own tax advisers.
Shares of the Funds may not be an appropriate investment for persons who
are "substantial users" of facilities financed by industrial development
bonds (including any Municipal Lease that may be deemed to constitute an
industrial development bond) or persons related to such "substantial users."
Such persons should consult their own tax advisers before investing in Fund
shares.
Distributions by the Funds of net interest income received from certain
temporary investments (such as certificates of deposit, commercial paper and
obligations of the United States government, its agencies, instrumentalities
and authorities), amounts attributable to market discount on bonds and net
short-term capital gains realized by the Funds, if any, will be taxable to
shareholders as ordinary income whether received in cash or additional
shares. Distributions to shareholders will not qualify for the dividends
received deduction for corporations.
Any net long-term capital gains realized by the Funds, whether
distributed in cash or reinvested in additional shares, must be treated as
long-term capital gains by shareholders regardless of the length of time
investors have held their shares. If a Fund should have net undistributed
capital gains in any year, the Fund would pay the tax on such gains and each
shareholder would be deemed, for federal tax purposes, to have paid his or
her pro rata share of such tax.
If in any year either Fund should fail to qualify under Subchapter M for
tax treatment as a regulated investment company, (i) that Fund would incur a
regular corporate federal income tax upon its net interest income, other than
interest income from Municipal Obligations, for that year, and (ii)
distributions to its shareholders out of net interest income from Municipal
Obligations or other investments, or out of net capital gains, would be
taxable to shareholders as ordinary dividend income for federal income tax
purposes to the extent of that Fund's current or accumulated earnings or
profits. That Fund would fail to qualify under Subchapter M if, among other
requirements, in any year (i) 30% or more of its gross income were derived
from the sale or other disposition of securities held for less than three
months, (ii) less than 90% of the Fund's gross income were derived from
specified income sources such as dividends, interest and gains from the
disposition of stock or securities or (iii) the Fund fails to satisfy the
diversification of investments requirement of the Code and fails to timely
cure such failure. Furthermore, a Fund would be unable to make Exempt
Interest Dividends if, at the close of any quarter of its taxable year, more
than 50% of the value of that Fund's total assets consisted of assets other
than Municipal Obligations. Additionally, if in any year a Fund qualified as
a regulated investment company but failed to distribute all of its net
income, the Fund would be taxable on the undistributed portion of its net
income. Although the Funds intend to distribute all of their net income
currently, a Fund could have undistributed net income if, for example,
expenses of the Fund were reduced or disallowed on audit.
If a Fund has both tax-exempt and taxable interest, it will use the
"actual earned method" for determining the designated percentage that is
taxable income and designate the use of that method within 45 days after the
end of the Fund's taxable year. Under this method, the ratio of taxable
income earned during the period for which a distribution was made to total
income earned during the period determines the percentage of the distribution
designated taxable. The percentages of income, if any, designated as taxable
will under this method vary from distribution to distribution.
The Tax Reform Act of 1986 imposed a nondeductible excise tax on
regulated investment companies if they fail to satisfy certain minimum
distribution requirements. This excise tax should not have a material
adverse effect on Fund operations, because each Fund intends to distribute
all of its net income each year.
Although the Funds currently include nine investment portfolios and
three series of shares outstanding at the date of this Statement of
Additional Information, the Funds' Trustees are authorized to divide the
shares into other separate series, and to establish additional portfolios
pertaining thereto. Each additional series of shares would relate to a
separate investment portfolio that would be different from the portfolios
covered by this Statement of Additional Information. The Trust expects that
it may create other separate state or regional portfolios with investments
concentrated in a particular state or region. The additional separate
portfolios may be attractive for investors seeking to concentrate their
investments and to minimize their liability for state income taxes on
interest income earned by the respective portfolios or for minimizing taxes
on intangibles, depending upon the particular states. Separate series of the
Trust will be treated under the Code as separate corporations except with
respect to the definitional requirements under Section 851 (a) of the Code.
The legislative history of the Tax Reform Act of 1986, which amended the
Code, indicates that the term "fund" means a segregated portfolio of assets,
the beneficial interest of which is owned by the holders of a class or series
of stock of the regulated investment company that is preferred over all other
classes or series in respect of such portfolio of assets. The capital gains
and losses of each series will belong solely to the holders of the shares of
that series and will not be aggregated with the capital gains and losses of
other series.
As is the case with other types of income, including other tax-exempt
interest income, Exempt Interest Dividends received by a shareholder will be
included in his or her "modified adjusted gross income" for the year if he or
she received Social Security benefits during the year. Under current law, if
a person's modified adjusted gross income exceeds $44,000 for the year
($34,000 for a single individual, zero for a married individual not filing a
joint income tax return and not living apart from his or her spouse at all
times during the year), a portion of that person's Social Security benefits
may be subject to federal income taxation.
The Code treats interest on certain Municipal Obligations which are
private activity bonds under the Code issued after August 7, 1986 (in certain
cases, after September 1, 1986) as a preference item for purposes of the
alternative minimum tax on individuals and corporations. The Funds may
purchase private activity bonds which are subject to treatment under the Code
as a preference item for purposes of the alternative minimum tax on
individuals and corporations, although the frequency and amounts of those
purchases are uncertain. Some portion of Exempt Interest Dividends may, as
a result of such purchases, be treated as a preference item for purposes of
the alternative minimum tax on individuals and corporations. Shareholders
are advised to consult their own tax advisers as to the extent and effect of
that treatment.
For taxable years beginning after 1989, the Code provides that the use
of adjusted net book income will be replaced by the use of adjusted current
earnings in computing corporate taxes. The adjusted current earnings of a
corporation will include Exempt Interest Dividends in calculating the
alternative minimum tax on corporations to the extent that such Dividends are
not otherwise treated as a preference item for the reasons discussed above.
An environmental tax is imposed on the excess of a corporation's modified
alternative minimum taxable income (minimum taxable base, discussed above,
with certain modifications) over $2 million. Modified alternative minimum
taxable income includes Exempt Interest Dividends. The environmental tax
applies with respect to years beginning after December 31, 1986 and before
January 1, 1996. Exempt Interest Dividends are included in effectively
connected earnings and profits for purposes of computing the branch profits
tax on certain foreign corporations doing business in the United States.
With respect to property and casualty companies, the amount of certain
cost deductions otherwise allowed is reduced (in certain cases below zero) by
a specified percentage of, among other things, Exempt Interest Dividends
received on shares. Commercial banks, thrift institutions and other
financial institutions may not deduct their cost of carrying shares.
Redemption or resale of shares will be a taxable transaction for federal
income tax purposes and the shareholder will recognize gain or loss in an
amount equal to the difference between the shareholder's basis in the shares
and the amount realized by the shareholder on the redemption or resale.
Assuming that the shareholder holds the shares as a capital asset, the gain
or loss will be a capital gain or loss and will be long term if the shares
were held for more than 12 months.
The foregoing is a general and abbreviated summary of the provisions of
the Code and Treasury Regulations presently in effect as they directly govern
the taxation of the Funds and their shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Shareholders are advised to consult their
own tax advisers for more detailed information concerning the federal
taxation of the Funds and the income tax consequences to shareholders of the
Funds.
State and Local Tax Aspects
The exemption from federal income tax for distributions of interest
income from Municipal Obligations which are designated Exempt Interest
Dividends will not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority.
Distributions attributable to interest on obligations originating in
Alabama, Arizona, New Mexico and Tennessee will not be subject to personal
income taxes imposed by the state of the same name as the Fund. For example,
an individual resident in New Mexico, who owns shares in the New Mexico Fund,
will not be required by New Mexico to pay income taxes on interest
attributable to obligations originating in that state. Capital gains
distributions are taxable by these states, irrespective of the origins of the
obligations from which the gains arise.
Individual shareholders in Pennsylvania will not be subject to
Pennsylvania income tax on distributions attributable to interest on
obligations originating in Pennsylvania, or distributions attributable to
gains on dispositions of obligations of Pennsylvania and its political
subdivisions and obligations of the United States and its territories and
possessions. Additionally, individual shareholders will be exempt from
Pennsylvania personal property tax on their Pennsylvania Fund shares to the
extent the Fund's assets consist of obligations described in the preceding
sentence. Individual residents in Pittsburgh will enjoy a similar exemption
from personal property taxes imposed by the City and School District of
Pittsburgh.
Florida, Texas and Utah do not currently impose an individual income tax
or do not impose an individual income tax on distributions attributable to
Municipal Obligations, although capital gains distributions will be subject
to personal income tax in Utah. Florida and Texas do not currently impose a
state individual income tax, although such a tax has been proposed in Texas.
Florida imposes a personal property or "intangibles" tax which is generally
applicable to securities owned by individual residents in Florida, but the
intangibles tax will not apply to Intermediate Florida Fund shares if the
Fund's assets as of the close of the preceding taxable year consist only of
cash, obligations of Florida and its political subdivisions, and obligations
of the United States, Puerto Rico, Guam or the United States Virgin Islands.
With respect to distributions of interest income from the Intermediate
National Fund, the laws of the several states and local taxing authorities
vary with respect to the taxation of such distributions, and shareholders of
the Fund are advised to consult their own tax advisers in that regard. The
Intermediate National Fund will advise shareholders within 60 days of the end
of each calendar year as to the percentage of income derived from each state
as to which it has any Municipal Obligations in order to assist shareholders
in the preparation of their state and local tax returns.
Accounts of Shareholders
When an investor makes an initial investment in shares of any Fund, the
Transfer Agent will open an account on the books of that Fund, and the
investor will receive a confirmation of the opening of the account.
Thereafter, whenever a transaction, other than the reinvestment of interest
income, takes place in the account - such as a purchase of additional shares
or redemption of shares or a withdrawal of shares represented by certificates
- - the investor will receive a confirmation statement giving complete details
of the transaction. Shareholders will also receive at least quarterly
statements setting forth all distributions of interest income and other
transactions in the account during the period and the balance of full and
fractional shares. The final statement for the year will provide the
information for purposes described in the Prospectus under the caption
"Distributions and Taxes."
The monthly distributions of interest income, net of expenses, and the
annual distributions of net realized capital gains, if any, will be credited
to the accounts of shareholders in full and fractional shares of their Fund
at net asset value on the payment or distribution date, as the case may be.
The issuance and delivery of certificates for shares is unnecessary, and
shareholders are thereby relieved of the responsibility of safekeeping. Upon
written request to the Transfer Agent, a certificate will be issued for any
or all of the full shares credited to a shareholder's account. Certificates
which have been issued to a shareholder may be returned at any time for
credit to his or her account. Shares so held will be redeemed as described
in the Prospectus under the caption "How to Redeem Fund Shares."
INVESTMENT ADVISER AND INVESTMENT ADVISORY AGREEMENT
Pursuant to the Investment Advisory Agreement, Thornburg Management
Company, Inc., 119 East Marcy Street, Suite 202, Santa Fe, New Mexico 87501
(TMC), will act as the investment adviser for, and will manage the investment
and reinvestment of the assets of the Funds in accordance with each Fund's
investment objectives and policies, subject to the general supervision and
control of the Funds' Trustees.
TMC is investment adviser for Thornburg Limited Term Municipal Fund,
Inc., a series investment company with two fund series having aggregate
assets of approximately $1,016,000,000 as of September 30, 1995. TMC also
acts as investment adviser for Thornburg Limited Term U.S. Government Fund
and Thornburg Limited Term Income Fund, separate series of the Trust which
had assets of $144,500,000 and $24,100,000, respectively, as of September 30,
1995. TMC is also a sub-adviser for Daily Tax-Free Income Fund, Inc., a
registered investment company.
TMC will provide continuous professional investment supervision. In
addition to managing each Fund's investments, TMC will administer the Fund's
business affairs, provide office facilities and certain clerical, bookkeeping
and administrative services. Pursuant to the Investment Advisory Agreement,
each of the Funds will pay to TMC a monthly management fee at an annual
percentage rate of the daily average net assets of the Fund, applied in
accordance with the following table, in consideration of the services and
facilities furnished by TMC. All fees and expenses are accrued daily and
deducted before payment of dividends to investors.
Net Assets Annual Rate
--------------------------- -----------
0 to $500 million .625%
$500 million to $1 billion .575%
$1 billion to $1.5 billion .525%
$1.5 billion to 2.0 billion .475%
More than $2.0 billion .400%
In addition to the fee of TMC, the Funds will pay all other costs and
expenses of their operations. The Funds also will bear the expenses of
registering and qualifying the Funds and the shares for distribution under
federal and state securities laws, including legal fees. The management fee
will be reduced, or TMC will assume certain expenses, in an amount necessary
to prevent any Fund's total expenses (including TMC's fee, but excluding
interest, taxes, brokerage and, to the extent permitted by applicable state
securities laws, extraordinary expenses) in any fiscal year from exceeding
the limits prescribed by any state in which the Funds' shares are qualified
for sale. The Funds currently believe that the most restrictive limitation
applicable to them is 2% of the first $10 million in assets, 1.5% of the next
$20 million, and 1% of assets in excess of $30 million.
For the three most recent fiscal periods ended September 30, 1993, 1994
and 1995, and for the six months ended March 31, 1995, with respect to each
Fund, the amounts paid to TMC by each Fund were as follows:
1993 1994 1995
-------- ---------- ----------
Intermediate National Fund $335,046 $1,062,263 $1,161,410
Intermediate New Mexico Fund $218,713 $ 670,111 $ 763,774
Intermediate Florida Fund N/A -0- -0-
The Florida Fund commenced operations on February 1, 1994. TMC has waived
and deferred its rights to fees in the foregoing periods as follows:
1993 1994 1995
-------- -------- -------- ----------
Intermediate National Fund $268,212 $462,663 $199,442 $ 191,779
Intermediate New Mexico Fund $259,170 $393,167 $199,574 $ 101,636
Intermediate Florida Fund N/A N/A $ 21,760 $ 73,419
TMC may (but is not obligated to) waive its rights to any portion of its fees
in the future, and may use any portion of its fee for purposes of shareholder
and administrative services and distribution of Fund shares. During the
fiscal year ended September 30, 1995, the Funds reimbursed TMC in the amounts
of $21,298 (National), $14,041 (New Mexico) and $875 (Florida) for certain
accounting expenses incurred by TMC on behalf of those Funds.
The Investment Advisory Agreement was approved for the Intermediate New
Mexico Fund, the Intermediate National Fund and the Intermediate Texas Fund
on June 4, 1991 by the Trustees of the Funds, including a majority of the
Trustees who are not "interested persons" (as defined in the 1940 Act) of the
Funds or TMC, and became effective for the New Mexico Fund and the National
Fund on June 20, 1991. The Investment Advisory Agreement was similarly
approved on October 4, 1993 by the Trustees for the Intermediate Alabama
Fund, Intermediate Florida Fund, Intermediate Pennsylvania Fund, Intermediate
Tennessee Fund and Intermediate Utah Fund. The Investment Advisory Agreement
was approved for the Intermediate Arizona Fund on January 24, 1994. The
Agreement is currently effective only for the Intermediate National Fund, the
Intermediate Florida Fund and the Intermediate New Mexico Fund, and will
become effective for any Fund upon its commencement of operations and sale of
shares. The Investment Advisory Agreement was presented to the shareholders
for approval at a special shareholder meeting called for each of the
Intermediate National Fund and Intermediate New Mexico Funds on January 24,
1992, at which the Agreement was approved by a majority of the outstanding
voting securities of each Fund. The Trustees do not intend to submit the
Agreement to shareholders of any other series for approval. The initial term
of this Agreement is two years, with extensions for successive 12-month
periods, provided that the continuation for a Fund is approved at least
annually by a majority of the Trustees who are not "interested" within the
meaning of the Investment Company Act of 1940 or by a vote of the majority of
the Fund's shares then outstanding. The Agreement may be terminated by
either party, at any time without penalty, upon 60 days' written notice, and
will terminate automatically in the event of its assignment. Termination
will not affect the right of TMC to receive payments on any unpaid balance of
the compensation earned prior to termination. The Agreement further provides
that in the absence of willful misfeasance, bad faith or gross negligence on
the part of TMC, or of reckless disregard of its obligations and duties under
the Agreement, TMC will not be liable for any action or failure to act in
accordance with its duties thereunder.
H. Garrett Thornburg, Jr., Chairman and a Trustee of the Trust, is also
a Director and controlling stockholder of TMC.
SERVICE AND DISTRIBUTION PLANS
Service Plans - All Classes
Each of the Funds has adopted a plan and agreement of distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Service
Plan") which is applicable to Class A and Class C shares of each Fund. The
Plan permits each Fund to pay to TMC (in addition to the management fee and
reimbursements described above) an annual amount not exceeding .25 of 1% of
the Fund's assets to reimburse TMC for specific expenses incurred by it in
connection with certain shareholder services and the distribution of that
Fund's shares to investors. TMC may, but is not required to, expend
additional amounts from its own resources in excess of the currently
reimbursable amount of expenses. Reimbursable expenses include the payment
of amounts, including incentive compensation , to securities dealers and
other financial institutions, including banks (to the extent permissible
under the Glass-Steagall Act and other federal banking laws), for
administration and shareholder services. The nature and scope of services
provided by dealers and other entities likely will vary from entity to
entity, but may include, among other things, processing new account
applications, preparing and transmitting to the Transfer Agent computer
processible tapes of shareholder account transactions, and serving as a
source of information to customers concerning the Funds and transactions with
the Funds. The Service Plan does not provide for accrued but unpaid
reimbursements to be carried over and paid to TMC in later years.
The Funds paid to TMC the amounts shown in the table below, under the
terms of the Service Plan for the fiscal year ended September 30, 1995.
Amounts reimbursed to TMC under the Plan were paid by TMC principally as
compensation to securities dealers and other persons selling the Funds'
shares, for administration and shareholder services.
Year ended 09/30/95 Class A Class C
National $500,756 $ 4,947
New Mexico $332,809 $ 220
Florida $ 20,103 $ 186
Class C Distribution Plan
Each Fund has adopted a plan and agreement of distribution pursuant to
Rule 12b-1 under the Investment Company Act of 1940, applicable only to the
Class C shares of that Fund ("Class C Distribution Plan"). The Class C
Distribution Plan provides for the Fund's payment to TSC on a monthly basis
of an annual distribution fee of .75% of the average daily net assets
attributable to the Fund's Class C shares.
The purpose of the Class C Distribution Plan is to compensate TSC for
its services in promoting the sale of Class C shares of the Fund. TSC
expects to pay compensation to dealers and others selling Class C shares from
amounts it receives under the Class C Distribution Plan. TSC also may incur
additional distribution-related expenses in connection with its promotion of
Class C shares sales, including payment of additional incentives to dealers,
advertising and other promotional activities and the hiring of other persons
to promote the sale of shares.
The Funds paid to TSC $12,862 (National), $573 (New Mexico), and $484
(Florida) under the Class C Distribution Plan for the fiscal year ended
September 30, 1995. Amounts paid to TSC under the Plan were paid by TSC
principally as compensation to securities dealers and other persons selling
the Funds' shares.
The Glass-Steagall Act prohibits certain banks from underwriting mutual
fund shares, but the Funds do not believe that this prohibition will apply to
the arrangements described in the Plans. However, no assurance can be given
that the Glass-Steagall Act will not be interpreted so as to prohibit these
arrangements. In that event, the Funds' ability to market their shares could
be impaired to a small extent. The Funds do not foresee that they will give
preference to banks or other depository institutions which receive payments
from TMC when selecting investments for the Funds.
Each Plan continues in effect for periods of 12 months each unless
terminated pursuant to its terms and may be continued from year to year
thereafter, provided that the continuance is approved at lease annually by a
vote of a majority of the Trustees, including a majority of the independent
Trustees cast in person at a meeting called for the purpose of voting on such
continuance. Each Plan also may be terminated at any time, without penalty,
if a majority of the independent Trustees or shareholders of a Fund class
vote to terminate the Plan for that class. So long as a Plan is in effect,
the selection and nomination of Trustees who are not "interested persons" of
a Fund shall be committed to the discretion of the Trustees who are not
"interested persons." The Plans may not be amended to increase materially
the amount of a Fund's payments thereunder without approval of the
shareholders of the affected classes. Under each Plan, the investment
adviser or the principal underwriter (as the case may be), or the Funds, by
a vote of a majority of the independent Trustees or of the holders of a
majority of the outstanding shares, may terminate the provisions retaining
the services of TMC or TSC under the Plan, without penalty. The Trustees
have the authority to approve continuance of a Plan without similarly
approving a continuance of the provisions retaining TMC or TSC thereunder.
To the extent that a Plan constitutes a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act, it will remain in effect as such,
so as to authorize the use of the Fund's assets in the amounts and for the
purposes set forth therein, notwithstanding the occurrence of an assignment,
as defined by the 1940 Act and the rules thereunder. To the extent it
constitutes an agreement pursuant to a plan, it will terminate automatically
in the event of an "assignment." Upon termination, no further payments may
be made under the agreement except for amounts previously accrued by unpaid.
The Funds may continue to make payments pursuant to the Plan of the amounts
authorized to be paid, which may or may not be to TMC or TSC, as the case may
be, or the adoption of other similar arrangements, in each case by the Funds'
Trustees, including a majority of the independent Trustees by vote cast in
person at a meeting called for that purpose.
Information regarding the services rendered under the Plan and the
amounts paid therefor is provided to, and reviewed by, the Trustees on a
quarterly basis. In their quarterly review, the Trustees consider the
continued appropriateness of the Plan and the level of compensation provided
therein.
PORTFOLIO TRANSACTIONS
TMC, in effecting purchases and sales of portfolio securities for the
accounts of the Funds, will place orders in such manner as, in the opinion of
TMC, will offer the best price and market for the execution of each
transaction. Securities normally will be purchased directly from an
underwriter or in the over-the-counter market from the principal dealers in
such securities, unless it appears that a better price or execution may be
obtained elsewhere. Purchases from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include the spread between the bid and asked price. Given the best
price and execution obtainable, it will be the practice of the Funds to
select dealers which, in addition, furnish research information (primarily
credit analyses of issuers) and statistical and other services to TMC. It is
not possible to place a dollar value on information and statistical and other
services received from dealers. Since it is only supplementary to TMC's own
research efforts, the receipt of research information is not expected
significantly to reduce TMC's expenses. In selecting among the firms
believed to meet the criteria for handling a particular transaction, TMC may
also give consideration to those firms which have sold or are selling shares
of the Funds. While TMC will be primarily responsible for the placement of
the Funds' business, the policies and practices of TMC in this regard must be
consistent with the foregoing and will at all times be subject to review by
the Trustees of the Funds.
TMC reserves the right to manage other investment companies and
investment accounts for other clients which may have investment objectives
similar to those of the Funds. Subject to applicable laws and regulations,
TMC will attempt to allocate equitably portfolio transactions among the Funds
and the portfolios of its other clients purchasing securities whenever
decisions are made to purchase or sell securities by the Funds and one or
more of such other clients simultaneously. In making such allocations the
main factors to be considered will be the respective investment objectives of
the Funds and such other clients, the size of investment commitments
generally held by the Funds and such other clients and opinions of the
persons responsible for recommending investments to the Funds and such other
clients. While this procedure could have a detrimental effect on the price
or amount of the securities available to the Funds from time to time, it is
the opinion of the Funds' Trustees that the benefits available from TMC's
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions. The Trustees will review simultaneous
transactions.
The Funds' portfolio turnover rates for the two most recent fiscal years
are as follows:
1994 1995
------ ------
Intermediate National Fund 48.30% 32.20%
Intermediate New Mexico Fund 6.62% 17.06%
Intermediate Florida Fund 15.55% 89.60%
MANAGEMENT AND HOLDERS OF SECURITIES
The management of the Funds, including general supervision of the duties
performed by TMC under the Investment Advisory Agreements, is the
responsibility of its Trustees. There are four Trustees, one of whom is an
"interested person." The names of the Trustees and officers and their
principal occupations and other affiliations during the past five years are
set forth below, with the Trustee who is an "interested person" of the Funds
indicated by an asterisk:
H. GARRETT THORNBURG, JR.,* 49, Trustee, President: Director, Chairman
(since January of 1987) and Treasurer of Thornburg Limited Term Municipal
Fund, Inc. (a mutual fund investing in certain municipal securities) since
its inception in 1984; Chairman and Director of Thornburg Mortgage Advisory
Corporation since its formation in 1989; Chairman and Director of Thornburg
Mortgage Asset Corporation (real estate investment trust) since its formation
in 1993; Executive Vice President of Daily Tax Free Income Fund, Inc. (mutual
fund) since its formation in 1982 and a Director from 1982 to June 1993;
President and Director of TMC since its formation in 1982.
DAVID A. ATER, 49, Trustee: Principal in Ater & Ater Associates, Santa
Fe, New Mexico (developer, planner and broker of residential and commercial
real estate) since 1990; owner, developer and broker for various real estate
projects; Director of Thornburg Mortgage Asset Corporation (real estate
investment trust) since 1994.
J. BURCHENAL AULT, 69, Trustee: Independent Fundraising Counsel, May
1986 to present; Trustee, Woodrow Wilson International Center for Scholars;
Provost, St. John's College, Santa Fe, New Mexico, from 1986 through May
1991; Director of Thornburg Limited Term Municipal Fund, Inc. since its
formation in 1984; Director of Farrer, Strauss & Giroux (publishers) since
1968.
FORREST S. SMITH, 64, Trustee: Attorney in private practice, Santa Fe,
New Mexico; shareholder Catron, Catron & Sawtell (law firm), Santa Fe, New
Mexico, 1988 to present.
BRIAN J. MCMAHON, 40, Vice President and Assistant Secretary: President
of Thornburg Limited Term Municipal Fund, Inc. since January, 1987 and Vice
President since its formation in 1984; Managing Director of TMC since
December 1985 and a Vice President since April 1984.
STEVEN J. BOHLIN, 36, Vice President and Treasurer: Vice President of
Thornburg Limited Term Municipal Fund, Inc. since November 1988 and Assistant
Vice President from 1985 to November 1988; Managing Director of TMC since
December 1990 and Vice President since December 1988.
DAWN B. SHAPLAND, 48, Secretary and Assistant Treasurer: Secretary,
Thornburg Limited Term Municipal Fund, Inc. since its formation in 1984; Vice
President, Daily Tax Free Income Fund, Inc. since 1989; Managing Director of
TMC since 1985 and a Vice President since January 1984.
WILLIAM FRIES, 56, Vice President: Managing Director of TMC since May
1995 and Vice President of Thornburg Limited Term Municipal Fund, Inc. since
June 1995; Vice President of USAA Investment Management Company from 1982 to
1995.
KEN ZIESENHEIM, 41, Vice President: Managing Director of TMC since 1995
and Vice President of Thornburg Limited Term Municipal Fund, Inc. since 1995;
Senior Vice President of Financial Services, Raymond James & Associates, Inc.
from 1991 to 1995.
JOHN ARIOLA, 26, Assistant Vice President: Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since July 1992; Accountant,
Thornburg Investment Trust and Thornburg Limited Term Municipal Fund, Inc.
since June 1991; Associate of TMC since 1992; Staff Auditor, Inventory
Auditors, Albuquerque, New Mexico, June 1987 to June 1991; student,
University of New Mexico, 1986 to 1990.
SUSAN ROSSI, 34, Assistant Vice President: Assistant Vice President of
Thornburg Limited Term Municipal Fund, Inc. since July 1992; Associate of TMC
since June 1990.
GEORGE STRICKLAND, 32, Assistant Vice President: Assistant Vice
President of Thornburg Limited Term Municipal Fund, Inc. since July 1992;
Associate of TMC since July 1991; Investor Representative, Calvert Group,
Washington, D.C., 1989 to 1991.
JONATHAN ULLRICH, 26, Assistant Vice President: Assistant Vice
President of Thornburg Limited Municipal Fund, Inc. since July 1992;
Associate, of TMC since September 1991; student, Brown University, 1987 to
1991.
CHRISTINE E. THOMPSON, 29, Assistant Vice President: Assistant Vice
President, Thornburg Limited Term Municipal Fund, Inc. since June 1993;
Associate of TMC since June 1992; Office Manager, Town and Country Janitorial
Services, Inc., Greenland, New Hampshire, September 1991 to February 1992;
Salesperson and later Department Manager, The Harvard Cooperative society,
Cambridge, Massachusetts, May, 1990 to September, 1991.
The business address of each person listed is 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501. Mr. Thornburg is a Director and the
President of TSC, and Executive Vice President of Daily Tax-Free Income Fund,
Inc.
The officers and Trustees affiliated with TMC will serve without any
compensation from the Funds. The Trust pays each Trustee who is not an
employee of TMC or an affiliated company a fee of $1,000 for each meeting of
the Trustees attended by the Trustee, pays an annual stipend of $1,000 to
each Trustee who serves on the Trust's audit committee, and reimburses all
Trustees for travel and out-of-pocket expenses incurred in connection with
attending such meetings.
As of November 8, 1995, National Fund had 17,591,815 shares outstanding,
New Mexico Fund had 10,382,494 shares outstanding, and Florida Fund had
1,382,494 shares outstanding. Class B shares issued and outstanding as of
September 30, 1995 were converted to Class A shares.
As of September 30, 1995, the following persons owned, beneficially or
of record, 5% or more of a Fund's outstanding shares:
No. of % of
Shareholder Fund Shares Total Shares
Merrill Lynch, Pierce, New Mexico Fund 634,575 6.11%
Fenner & Smith
Mutual Fund Operations
P. O. Box 45286
Jacksonville, FL 32232-5286
E. Good Florida Fund 92,805 6.75%
Naples, FL
M. Bozzelli Florida Fund 73,235 5.32%
Sarasota, FL
As of the same date, officers and trustees of the Trust, as a group (together
with family members), owned themselves or through affiliated persons 672,186
shares of the Intermediate New Mexico Fund representing 6.47% of the Fund's
outstanding shares on that date; officers and trustees of the Trust, as a
group (together with family members), owned themselves or through affiliated
persons less than 1% of the National Fund and less than 1% of the Florida
Fund.
HOW TO PURCHASE FUND SHARES
Procedures with respect to the manner in which shares of the Funds may
be purchased and how the offering price is determined are set forth in the
Prospectus under the caption "BUYING FUND SHARES IN GENERAL."
The Prospectus states that certain classes of investors, specified
below, may purchase Class A shares of the Funds at variations to the Public
Scale. The Trust may change or eliminate these variations at any time.
(1) Existing shareholders of a Fund may purchase shares upon the
reinvestment of dividends and capital gains distributions with no sales
charge. This practice is followed by many investment funds that charge sales
loads for new investments.
(2) Shareholders of a Fund who have redeemed all or any portion of
their investment in Class A shares of a Fund may purchase Class A shares with
no sales charge up to the maximum dollar amount of their shares redeemed
within 24 months of the redemption date, provided that the shareholder's
dealer or the shareholder must notify TSC or the Transfer Agent at the time
an order is placed that such a purchase would qualify for this variation to
the Public Scale. Similar notifications must be made in writing by the
dealer, the broker, or the shareholder when the order is placed by mail. The
sales charge will not be eliminated if notification is not furnished at the
time of the order or a review of TSC's or the Transfer Agent's records fails
to confirm the investor's represented previous holdings.
(3) Persons may purchase Class A shares of a Fund at no sales charge if
they redeem Class A shares of the Fund or any other series of Thornburg
Investment Trust, or of any series of Thornburg Limited Term Municipal Fund,
Inc., and reinvest some or all of the proceeds within 24 months. The
shareholder's dealer or the shareholder must notify TSC or the Transfer Agent
at the time an order is placed that the purchase qualifies for this variation
to the Public Scale.
The special classes of shareholders in subsections (2) and (3) above
were created as a convenience for those shareholders who invest in a Fund and
subsequently make a decision to redeem all or part of their investment for a
temporary period. In some cases, the existence of this special class of
shareholders will act as further inducement for certain individuals to make
an initial investment in a Fund, particularly if those investors feel that
they might have a temporary need to redeem all or part of their investment in
the coming years. Shareholders who have previously invested in a Fund are
more familiar than the general public with the Fund, its investment
objectives, and its results. The costs to TSC of its marketing to these
individuals and maintaining the records of their prior investment are minimal
compared to the costs of marketing the Fund to the public at large.
(4) Officers, Trustees, directors and employees of the Trust, TMC, TSC,
the Custodian and Transfer Agent, and counsel to the Trust, while in such
capacities, and members of their families, including trusts for the benefit
of the foregoing, may purchase shares of a Fund with no sales charge,
provided that they notify TSC or the Transfer Agent at the time an order is
placed that a purchase will qualify for this variation from the Public Scale.
The sales charge will not be eliminated if the notification is not furnished
at the time of the order or a review of Fund records fails to confirm that
the investor's representation is correct. The reduced sales charge to these
persons is based upon the Trust's view that their familiarity with and
loyalty to the Funds will require less selling effort by the Fund, such as a
solicitation and detailed explanation of the conceptual structure of the
Funds, and less sales-related expenses, such as advertising expenses,
computer time, paper work, secretarial needs, postage and telephone costs,
than are required for the sale of shares to the general public. Inclusion of
the families of these persons is based upon the Trust's view that the same
economies exist for sales of shares to family members.
(5) Employees of brokerage firms who are members in good standing with
the National Association of Securities Dealers, Inc. ("NASD"), employees of
financial planning firms who place orders for the Funds placed directly with
the Transfer Agent or TSC and through a broker/dealer who is a member in good
standing with the NASD, and employees of eligible non-NASD members which
accept orders for shares of the Fund on an agency basis and clear those
orders through a broker/dealer who is a member in good standing with NASD,
and their families, including trusts for the benefit of the foregoing, may
purchase shares of the Funds for themselves with no sales charge, provided
that (i) the order must be through a NASD member firm which has entered into
a Selected Dealer Agreement with TSC to distribute shares of the Fund, and
(ii) the shareholder's broker/dealer or the shareholder must notify TSC or
the Transfer Agent at the time an order is placed that the purchase would
qualify for this variation to the Public Scale. Similar notification must be
made in writing by the dealer, the broker, or the shareholder when such an
order is placed by mail. The reduced sales charge will not apply if the
notification is not furnished at the time of the order or a review of TSC's,
the dealer's, the broker's or the Transfer Agent's records fails to confirm
that the investor's representation is correct.
Because they sell the Funds' shares, these individuals tend to be much
more aware of the Funds than the general public. Any additional costs to TSC
of marketing to these individuals are minimal.
(6) Bank trust departments, companies with trust powers and investment
advisers who receive compensation on a fee basis may purchase shares of a
Fund for their customers at no sales charge, provided that these persons
notify TSC or the Transfer Agent, at the time an order qualifying for this
reduced charge is placed, that such a purchase would qualify for this
variation to the Public Scale.
(7) Purchases of Class A shares of any Fund may be made at net asset
value provided that such purchases are placed through a broker that maintains
one or more omnibus accounts with the Funds and such purchases are made by
(i) investment advisers or financial planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; (ii) clients of such investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment adviser or
financial planner on the books and records of the broker or agent; and (iii)
retirement and deferred compensation plans and trusts used to fund those
plans, including, but not limited to, those defined in Sections 401(a)
through 403(b) or 457 of the Internal Revenue Code and "rabbi trusts."
Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent.
These organizations may charge fees to clients for whose accounts they
purchase shares of a Fund in a fiduciary capacity. Where the reduced sales
charge applies, notification is required at the time the order is received,
and a review of TSC's or Transfer Agent's records must confirm that the
investor's representation is correct.
(8) No sales charge will be payable at the time of purchase on
investments of $1 million or more made by a purchaser. A contingent deferred
sales charge ("CDSC") will be imposed on these investments in the event of a
share redemption within 1 year following the share purchase at the rate of
1/2 of 1% of the value of the shares redeemed. In determining whether a CDSC
is payable and the amount of any fee, it is assumed that shares not subject
to the charge are the first redeemed, followed by other shares held for the
longest period of time. The applicability of these fees will be unaffected
by transfers of registration. TSC or TMC intend to pay a commission of up to
1/2 of 1% to dealers who place orders of $1 million or more for a single
purchaser.
(9) Certain employee benefit plans and insurance company separate
accounts used to fund annuity contracts may purchase shares of the Funds at
no sales charge. TSC or TMC intend to pay a commission of up to 1/2 of 1% to
dealers who place orders for these plans.
(10) Charitable organizations or foundations, including trusts
established for the benefit of charitable organizations or foundations, may
purchase shares of the Funds at no sales charge. TSC or TMC intend to pay a
commission of up to 1/2 of 1% to dealers who place orders for these
purchasers.
The investment decisions of the persons and organizations described in
the foregoing paragraphs tend to be made by informed fiduciaries or other
advisers. Typically, these persons are better able than the general public
to evaluate quickly the appropriateness of a Fund's investment objectives and
performance in light of their customers' goals. In certain cases, these
organizations may approach a Fund directly with no solicitation after reading
performance data in trade publications. Consequently costs of marketing to
these persons and organizations likely will be minimal.
(11) In any case where the Fund acquires substantially all of the
assets of a registered investment company in exchange for the Fund's shares,
no sales charge will be imposed. Such exchanges are preceded by the
distribution of materials to the shareholders at the acquired company, which
explain the transaction. The preparation and dissemination of these
materials and other information relating to such a transaction commonly are
paid for by TMC rather than the Fund or TSC.
(12) Such persons as are determined by the Trustees to have acquired
shares under special circumstances, not involving any sales expense to the
Fund or to TSC, may purchase shares of the Fund with no sales charge. This
variation from the Public Scale contemplates circumstances where a relatively
large sale can be made at no distribution cost to a large investor or a
number of smaller investors who are similarly situated. In the contemplated
circumstances, there would be no cost of distribution, or any costs would be
paid by TMC.
(13) Shares of the Fund may be sold at a reduced or no sales charge
pursuant to sponsored arrangements, which include programs under which an
organization makes recommendations to or permits group solicitation of its
employees, members or participants. Information on these arrangements is
available from TSC.
(14) Investors may purchase shares of any Fund at net asset value
without a sales charge to the extent that the purchase represents proceeds
from a redemption (within the previous 60 days) of shares of another mutual
fund which has a sales charge. When making a direct purchase at net asset
value under this provision, the Fund must receive one of the following with
the direct purchase order: (i) the redemption check representing the
proceeds of the shares redeemed, endorsed to the order of the Fund, or (ii)
a copy of the confirmation from the other fund, showing the redemption
transaction. Standard back office procedures should be followed for wire
order purchases made through broker dealers. Purchases with redemptions from
money market funds are not eligible for this privilege. This provision may
be terminated anytime by TSC or the Funds without notice.
NET ASSET VALUE
Procedures for determining the net asset value of the Funds' shares are
set forth in the Prospectus.
The Funds will calculate the net asset value at least once daily on days
when the New York Stock Exchange is open for trading, and more frequently if
deemed desirable by the Trust. Net asset value will not be calculated on New
Year's Day, Washington's Birthday (on the third Monday in February), Good
Friday, Memorial Day (on the last Monday in May), Independence Day, Labor
Day, Thanksgiving Day, Christmas Day, on the preceding Friday if any of the
foregoing holidays falls on a Saturday, and on the following Monday if any of
the foregoing holidays falls on a Sunday. Under the Investment Company Act
of 1940, net asset value must be computed at least once daily on each day
(i) in which there is a sufficient degree of trading in a Fund's portfolio
securities that the current net asset value of its shares might be materially
affected by changes in the value of such securities and (ii) on which an
order for purchase or redemption of its shares is received.
REDEMPTION OF SHARES
Procedures with respect to redemption of Fund shares are set forth in
the Prospectus under the caption "How to Redeem Fund Shares."
The Funds may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), (b) when trading in the
markets the Funds normally utilize is restricted, or an emergency exists as
determined by the Securities and Exchange Commission so that disposal of the
Funds' investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit for protection of the shareholders of a Fund.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Trust, Thornburg
Securities Corporation acts as the principal underwriter of Fund shares. The
Funds do not bear selling expenses except (i) those involved in registering
shares with the Securities and Exchange Commission and qualifying them or the
Funds with state regulatory authorities, and (ii) expenses paid under the
Service and Distribution Plans which might be considered selling expenses.
Terms of continuation, termination and assignment under the Distribution
Agreement are identical to those described above with regard to the
Investment Advisory Agreement, except that termination other than upon
assignment requires six months' notice.
H. Garrett Thornburg, Jr. President, Treasurer and a Trustee of the
Funds, is also Director and controlling stockholder of TSC.
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, is
the independent auditor of the Funds for the fiscal year ending September 30,
1996. Shareholders will receive semi-annual unaudited financial statements,
and annual financial statements audited by the independent auditors.
FINANCIAL STATEMENTS
Statements of Assets and Liabilities including Schedules of Investments
as of September 30, 1995, Statements of Operations for the year then ended
and Statements of Changes in Net Assets for the two years in the period ended
September 30, 1995, Notes to Financial Statements, Financial Highlights, and
Independent Auditor's Reports dated October 27, 1995 are incorporated herein
by reference from those Funds' respective Annual Reports to Shareholders for
the year ended September 30, 1995.
