THORNBURG FUNDS - INSTITUTIONAL CLASS SHARES
July 5, 1996 Prospectus
Institutional Class shares of the following Funds are offered through this
combined prospectus:
MUNICIPAL FUNDS TAXABLE INCOME FUNDS
Thornburg Limited Term Municipal Fund Thornburg Limited Term
National Portfolio U. S. Government Fund
("Limited Term National Fund") ("Government Fund")
Thornburg Intermediate Municipal Fund Thornburg Limited Term Income Fund
("Intermediate National Fund") ("Income Fund")
Limited Term National Fund is a separate investment portfolio of Thornburg
Limited Term Municipal Fund, Inc. and Intermediate National Fund, Government
Fund and Income Fund are separate investment portfolios of Thornburg
Investment Trust. Limited Term National Fund and Intermediate National Fund
are municipal bond funds; Government Fund and Income Fund are taxable bond
funds. Each of the Fund's investment objectives are described beginning on
page ___ of this Prospectus under the caption "General Information".
All of the Funds are managed by Thornburg Management Company, Inc. (TMC), and
issue multiple classes of shares. Institutional Class shares are offered
through this prospectus. Other classes issued by the Funds are described on
page ___ under the caption "General Information".
TABLE OF CONTENTS PAGE
EXPENSE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . ___
GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . ___
INVESTMENT OBJECTIVES AND POLICIES - In General. . . . . . . . . . . ___
INVESTMENT POLICIES OF THE MUNICIPAL FUNDS . . . . . . . . . . . . . ___
INVESTMENT POLICIES OF THE TAXABLE INCOME FUNDS. . . . . . . . . . . ___
YOUR ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___
BUYING FUND SHARES. . . . . . . . . . . . . . . . . . . . . . . . ___
OPENING AN ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . ___
SELLING FUND SHARES . . . . . . . . . . . . . . . . . . . . . . . ___
INVESTOR SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . ___
SHAREHOLDER AND ACCOUNT POLICIES . . . . . . . . . . . . . . . . . . ___
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___
SERVICE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___
PERFORMANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___
ORGANIZATION OF THE FUNDS. . . . . . . . . . . . . . . . . . . . . . ___
TMC AND TSC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . ___
This Prospectus sets forth concisely the information a prospective investor
should know about the Funds before investing. It should be read and retained
for further reference. Additional information about the Funds is contained
in a Statement of Additional Information, Thornburg Funds Institutional Class
Shares, dated July 5, 1996. The Statement of Additional Information has been
filed with the Securities and Exchange Commission and may be obtained at no
charge by contacting Thornburg Securities Corporation, 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501, 888-598-0400. This Prospectus
incorporates by reference the entire Statement of Additional Information.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
FUND SHARES INVOLVE INVESTMENT RISKS (INCLUDING POSSIBLE LOSS OF PRINCIPAL),
AND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, AND ARE
NOT INSURED BY, ANY BANK, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY GOVERNMENT AGENCY.
EXPENSE INFORMATION
Shareholder Transaction Expenses
All Funds
---------
Maximum Sales Charge on Purchases or Reinvested Dividends none
Maximum Deferred Sales Charge on Redemptions none
Redemption Fees none
Exchange Fees none
Annual Operating Expenses
Examples: Assuming the Funds'
expense percentages remain the
same, an investor making a
$1,000 investment in
Institutional Class shares of
one of the Funds will pay the
Limited Term National Fund following cumulative expenses,
-------------------------- assuming a 5% annual return.
Management Fees .45% After 1 year $ 6.00
12b-1 Fees (after fee waiver) .0% After 3 years $19.00
Other Expenses .15% After 5 years $33.00
---- After 10 years $75.00
Total Fund Operating Expenses .60%
Intermediate National Fund
--------------------------
Management Fees .50% After 1 year $ 7.00
12b-1 Fees (after fee waiver) .0% After 3 years $22.00
Other Expenses .19% After 5 years $38.00
---- After 10 years $86.00
Total Fund Operating Expenses .69%
Government Fund
---------------
Management Fees .38% After 1 year $ 6.00
12b-1 Fees (after fee waiver) .0% After 3 years $19.00
Other Expenses .22% After 5 years $33.00
---- After 10 years $75.00
Total Fund Operating Expenses .60%
Limited Term Income Fund
------------------------
Management Fees .50% After 1 year $ 7.00
12b-1 Fees (after fee waiver) .0% After 3 years $22.00
Other Expenses .19% After 5 years $38.00
---- After 10 years $86.00
Total Fund Operating Expenses .69%
Expenses reflect rounding. Although each Fund has a 12b-1 plan, TMC has no
present intention to seek any fee under the 12b-1 plans, and the amounts
shown reflect a waiver of 12b-1 fees. Other Expenses are estimated for the
current fiscal year, and could be higher. Absent waivers of Rule 12b-1 fees,
the 12b-1 fees would be .25% for each of the Funds, and Total Fund Operating
Expenses for each of the Funds would be .25% higher. TMC may, but is not
required to, assume Other Expenses to the extent those expenses exceed the
estimated amounts shown; absent any such assumption, the Other Expenses could
be higher than those shown.
Explanation of Tables
Actual expenses may be greater or less than those shown. The expense
figures shown in the tables above are presented to assist the investor in
understanding the various costs that an investor in any of the Funds will
bear, directly or indirectly. The Funds' investment adviser may not waive
fees or assume Fund expenses in the future.
GENERAL INFORMATION
The primary investment objective of each of the Municipal Funds, Limited Term
National Fund and Intermediate National Fund, is to provide, through
investment in professionally managed portfolios of Municipal Obligations, as
high a level of current income exempt from federal income tax as is
consistent, in TMC's view, with preservation of capital. Limited Term
National Fund will maintain a portfolio having a dollar-weighted average
maturity of normally not more than five years, to attempt to reduce
fluctuations in net asset value relative to municipal bond portfolios with
longer average maturities while expecting lower yields than those received on
portfolios with longer average maturities. Intermediate National Fund will
maintain a portfolio having a dollar-weighted average maturity of normally
three to ten years, to attempt to reduce fluctuation in net asset value
relative to long-term municipal bond portfolios. Intermediate National Fund
may receive lower yields than those received on long-term bond portfolios,
while seeking higher yields and expecting higher share price volatility than
Limited Term National Fund.
The primary investment objective of each of the Taxable Income Funds,
Government Fund and Income Fund, is to provide, through investment in a
professionally managed portfolio of fixed income obligations, as high a level
of current income as is consistent, in TMC's view, with preservation of
capital. The Government Fund will try to achieve its primary investment
objective by investing mainly in obligations issued or guaranteed by the
United States Government or by its agencies or instrumentalities and in
participations in, or repurchase agreements secured by, such obligations.
Income Fund will try to achieve its primary investment objective by investing
in investment grade short and intermediate maturity bonds and asset backed
securities such as mortgage backed securities and collateralized mortgage
obligations. Income Fund also may invest in or utilize other investment
strategies to hedge market risks, manage cash positions or to enhance
potential gain. Additionally, each Fund will seek to reduce fluctuations in
its net asset value compared to longer term portfolios by investing in
obligations with an expected dollar-weighted average maturity of normally not
more than five years.
There can be no assurance that the Funds' objectives can be achieved. If
your sole objective is preservation of capital, then the Funds may not be
suitable for you because their net asset values will vary as market interest
rates fluctuate. Investors whose sole objective is preservation of capital
may wish to consider a high quality money market fund. The primary and
secondary investment objective of each Fund is a fundamental policy and may
not be changed without a vote of the Fund's shareholders. Please see
Investment Objectives and Policies below for a discussion of the Funds'
Investment policies.
Each Fund currently issues multiple classes of shares: Institutional Class
shares, Class A shares and Class C shares. Each of a Fund's shares
represents an equal undivided interest in the Fund's assets, and each Fund
has common investment objectives and a common investment portfolio.
Different classes may have different sales charges and other expenses which
may affect performance. Investors may telephone Thornburg Securities
Corporation at (888) 598-0400 to obtain more information concerning Class A
or Class C shares available to them through their sales representative.
Investors may also obtain information respecting Class A and Class C shares
through their sales representative or other person which is offering or
making available the Institutional Class shares described in this Prospectus.
On any day on which the New York Stock Exchange, Inc. is open for trading,
investors may initiate purchases and redemptions of a Fund's shares. See
"Your Account" beginning on page ___ for information about buying Fund
shares, and "Selling Fund Shares" beginning on page ___ for information about
redeeming Fund shares.
INVESTMENT OBJECTIVES AND POLICIES - In General
Primary Objectives
The primary investment objective of the Municipal Funds is to obtain as high
a level of current income exempt from federal income tax as is consistent, in
the view of TMC, with preservation of capital. The primary investment
objective of the Taxable Income Funds is to provide, through investment in a
professionally managed portfolio of fixed income obligations, as high a level
of current income as is consistent, in the view of TMC, with safety of
capital. Income from the Municipal Funds which is otherwise exempt from
federal income tax may be subject to the alternative minimum tax, and
distributions from gains attributable to market discount on portfolio
securities is treated as ordinary income for federal income tax purposes.
The objective of preserving a Fund's capital may preclude the Fund from
obtaining the highest yields available.
Thornburg Management Company, Inc. (TMC) actively manages the Funds'
portfolios in attempting to meet the Funds' primary investment objectives.
Investment decisions are based upon general economic and financial trends,
such as domestic and international economic development, outlooks for
securities markets, interest rates and inflation, the supply and demand for
debt securities, and other factors. The Funds' portfolios are determined by
individual security analyses, and TMC's credit analysts actively monitor the
credit quality of the Funds' portfolios.
Each Fund will seek to enhance its income by taking advantage of yield
disparities, trends or other factors in the fixed income markets. Although
each Fund ordinarily will acquire securities for investment rather than for
realization of gains on market fluctuations, a Fund may dispose of any
security prior to its scheduled maturity to enhance income or reduce loss, to
change the portfolio's average maturity, or to otherwise respond to current
market conditions. In addition, the Funds may utilize other techniques,
discussed below, to enhance a Fund's investment income.
Secondary Objectives
The secondary objective of each of the Funds is to minimize expected
fluctuations in net asset value relative to longer intermediate and long-term
bond portfolios. Because the magnitude of the changes in market value of
interest bearing obligations ordinarily is greater for obligations of longer
terms, each Fund believes that it can reduce the magnitude of fluctuations in
the values of its assets by limiting its weighted average maturity. Limited
Term National Fund, Government Fund and Income Fund each will maintain a
portfolio having a dollar-weighted average maturity of normally not more than
five years, with the objective of reducing fluctuations in its net asset
value relative to bond portfolios with longer average maturities while
expecting lower yields than those received on portfolios with longer average
maturities. Intermediate National Fund will maintain a portfolio having a
dollar-weighted average maturity of normally three to ten years, with the
objective of reducing fluctuations in net asset value relative to long-term
bond portfolios. There is no limitation on the maturity of any specific
security any of these Funds may purchase, subject to the limitation on the
average portfolio maturity of each Fund. Each Fund's dollar-weighted average
maturity may be lowered for temporary defensive purposes if conditions or
expectations for the behavior of interest rates indicate that a lower average
maturity will be advantageous. Such conditions could include increasing
inflation or a market in which short-term obligations temporarily have
higher yields than longer-term obligations. TMC also will attempt to
minimize principal fluctuations in the Funds' portfolios through, among other
things, diversification, careful credit analysis and security selection.
INVESTMENT POLICIES OF THE MUNICIPAL FUNDS
The Municipal Funds will pursue their primary objective by investing in a
portfolio of investment grade or equivalent obligations which are issued by
states and state agencies, and local governments and agencies, and by United
States territories and possessions ("Municipal Obligations"). Municipal
Obligations are discussed below under the caption "Municipal Obligations,"
and investment grade ratings are discussed below under the caption
"Securities Ratings and Investment Quality".
Except to the extent the Municipal Funds are invested in temporary
investments for defensive purposes, each Municipal Fund's policy under normal
conditions is to invest 100% of its net assets in Municipal Obligations. As
a fundamental policy which may not be changed without a vote of a Municipal
Fund's shareholders, each Municipal Fund must normally invest at least 80% of
its net assets in Municipal Obligations. The Municipal Funds may purchase
obligations issued by or on behalf of territories or possessions of the
United States and their agencies and instrumentalities.
Each Municipal Fund has reserved the right to invest up to 20% of its net
assets in "temporary investments" in taxable securities (of comparable
quality to the 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. 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. Neither Municipal Fund expects
to find it necessary to make temporary investments in taxable investments.
Municipal Obligations
Municipal Obligations are obligations bearing interest exempt from federal
income taxes, which are issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia, and their
political subdivisions, agencies and instrumentalities. Municipal
Obligations include notes (including tax-exempt commercial paper), bonds,
municipal leases and participation interests in these obligations. Interest
on Municipal Obligations may be subject to the alternative minimum tax or
state income taxes. See "Federal Taxes."
The yields on Municipal Obligations are dependent on a variety of factors,
including the condition of the general money market and the Municipal
Obligation market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The market value of outstanding
Municipal Obligations will vary with changes in prevailing interest rates
and as a result of changing evaluations of the ability of their issuers to
meet interest and principal payments. 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 its shares. Municipal
Obligations often grant the issuer the option to pay off the obligation prior
to its final maturity. Prepayment of Municipal Obligations may reduce the
expected yield on invested funds, the net asset value of the Fund, or both if
interest rates have declined below the level prevailing when the obligation
was purchased. If interest rates have declined, reinvestment of the proceeds
from the prepayment of Municipal Obligations may result in a lower yield to
the Fund. In addition, the federal income tax treatment of gains from market
discount as ordinary income may increase the price volatility of Municipal
Obligations when interest rates rise.
Obligations of issuers of Municipal Obligations are subject to the provisions
of bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the United States Bankruptcy Code. In addition, the
obligations of such issuers may become subject to the laws enacted in the
future by Congress, state legislatures or referenda extending the time for
payment of principal or interest, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There
is also the possibility that, as a result of legislation or other
conditions, the power or ability of any issuer to pay, when due, the
principal of and interest on its Municipal Obligations may be materially
affected.
Variable Rate Securities; Inverse Floaters; and Demand Instruments
Either Municipal Fund may purchase variable rate Municipal Obligations.
These variable rate securities bear rates of interest that are adjusted
periodically according to formulas intended to reflect market rates of
interest, and these may include "inverse floaters," whose rates vary
inversely with changes in market rates of interest. The values of inverse
floaters will tend to be more volatile than fixed rate municipal securities
having similar credit quality, redemption provisions, and maturity. Neither
of the Municipal Funds will invest more than 10% of its total assets in
securities whose rates vary inversely with changes in market rates of
interest. Each Fund also may purchase variable rate demand instruments and
also may purchase fixed rate municipal demand instruments either in the
public market or privately from banks, insurance companies and other
financial institutions. These instruments 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 the 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.
Municipal Leases
Either Municipal Fund may invest in Municipal Leases. These obligations are
used by state and local governments to acquire a wide variety of equipment
and facilities. Many such obligations include "non-appropriation" clauses
which provide that the governmental issuer has no obligation to make payments
unless money is appropriated for that purpose. If an issuer stopped making
payment on a Municipal Lease held by the Fund, the Lease would lose some or
all of its value. Often, the Fund will not hold the obligation directly,
but will purchase a "participation interest" in the obligation, which gives
the Fund an undivided interest in the underlying Municipal Lease. Some
Municipal Leases may be illiquid under certain circumstances, and TMC will
evaluate the liquidity of each Municipal Lease upon its acquisition by a Fund
and periodically while it is held.
INVESTMENT POLICIES OF THE TAXABLE INCOME FUNDS
The Government Fund will pursue its primary objective by investing mainly in
obligations issued or guaranteed by the United States Government or by its
agencies or instrumentalities and in participations in such obligations or in
repurchase agreements secured by such obligations. The Income Fund will seek
to achieve its primary investment objective by investing in investment grade
short and intermediate maturity bonds and asset backed securities such as
mortgage backed securities and collateralized mortgage obligations. The
Income Fund also may invest in or utilize other investment strategies to
hedge market risks, manage cash positions or to enhance potential gain. No
assurance can be given that the Funds will achieve their objective. The types
of securities the Taxable Funds may invest in are discussed below under the
caption "Taxable Obligations," and investment grade ratings are discussed
below under the caption "Securities Ratings and Investment Quality".
Each Taxable Income Fund's name derives from its policy of maintaining an
overall portfolio of investments with a dollar-weighted average maturity of
normally not more than five years, with the objective of reducing
fluctuations in the Fund's net asset value per share compared to longer
maturity portfolios. Normally, the Funds expect to offer greater price
stability than a higher yielding long-term bond fund and higher yields than
most short-term investments. Historically, intermediate-term government
bonds enjoyed higher returns, compounded annually over the period 1926-1995,
as compared to long-term government bonds and 90-day U. S. Treasury Bills.
Intermediate-term bonds outperformed longer term issues because
intermediate-term bonds did not suffer the large capital losses which befell
higher yielding long-term bonds when bond yields rose. Intermediate-term
bonds, which have less price stability than short-term obligations,
nonetheless outperformed short-term bills because the yield on intermediate-
term obligations typically is higher than the yield on short-term
obligations. The combination of price stability and relatively high yield
enjoyed by intermediate-term bonds caused these bonds to outperform normally
higher yielding long-term bonds and normally more stable short-term bills
during the periods described. The relationship between interest rates and
the values of obligations, as shown by the foregoing study, applies to all
types of debt securities and has been consistently demonstrated in the
portfolios managed by TMC and the markets it has observed. However, no
assurance can be given that each Taxable Income Fund's short and
intermediate-term obligations will perform as well in the future as
intermediate-term government bonds have in the past.
Counsel to the Funds has advised that in their view shares of Government Fund
are a legal investment for, among other investors, commercial banks and
credit unions chartered under the laws of the United States. This advice is
based upon a review of this Prospectus and the Fund's Statement of Additional
Information, and upon counsel's receipt of undertakings by TMC and Thornburg
Investment Trust respecting investment policies. In addition, Thornburg
Investment Trust believes that the Government Fund is currently a legal
investment for savings and loan associations and commercial banks chartered
under the laws of certain states.
Taxable Obligations
Both Taxable Income Funds buy the following types of securities. Securities
and techniques specific to Government Fund or to Income Fund are detailed
under the captions "Government Fund Investment Policies" and "Income Fund
Investment Policies".
U. S. Government Securities - Government Fund and Income Fund
U. S. Government securities include U. S. Treasury obligations such as U. S.
Treasury Bills, U. S. Treasury Notes, and U. S. Treasury Bonds, with various
interest rates, maturities and dates of issuance. These U. S. Treasury
securities are direct obligations of the U. S. Treasury, and are backed by
the full faith and credit of the U. S. Government.
U. S. Government Agency Obligations
U. S. Government agency obligations include, but may not be limited to,
obligations issued by the Banks for Cooperatives; the Export-Import Bank of
the U. S.; the Farmers Home Administration; the Federal Deposit Insurance
Corporation; the Federal Financing Bank; the Federal Home Loan Banks; the
Government National Mortgage Association (GNMA); the Federal Home Loan
Mortgage Corporation (FHLMC); the Federal National Mortgage Association
(FNMA); the Federal Housing Administration; the Federal Intermediate Credit
Banks; the Federal Land Banks; the General Services Administration; the Small
Business Administration; the Student Loan Marketing Association; and the U.S.
Maritime Administration. Obligations issued by the Farmers Home
Administration, Federal Financing Bank, General Services Administration, and
the Small Business Administration are backed by the full faith and credit of
the United States or the agency has the authority to borrow from the U. S.
Treasury. Other agency obligations are supported by discretionary authority
of the Treasury to purchase obligations of the agency.
GNMA Certificates and Other Asset-Backed Securities
GNMA certificates and other mortgage passthrough securities issued by the
FHLMC and the FNMA evidence interests in specific pools of mortgage loans.
The securities provide shareholders with payments consisting of both interest
and principal as the mortgages in the underlying mortgage pools are paid off.
Variations in interest rates and other factors may result in prepayment of
some mortgages underlying these certificates, so that the resulting term of
the certificates will change. During periods of rising interest rates,
mortgage-backed securities may have a greater risk of capital depreciation
because of decreased prepayments and increased effective maturity, and during
periods of declining interest rates these securities may have less potential
for capital appreciation because of increased prepayments. TMC will
continually evaluate any investment in these certificates in light of market
conditions and each Fund's policy of maintaining a portfolio normally having
a dollar-weighted average maturity or estimated average life of not more than
five years.
Repurchase Agreements
When one of the Taxable Income Funds purchases securities, it may enter into
a repurchase agreement with the seller in which the seller agrees, at the
time of sale, to repurchase the security at a mutually agreed-upon time and
price. The resale price will be in excess of the purchase price reflecting
an agreed-upon market rate effective for the period of time the Fund's money
will be invested in the securities, and will not be related to the coupon
rate of the purchased securities. At the time the Fund enters into a
repurchase agreement, the value of the underlying securities, including
accrued interest, will be equal to or exceed the value of the repurchase
agreement, and for repurchase agreements which mature in more than one day,
the seller will agree to furnish additional security if the value of the
underlying security falls below the value of the repurchase agreement. If
the seller enters a bankruptcy or other insolvency proceeding, or the seller
fails to repurchase the underlying security as agreed, the Fund could
experience losses, including loss of rights to the security. The Government
Fund will not enter into a repurchase agreement if, as a result, more than
10% of the value of its net assets would then be invested in repurchase
agreements maturing in more than seven days and other securities which are
considered illiquid. The Income Fund will not enter into a repurchase
agreement or purchase any security deemed illiquid if as a result, more than
15% of the value of its net assets would be invested in repurchase agreements
maturing in more than seven days and other securities which are considered
illiquid.
Reverse Repurchase Agreements
Either of the Taxable Income Funds may enter into reverse repurchase
agreements to obtain short-term liquidity. In such a transaction the Fund
would sell a security to a purchaser and agree to repurchase the security in
the future. The Funds will enter into reverse repurchase agreements only
with dealers, banks or recognized financial institutions. These agreements
are subject to the risk that the underlying security will decline in value
during the period when the Fund is obligated to repurchase it. If a Fund
enters into any such transaction, it will deposit high grade liquid debt
assets in a segregated account with its Custodian in an amount sufficient to
meet the Fund's obligations to the purchaser. Neither Fund will enter into
any reverse repurchase agreement if, as a result, more than 5% of its total
assets would be subject to such obligations.
Dollar Roll Transactions
The Taxable Income Funds may enter into dollar roll transactions with
selected banks and broker-dealers. Dollar roll transactions are treated as
reverse repurchase agreements for purposes of a Fund's borrowing restrictions
and consist of the sale by the Fund of mortgage-backed securities, together
with a commitment to purchase similar, but not identical, securities at a
future date, at the same price. If a Fund enters into any such transaction,
it will deposit high grade liquid assets in a segregated account with the
custodian in an amount sufficient to meet the Fund's obligations to the
purchaser. A Fund is paid a fee as consideration for entering into the
commitment to purchase. If the broker-dealer to whom the Fund sells the
security underlying a dollar roll transaction becomes insolvent, the Fund's
right to purchase or repurchase the security may be restricted.
Additionally, the value of the security may change adversely over the term of
the dollar roll and the return earned by the Fund with the proceeds of a
dollar roll may not exceed transaction costs.
Securities Lending
The Taxable Income Funds may from time to time lend securities on a short-
term basis to banks, brokers, dealers and certain financial institutions and
receive as collateral cash, government securities, or irrevocable bank
letters of credit. The borrowers will be required to deposit and maintain
collateral at least equal to 102% of the current value of the loaned
securities plus accrued interest. Securities loans will not be made by a
Fund if as a result the aggregate of all such outstanding loans exceeds one-
third of the value of the Fund's total assets. The Fund will continue to be
entitled to the interest payable on the loaned securities and will either
receive as income a portion of the interest on the investment of any cash
loan collateral or, in the case of collateral other than cash, a fee
negotiated with the borrower. The terms of these loans will provide that
they are terminable at any time. Loans of securities involve risks of delay
in receiving additional collateral or in recovering the securities loaned or
even loss of rights in the collateral in the event of the insolvency of the
borrower of the securities.
Government Fund - Investment Policies
The Government Fund will invest at least 65% of its total assets in
obligations issued or guaranteed by the United States Government or its
agencies or instrumentalities, and will invest at least 80% of its total
assets in such obligations and in readily marketable participations in such
obligations or in repurchase agreements secured by such obligations.
Although the Fund will acquire obligations issued or guaranteed by the U. S.
Government and its agencies and instrumentalities, neither the Fund's net
asset value nor its dividends are so guaranteed.
Participations, CMOs
To facilitate its investment in any of the types of obligations which the
Government Fund may acquire, the Fund may purchase "participations" in any of
these obligations. Participations are undivided interests in pools of
securities which are assembled by certain banks or other responsible persons,
such as securities broker/dealers and investment banking houses, where the
underlying government credit support passes through or is otherwise available
to the participants or the trustee for all participants. Similarly, the
Fund may acquire collateralized mortgage obligations (CMOs), which are
obligations issued by a trust or other entity organized to hold a pool of
U.S. Government insured mortgage-backed securities (such as GNMA
certificates) or mortgage loans. The Fund will acquire a CMO when TMC
believes that the CMO is more attractive than the underlying securities in
pursuing the Fund's primary and secondary investment objectives.
Participations and privately issued CMOs are not considered U.S. Government
securities, and are not considered part of the 65% of the total assets of
the Government Fund which will be invested in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Other Securities
The Government Fund may under certain market conditions invest up to 20% of
its assets in (i) time certificates of deposit maturing in one year or less
after the date of acquisition which are issued by United States banks having
assets of one billion dollars or more, or (ii) time certificates of deposit
insured as to principal by the Federal Deposit Insurance Corporation. If any
certificate of deposit (whether insured in whole or in part) is non-
negotiable, and it matures in more than seven days, it will be considered
illiquid and subject to the Fund's fundamental investment restriction that no
more than 10% of the Fund's net assets will be placed in illiquid
investments.
Income Fund - Investment Policies
In general, the Income Fund may purchase securities permissible for the
Government Fund. The Income Fund also may invest in other types of debt
securities, so long as at least 65% of its net assets are invested in a
managed portfolio of securities consisting of:
* U.S. Government securities, including bonds, notes, and bills issued
by the U.S. Treasury, and securities issued guaranteed by agencies
and instrumentalities of the U.S. Government;
* Corporate debt securities, such as bonds, notes and debentures;
* Mortgage-backed securities;
* Other asset-backed securities;
* Municipal securities;
* Money market instruments which are comprised of commercial paper,
bank obligations (i.e., certificates of deposit and bankers'
acceptances) and repurchase agreements;
* Privately-placed securities (restricted securities); and
* Foreign securities, including non-U.S. dollar-denominated securities
and U.S. dollar-denominated debt securities issued by foreign issuers
and foreign branches of U.S. banks.
Municipal Securities
The Income Fund may invest in municipal securities, which include obligations
issued by states, territories and possessions of the United States, and their
political subdivisions, agencies and instrumentalities. Municipal securities
may be "general obligation" bonds or "revenue bonds." General obligation
bonds are backed by the credit of the issuing political subdivision or
agency, and revenue bonds are repaid from the revenues derived from a
specific project such as a waste treatment plant or stadium. Although
investments in municipal obligations will be made subject to the Fund's
emphasis on purchases of investment grade securities (described below under
"Securities Ratings and Credit Quality"), municipal obligations are subject
to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors. In addition, these obligations could
become subject to actions by state legislatures or voter referenda extending
the time for repayment of principal or imposing other constraints upon
enforcement of the obligations or upon political subdivisions to levy taxes
to pay the obligations.
Foreign Securities
While the Income Fund generally emphasizes investments in U. S. Government
securities and other issuers domiciled in the United States, it may invest in
foreign securities of the same types and quality as the domestic securities
in which the Income Fund may invest when the anticipated performance of
foreign securities is believed by TMC to offer more potential than domestic
alternatives in keeping with the investment objectives of the Income Fund.
Foreign securities may be denominated either in U. S. dollars or foreign
currencies.
The Income Fund may also invest in instruments offered by brokers which
combine forward contracts, options and securities in order to reduce foreign
currency exposure. The Income Fund may enter into multiple futures, options
and foreign currency transactions or a combination of these transactions,
instead of a single transaction, as part of a hedging strategy.
Investments in foreign securities involve special risks due to more limited
information, higher brokerage costs, different accounting standards, thinner
trading markets and the likely impact of foreign taxes on the yield from debt
securities. They may also entail other risks, such as the possibility of one
or more of the following: imposition of dividend or interest withholding or
confiscatory taxes; currency blockages or transfer restrictions;
expropriation, nationalization or other adverse political or economic
developments; less government supervision and regulation of securities
exchanges, brokers and listed companies; and the difficulty of enforcing
obligations in other countries. Purchases of foreign securities are usually
made in foreign currencies and, as a result, the Income Fund may incur
currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U. S. dollar.
Further, it may be more difficult for the Income Fund's agents to keep
currently informed about corporate actions which may affect the prices of
portfolio securities. Communications between the United States and foreign
countries may be less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. The Income Fund's ability and
decisions to purchase and sell portfolio securities may be affected by laws
or regulations relating to the convertibility and repatriation of assets.
These risks may be more acute in the case of developing countries.
Other Investment Strategies
The Income Fund may, but is not required to, utilize various other investment
strategies described below to hedge various market risks such as the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted by modern portfolio
managers and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as
new instruments and strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Income Fund may
purchase and sell exchange-listed and over-the-counter put and call options
on securities, financial futures, equity and fixed-income indices and other
financial instruments, purchase and sell financial futures contracts, enter
into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currency or currency futures (collectively, all the above are called
"Strategic Positions"). Strategic Positions may be used to attempt to
protect against possible changes in the market value of securities held in or
to be purchased for the Income Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Income Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of the Income Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities. The Fund may manage its portfolio maturity
or duration by using options, futures and swaps to acquire and dispose of
specific securities having maturities which are then considered desirable in
managing the Fund's maturity or duration. "Duration" is a measure of an
obligation's life, based upon the present value of the obligor's payments of
principal and interest, and is usually shorter than the obligation's
maturity. Some Strategic Positions may also be used to enhance potential
gain, although no more than 5% of the Fund's assets will be committed to
Strategic Positions entered into for purposes other than bona fide hedging,
risk management or portfolio management. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, because use of any
Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Income Fund to utilize these Strategic
Positions successfully will depend on TMC's ability to predict pertinent
market movements, which cannot be assured. The Income Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Positions involve certain risks including possible default by the
other party to the transaction, illiquidity and, to the extent TMC's view as
to certain market movements is incorrect, the risk that the use of such
Strategic Positions could result in losses greater than if they had not been
used. Use of put and call options may result in losses to the Income Fund,
force the purchase or sale of portfolio securities at inopportune times or
for prices higher than (in the case of put options) or lower than (in the
case of call options) current market values, limit the amount of
appreciation the Income Fund can realize on its investments or cause the
Income Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Income Fund incurring losses as a result of
a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of a
futures contract and price movements in the related portfolio position of
the Income Fund creates the possibility that losses on the hedging instrument
may be greater than gains in the value of the Income Fund's position.
In addition, futures and options markets may not be liquid in all
circumstances, and over-the-counter options and certain other Strategic
Positions (e.g. caps and floors) are considered to be illiquid securities.
As a result, in certain markets, the Income Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although
the contemplated use of these futures contracts and options should tend to
minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they tend to limit any potential gain resulting
from an increase in the position's value. The Income Fund will not invest in
any over-the-counter option, cap, rate swap, currency swap, floor or other
illiquid security, if, as a result of that investment, more than 15% of its
net assets would be invested in securities which are not readily marketable
by the Income Fund. The Fund will segregate cash or high grade liquid debt
assets sufficient to meet its obligation to purchase and deliver securities
or currencies under any futures contract or option or to pay any amount owed
upon the expiration of an index-based futures contract. Finally, the daily
margin requirements for futures contracts may create a greater ongoing
potential financial risk than would purchases of options, where the exposure
is limited to the cost of the initial premium. Losses resulting from the use
of Strategic Positions would reduce net asset value, and possibly income, and
such losses could be greater than if the Strategic Positions had not been
utilized. The Strategic Positions that the Fund may use and some of their
risks are described more fully in the Income Fund's Statement of Additional
Information.
Covered Short Sales
Income Fund may make short sales of securities, but will only do so in
circumstances where it owns securities of the type sold, or Income Fund owns
securities giving it the right to obtain securities equivalent in kind and
amount to the securities sold and, if the right is conditional, the sale
is made upon the same conditions, except in connection with arbitrage
transactions, and except that the Fund may obtain such short-term credits as
may be necessary for the clearance of purchases and sales of securities.
Segregated Accounts
Income Fund may be required to segregate high grade debt assets in order to
provide coverage consistent with applicable regulatory policies on reverse
repurchase agreements, covered call and put options written by the Fund, to
cover forward foreign currency exchange contracts that require the Fund to
purchase or sell foreign currency for hedging purposes, or in an amount equal
to the value of the instruments underlying any futures contracts and options
on futures.
When-Issued Securities - Municipal Funds and Taxable Income Funds
Both the Municipal Funds and the Taxable Income Funds may purchase securities
on a when-issued or forward delivery basis, for payment and delivery at a
later date. The price and yield are generally fixed on the date of the
purchase commitment. During the period between purchase and settlement, no
interest accrues to the purchasing Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
Securities Ratings and Credit Quality - Municipal Funds and Taxable Income
Funds
Each of the Municipal Funds' assets will normally consist of (1) securities,
or participation interests therein, that are rated at the time of purchase
within the four highest grades by Moody's Investors Service ("Moody's"),
Fitch Investors Service ("Fitch"), or Standard & Poor's Corporation ("S&P"),
(2) securities, or participation interests therein, that are not rated by a
rating agency, but are issued by obligors that, at the time of purchase,
either have other comparable debt obligations that are rated within the four
highest grades (Baa or BBB or better) by Moody's or S&P or Fitch or, in the
case of obligors whose obligations are unrated, are deemed by TMC to be
comparable to issuers having such debt ratings, and (3) cash. Government
Fund invests at least 65% of its total assets in obligations issued or
guaranteed by the U. S. Government or its agencies or instrumentalities, and
may invest in participations, repurchase agreements and other obligations
described above on page ___. Such obligations are not typically rated. At
least 65% of Income Fund's net assets will be invested in (1) obligations of
the U. S. Government, its agencies and instrumentalities, and in (2) debt
securities rated at the time of purchase in one of the three highest
categories of Standard & Poor's Corporation (AAA, AA or A) or Moody's
Investor's Service, Inc. (Aaa, Aa or A) or, if not rated, judged to be of
comparable quality by TMC. Income Fund will not invest in any debt security
rated at the time of purchase lower than BBB by Standard & Poor's or Baa by
Moody's or of equivalent quality as determined by TMC.
Securities rated in the described categories are described as "investment
grade," and are regarded as having a capacity to pay interest and repay
principal that varies from "extremely strong" to "adequate." According to
S&P, for example, BBB bonds normally exhibit adequate protection parameters,
although adverse economic conditions or other changes are more likely to
lead to a weakened capacity compared to higher rated categories, and AAA
bonds exhibit extremely strong capacity. Securities rated Baa are regarded
by Moody's as having some speculative characteristics. Securities rated BBB
by Fitch are considered to have adequate capacity, although adverse changes
in economic conditions and circumstances are more likely to have an adverse
impact than for higher rated categories. Please see the Statement of
Additional Information for Thornburg Funds Institutional Class Shares for
detailed descriptions of these ratings.
If permitted to do so, the Funds will only buy (i) variable rate demand
instruments that are rated within the two highest grades of either rating
agency or, if unrated, are deemed by TMC to be of high quality and minimal
credit risk, (ii) commercial paper that is rated within the two highest
grades of a rating agency, and (iii) municipal notes that are rated within
the two highest grades of a rating agency or, if unrated, are deemed by TMC
to be of comparable quality to such rated municipal notes. To the extent
that unrated securities may be less liquid, there may be somewhat greater
risk in purchasing unrated securities, especially Municipal Obligations, than
in purchasing comparable, rated securities. If a Fund experienced unexpected
net redemptions, it could be forced to sell such unrated securities at
disadvantageous prices without regard to the security's investment merits,
depressing the Fund's net asset value and possibly reducing the Fund's
overall investment performance.
Credit ratings do not reflect the risk that market values of fixed income
securities will fluctuate with changes in interest rates, and credit rating
firms fail to change credit ratings in a timely fashion to reflect events
subsequent to initial ratings. Accordingly, in addition to using credit
rating information, TMC subjects each issue under consideration for
investment to its own credit analysis in an effort to assess the issuer's
financial soundness. This analysis is performed on a continuing basis for
all issues held by a Fund, and TMC may determine to dispose of portfolio
securities upon a change in ratings or adverse events or market conditions
not reflected in ratings. TMC evaluates the credit quality of unrated
securities purchased by a Fund under the general supervision of the Fund's
Directors or Trustees, and determines the equivalency of unrated obligations
to rated obligations.
Portfolio Turnover
Each of the Funds had the portfolio turnover rate shown below for its most
recent fiscal year:
Fund Turnover Rate Fiscal Year Ended
---- ------------- -----------------
Limited Term National Fund 20.59% June 30, 1996
Intermediate National Fund 32.20% September 30, 1995
Government Fund 28.31% September 30, 1995
Income Fund 43.12% September 30, 1995
Each Fund anticipates that its annual turnover rate normally will be less
than 100%. A 100% turnover rate would occur, for example, if all of the
securities held by a Fund were sold and replaced within one year. TMC does
not consider the portfolio turnover rate a limiting factor in making
investment decisions for a Fund which are otherwise consistent with that
Fund's investment objectives and management policies. A higher rate of
turnover, may, however, result in increased transaction costs.
Investment Restrictions
The Funds' respective primary and secondary investment objectives are
fundamental, and cannot be changed without a shareholder vote. Limited Term
National Fund, Intermediate National Fund and Government Fund are each
subject to the restriction that it will not purchase any investment or enter
into any transaction if as a result more than 10% of the Fund's net assets
are illiquid investments; the comparable restriction applicable to Income
Fund is 15%. Limited Term National Fund, Intermediate National Fund and
Government Fund, as a fundamental policy, will not borrow money, except for
emergency or temporary purposes, and then only in an amount not exceeding 5%
of the Fund's total assets at the time of borrowing, except that Government
Fund and Intermediate National Fund may borrow up to 10% of total Fund assets
from banks. Income Fund is subject to the nonfundamental policy that it will
not borrow money, except as a temporary measure, and then only in an amount
not exceeding 5% of total assets unless the borrowing is from banks in which
case the limitation is 10% of total assets. The Funds' investment policies
and restrictions, unless otherwise noted, are nonfundamental and may be
changed without a shareholder vote. No Fund will change a nonfundamental
policy or restriction without notifying its shareholders. Investment
policies are subject to additional restrictions, which are described in the
Statement of Additional Information.
YOUR ACCOUNT
Buying Fund Shares
The Institutional Class shares of the Funds are sold on a continuous basis
with no initial sales charge or contingent deferred sales charge at the net
asset value (NAV) per share next determined after a purchase order is
received by the Funds' transfer agent and accepted. The NAV of each Fund is
computed at least once each day the Funds conduct business, by adding the
value of the Fund's assets, subtracting its liabilities and dividing the
result by the number of shares outstanding. NAV is normally calculated at
four o'clock p. m. Eastern time on each day the New York Stock Exchange is
open. See the table on the following page for instructions on how to place
your order.
Each Fund reserves the right to suspend the offering of shares for a period
of time. Each Fund also reserves the right to reject any specific purchase
order, including certain purchases by exchange. See "Exchange Restrictions"
on page ___.
Qualified individual investors and qualified institutions purchasing shares
for their own account are eligible to purchase Institutional Class shares,
provided they invest a minimum of $2,500,000. The minimum amount for
subsequent purchases is $5,000. Qualified institutions include corporations,
banks and insurance companies purchasing for their own accounts and other
institutions such as trusts, endowments and foundations. TMC or TSC may make
payments from their own resources to assist in the sales or promotion of the
Funds.
Qualified employee benefit or retirement plans other than an individual
retirement account ("IRA") or SEP-IRA are also eligible to purchase
Institutional Class shares, provided they either invest a minimum of
$1,000,000 in the Funds or have 100 or more eligible participants enrolled in
the plan. There is no minimum amount for subsequent purchases.
Investment dealers, financial advisers or other investment professionals,
including bank trust departments and companies with trust powers, purchasing
for the accounts of others within a clearly defined "wrap" or other fee based
investment advisory program are eligible to purchase Institutional Class
shares. TSC will establish a minimum amount per program or per account to
qualify for purchase of Institutional Class shares. Consult your applicable
professional for their minimum.
Employees, officers, trustees, directors of any Thornburg Fund or Thornburg
company, and their families or trusts established for the benefit of any of
the foregoing, may also purchase Institutional Class shares.
Opening an Account
Complete and sign an account application and give it, along with your check,
to the Fund in which you are investing or to your financial intermediary.
You may also open your account by wire or mail. If there is no application
accompanying this prospectus, please call 1-888-598-0400. If you buy shares
by check and then redeem those shares, the payment may be delayed for up to
15 business days to ensure that your previous investment has cleared.
When you sign your account application, you will be asked to certify that
your Social Security or taxpayer identification number is correct and that
you are not subject to 31% backup withholding for failing to report income to
the IRS. If you violate IRS regulations, the IRS can require the Fund to
withhold 31% of your taxable distributions and redemptions.
If you open or add to your account yourself rather than through your
financial advisor please note the following:
* All of your purchases must be made in U. S. dollars.
* Checks must be drawn on U. S. banks; the Funds do not accept cash.
* If your check does not clear, your purchase will be canceled and you
could be liable for any losses or fees the Fund or its Transfer Agent
have incurred.
Buying Shares To Open an Account To Add To An Account
Qualified Individual Minimum Minimum
or Institution $2,500,000 $5,000
Qualified Plans Consult your Plan Consult your Plan
Administrator Administrator
Within Wrap or Fee Based Consult your Program Consult your Program
Program Sponsor Sponsor
By Telephone Exchange from another Exchange from another
1-888-598-0400 Thornburg Fund Thornburg Fund
account with the same account with the same
registration, registration
including name, including name,
address, and address, and
taxpayer ID number. taxpayer ID number.
By Mail Complete and sign Make your check
the application. payable to the
Make your check applicable
payable to the Thornburg Fund.
applicable Indicate your
Thornburg Fund. Fund account number
Mail to the address on your check and
indicated on the mail to the address
application. printed on your
account statement.
Automatic Investment Plan Use one of the above Use Automated Clearing
(excluding Qualified procedures to open House funds. Sign up
Individuals and your account. Obtain for this service when
and Institutions) an Automatic you open your account,
Investment Plan form or call 1-888-598-0400
to sign up for this to add it.
service.
When you buy shares of a Fund or sell them through your financial advisor,
you may be charged a fee for this service. Please read your financial
advisor's program materials for any additional procedures, service features
or fees that may apply.
Certain financial institutions that have entered into sales agreements with
TSC may enter confirmed purchase orders on behalf of customers by phone, with
payment to follow no later than the time when the Fund is priced on the
following business day. If payment is not received by that time, the
financial institution could be held liable for resulting fees or losses.
Street Name Accounts. Some financial intermediaries offer to act as owner of
record of Fund shares as a convenience to investors who are clients of those
firms and shareholders of an individual Fund. Neither the Funds nor their
Transfer Agent can be responsible for failures or delays in crediting
shareholders for dividends or redemption proceeds, or for delays in reports
to shareholders if a shareholder elects to hold Fund shares in street-name
through an account with a financial intermediary rather than directly in the
shareholder's own name. Further, neither the Fund nor their Transfer Agent
will be responsible to the investor for any loss to the investor due to the
failure of a financial intermediary, its loss of property or funds, or its
acts or omissions. Prospective investors are urged to confer with their
financial intermediaries to learn about the different options available for
owning mutual fund shares. You may receive share certificates or hold shares
in your name with the Transfer Agent upon request.
SELLING FUND SHARES
Shareholders of record (the person or entity in whose name the shares are
registered) can withdraw money from their Fund at any time by redeeming some
or all of the shares in the account, either by selling them back to the Fund
or by selling the shares through their financial adviser. The shares will be
purchased by the Fund at the next share price (NAV) calculated after the
redemption order is received in proper form and accepted. Share price is
normally calculated at 4 p.m. Eastern time. Please note the following:
* Consult your financial advisor for procedures governing redemption
through the advisor's firm.
* Telephone redemptions over the wire generally will be credited to your
bank account on the business day after your phone call (see Redeeming
Shares, page ____).
* Your Fund may hold payment on redemptions until it is reasonably
satisfied that investments previously made by check have been
collected, which can take up to 15 business days.
* Payment for shares redeemed normally will be made by mail the next
business day, and in most cases within seven days, after receipt by the
Transfer Agent of a properly executed request for redemption
accompanied by any outstanding certificates in proper form for
transfer. The Fund may suspend the right of redemption and may
postpone payment when the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by rules of the Securities
and Exchange Commission during an emergency which makes it impractical
for the Funds to dispose of their securities or fairly to determine net
asset value, or during any other period specified by the Securities and
Exchange Commission in a rule or order for the protection of investors.
* To the extent consistent with state and federal law, your Fund may make
payments of the redemption price either in cash or in kind. The Funds
have elected to pay in cash all requests for redemption by any
shareholder. They may, however, limit such cash in respect to each
shareholder during any 90 day period to the lesser of $250,000 or 1% of
the net asset value of a Fund at the beginning of such period. This
election has been made pursuant to Rule 18f-1 under the Investment
Company Act of 1940 and is irrevocable while the Rule is in effect
unless the Securities and Exchange Commission, by order, permits its
withdrawal. In the case of a redemption in kind, securities delivered
in payment for shares would be valued at the same value assigned to
them in computing the net asset value per share of the Fund. A
shareholder receiving such securities would incur brokerage costs when
selling the securities.
To sell shares in an account, you may use any of the methods described on the
following page.
If you are a qualified individual or qualified institution selling some but
not all of your shares, leave at least $25,000 worth of shares in the account
to keep it open. If you own shares through a "wrap" or fee based program,
you must leave at least $1,000 worth of shares in the account to keep it
open. There is no minimum balance requirement for Qualified Plans.
Certain requests must include a signature guarantee. It is designed to
protect you and your Fund from fraud. If you are redeeming directly rather
than through a financial adviser and you have not signed up for
telephone redemption, your request must be made in writing and include a
signature guarantee if any of the following situations apply:
* You wish to redeem more than $10,000 worth of shares,
* Your account registration has changed within the last 30 days,
* The redemption check is being mailed to a different address than the
one on your account,
* The check is being made payable to someone other than the person in
whose name the account is registered, or
* The redemption proceeds are being transferred to a Thornburg account
with a different registration.
You should be able to obtain a signature guarantee from a bank, broker
dealer, credit union (if authorized under state law), securities exchange or
association, clearing agency, savings association or participant in the
Securities Transfer Agent Medallion Program (STAMP). A notary public cannot
provide a signature guarantee.
Redeeming Shares Account Type Special Requirements
Through A Financial All Account Types Consult with your
Intermediary financial advisor.
They may charge a fee
By Mail Individual, Joint The letter of
Tenant, Sole instruction must be
Proprietorship, signed by all persons
UGMA, UTMA required to sign for
transactions, exactly
as their names appear
on the account and
must include:
Send to: NFDS * Your name,
c/o Thornburg Funds * The Fund's name,
PO Box 419017 * Your Fund account no.
Kansas City, MO * The dollar amount or
64141-6017 number of shares to be
redeemed,
* Any other applicable
requirements listed above
* Signature guarantee,
if required.
Trust In addition to the
above requirements,
the trustee must sign
the letter indicating
capacity as trustee.
If the trustee's name
is not in the account
registration, provide
a copy of the trust
document certified
w/in the last 60 days.
Business or In addition to the
Organization above requirements,
at least one person
authorized by
corporate resolution
to act on the account
must sign the letter
which must be
signature guaranteed.
Include a corporate
resolution with a
corporate seal.
Executor, Call 888-598-0400 for
Administrator, instructions.
Conservator,
Guardian
By Telephone All account types You must sign up for
except Street Name the telephone
Accounts redemption feature
before using it.
Minimum Wire $1,000
Minimum Check $500
By Systematic All account types You must sign up for
Withdrawal Plan this feature to use it
Minimum Account Balance
$25,000
Minimum Check $500
Telephone redemption. If you completed the telephone redemption section of
your application when you first purchased your shares, you may easily redeem
shares of your Fund by telephone. Simply call a Fund Customer Service
Representative at 888-598-0400. Money can be wired directly to the bank
account designated by you on the application or sent to you in a check. The
Fund's Transfer Agent may charge a fee for a bank wire. This fee will be
deducted from the amount wired.
If you did not complete the telephone redemption section of your application,
you may add this feature to your account by calling the Fund for a telephone
redemption application. Once you receive it, please fill it out, have it
signature guaranteed and send it to: NFDS c/o Thornburg Funds
P.O. Box 419017
Kansas City, MO 64141-6017.
Considerations With Respect to Telephone Redemption. The Funds, TSC, TMC and
the Funds' Transfer Agent are not responsible for, and will not be liable
for, the authenticity of withdrawal instruction received by telephone or the
delivery or transmittal of the redemption proceeds if they follow
instructions communicated by telephone that they reasonably believe to
be genuine. By electing telephone redemption you are giving up a measure of
security you otherwise may have by redeeming shares only with written
instructions, and you may bear the risk of any losses resulting from
telephone redemption. The Funds and their Transfer Agent will attempt to
implement reasonable procedures to prevent unauthorized transactions and the
Funds or their Transfer Agent could be liable if these procedures are not
employed. These procedures will include recording of telephone transactions,
providing written confirmation of such transactions within 5 days, and
requesting certain information to better confirm the identity of the caller
at the time of the transaction. You should verify the accuracy of your
confirmation statements immediately after you receive them.
INVESTOR SERVICES
Thornburg Funds provides a variety of services to help you manage your
account.
Information Services
Thornburg Funds' telephone representatives are available Monday through
Friday from 8:30 am to 6:30 p.m. Eastern time. Whenever you call, you can
speak with someone equipped to provide the information or service you need.
Statements and reports that Thornburg Funds send to you include the
following:
* Account statements after every transaction affecting your account
* Monthly account statements
* Financial reports (every six months)
* Cost basis statement (at the end of any year in which you redeem
shares)
Exchange Privilege
You may exchange Institutional Class shares of any Thornburg Fund for
Institutional Class shares of any other Thornburg Fund that offers
Institutional Class shares. Please consult the exchange and reinvestment
privilege information in the Prospectus of the other Thornburg Fund. Note
that exchanges out of a Fund may have tax consequences for you.
Exchange Restrictions
As a shareholder, you have the privilege of exchanging Institutional Class
shares of the Fund for Institutional Class shares of other Thornburg Funds
which offer Institutional Class shares. However, you should note the
following:
* The Fund you are exchanging into must be registered for sale in your
state.
* You may only exchange between accounts that are registered in the same
name address, and taxpayer identification number.
* Before exchanging into a Fund, read its prospectus.
* Exchanges may have tax consequences for you.
* Because excessive trading can hurt fund performance and shareholders,
each Fund reserves the right to temporarily or permanently terminate
the exchange privilege of any investor who makes more than four
exchanges out of a Fund in any calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, will be counted together for purposes of the
four exchange limit.
* Each Fund reserves the right to refuse exchange purchases by any person
or group if, in TMC's judgment, the Fund would be unable to invest the
money effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
* Your exchanges may be restricted or refused if a Fund receives or
anticipates simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that coincide
with a "market timing" strategy may be disruptive to a Fund. Although
a Fund will attempt to give prior notice whenever it is reasonably able
to do so, it may impose these restrictions at any time. The Funds
reserve the right to terminate or modify the exchange privilege in the
future.
Systematic Withdrawal Plans
Systematic withdrawal plans let you set up periodic redemptions from your
account. Consult your financial intermediary or call a Fund Customer Service
Representative at 888-598-0400 for information.
SHAREHOLDER AND ACCOUNT POLICIES
Dividends and Capital Gains
Each Fund distributes substantially all of its net income and realized
capital gains, if any, to shareholders each year. Each Fund declares its net
investment income daily and distributes it monthly. Each Fund will
distribute net realized capital gains, if any, at least annually. Capital
gain distributions, if any, normally will be declared and payable in
December. You will be notified annually by your Fund as to the amount and
characterization of distributions paid to or reinvested by you for the
preceding tax year.
Distribution Options
The Funds earn interest from bond, money market, and other investments.
These are passed along as dividend distributions. Each Fund realizes capital
gains whenever it sells securities for a higher price than it paid for them.
These are passed along as capital gain distributions. When you open an
account, specify on your application how you want to receive your
distributions. Each Fund offers four options, (which you can change at
anytime).
Dividends
1. Reinvestment Option. Your dividend distributions will be automatically
invested in additional shares of your Fund. If you do not indicate a choice
on your application, you will be assigned this option. You may also instruct
the Fund to invest your dividends in the shares of another Thornburg Fund.
2. Cash Option. You will be sent a check for your dividend distributions.
Cash distribution checks are normally mailed on the third business day after
the month-end.
Capital Gain
1. Reinvestment Option. Your capital gain distributions, if any, will be
automatically reinvested in additional shares of your Fund. If you do not
indicate a choice on your application, you will be assigned this option. You
may also instruct the Fund to reinvest your capital gain distributions in
shares of another Thornburg Fund.
2. Cash Option. You will be sent a check for any capital gain distributions.
Shares of any Thornburg Fund purchased through reinvestment of dividend and
capital gain distributions are not subject to sales charges or contingent
deferred sales charges.
Turnover and Capital Gains
The Funds do not normally engage in short-term trading for profits.
However, when a Fund believes that a security will no longer contribute
towards its reaching its goal or that another security will better contribute
to its goal, it will normally sell that security.
When a Fund sells a security at a profit it realizes a capital gain. When it
sells a security at a loss it realizes a capital loss. A fund must, by law,
distribute capital gains, net of any losses, to its shareholders. Whether
you reinvest your capital gain distributions or take them in cash, the
distribution is taxable.
To minimize taxable capital gain distributions, each Fund will realize
capital losses, if available, when, in the judgment of the portfolio
manager, the integrity and income generating aspects of the portfolio would
be unaffected by doing so.
TAXES
Federal Taxes - In General
Each Fund has qualified under Subchapter M of the Internal Revenue Code (the
"Code") for tax treatment as a regulated investment company, and intends to
continue its qualification so long as qualification is in the best interests
of its shareholders under Subchapter M. This tax treatment relieves a Fund
from paying federal income tax on income which is currently distributed to
its shareholders. Certain general aspects of federal income taxation of
individual shareholders are discussed below. Aspects of investment by
shareholders who are not individuals are addressed in a limited manner.
Prospective investors, and in particular corporations, should consult their
own tax advisers concerning federal, state and local tax consequences
respecting investments in the Funds.
Federal Taxes - Municipal Funds
The Municipal Funds intend to satisfy conditions that will enable them
to designate distributions from the interest income generated by investments
in Municipal Obligations, which are exempt from federal income tax when
received by a Fund, as Exempt Interest Dividends. Shareholders receiving
Exempt Interest Dividends will not be subject to federal income tax on the
amount of such dividends, except to the extent the alternative minimum tax
may be imposed.
Distributions by the Municipal Funds of net interest income received from
certain temporary investments (such as certificates of deposit, corporate
commercial paper and obligations of the U. S. government, its agencies and
instrumentalities) and net short-term capital gains realized by the Fund, 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 Fund, whether or not distributed, will be
taxable to shareholders as long-term capital gains regardless of the length
of time investors have held their shares, although gains attributable to
market discount on portfolio securities will be characterized as ordinary
income. Each year the Fund will, where applicable, mail to shareholders
information on the tax status of dividends and distributions, including the
respective percentages of tax-exempt and taxable, if any, income and an
allocation of tax-exempt income on a state-by-state basis. The exemption of
interest income for federal income tax purposes does not necessarily result
in an exemption under the income or other tax laws of any state or local
taxing authorities. (See "State Taxes", below). Shareholders are advised
to consult their own tax advisers for more detailed information concerning
the federal, state and local taxation of the Fund and the income tax
consequences to its shareholders.
The Funds' counsel, White, Koch, Kelly & McCarthy, Professional Association,
has not made and normally will not make any review of the proceedings
relating to the issuance of the Municipal Obligations or the basis for any
opinions issued in connection therewith. In the case of certain Municipal
Obligations, federal tax exemption is dependent upon the issuer (and other
users) complying with certain ongoing requirements. There can be no
assurance that the issuer (and other users) will comply with these
requirements, in which event the interest on such Municipal Obligations could
be determined to be taxable, in most cases retroactively from the date of
issuance. Certain matters under the Code, including certain exceptions to
the foregoing, are discussed more specifically below.
The Code treats interest on certain Municipal Obligations which are private
activity bonds under the Code as a preference item for purposes of the
alternative minimum tax on individuals and corporations. The Municipal Funds
may purchase without limitation private activity bonds the interest on which
is 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 these purchases are uncertain. Some portion of
Exempt Interest Dividends could, 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 this treatment.
Federal Taxes - Taxable Income Funds
Distributions to shareholders representing net investment income and net
short term capital gains will be taxable to the recipient shareholders as
ordinary income, whether the distributions are actually taken in cash or are
reinvested in additional shares. Fund distributions will not be eligible for
the dividends received deduction for corporations. Distributions of net
long-term capital gains, if any, will be treated as long-term capital gains
by shareholders regardless of the length of time the shareholder has owned
the shares, and whether received as cash or in additional shares.
Redemption or resale of shares by a shareholder 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 received on the redemption or resale. If the
shares sold or redeemed are 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 one year.
State Taxes
With respect to distributions of interest income and capital gains from the
Funds, the laws of the several states and local taxing authorities vary with
respect to the taxation of such distributions, and shareholders of the Funds
are advised to consult their own tax advisers in that regard. The Municipal
Funds will advise shareholders approximately 60 days after 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. The Taxable Income Funds
will advise shareholders approximately 60 days after the end of each calendar
year as to the percentage of income derived from Treasury securities in order
to assist shareholders in the preparation of their state and local tax
returns. Prospective investors are urged to confer with their own tax
advisers for more detailed information concerning state tax consequences.
SERVICE PLAN
Each of the Funds has adopted a Service Plan under which TMC may make
payments to securities dealers and other financial institutions,
intermediaries and organizations to obtain various shareholder related
services or to reimburse their marketing expenses. Each Fund's Service Plan
permits the Fund to reimburse TMC for these payments at an annual rate of up
to .25% of the Fund's net assets attributable to Institutional Class shares.
No assets attributable to Institutional Class shares will be used to
reimburse expenses related to any other class of shares of the same Fund.
TMC has no present intention to seek any reimbursement from any of the Funds
under the Service Plans.
The Glass-Steagall Act prohibits certain banks from underwriting mutual fund
shares. The Funds do not believe that this prohibition will apply to the
plans described above. However, no assurance can be given that the Glass-
Steagall Act will not be interpreted so as to prohibit this arrangement. In
that event, the ability of the Funds to market their shares could be
impaired to a small extent. In addition, state securities laws on this issue
may differ from interpretations of federal law, and banks and financial
institutions may be required to register as dealers pursuant to state law.
PERFORMANCE
Yield Computation and Total Return
Each Fund may quote its yields and returns in reports, sales literature and
advertisements. Yield and return information are computed separately for each
class of a Fund's shares. Yield and return could differ in minor respects
among classes of the same Fund because of allocation of certain expenses to
one or more specific classes to which the expenses relate. Any return quoted
should not be considered a representation of the return in the future since
return figures are based upon historical earnings. Actual performance will
vary.
Current yield quotations will include a standardized calculation which
computes yield for a 30-day or one-month period by dividing the Fund's net
investment income per share during the period by its net asset value on the
last day of the period and annualizing the result. Provided that any such
quotation is also accompanied by the standardized calculation referred to
above, the Fund may also quote non-standardized yields. 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: 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;
(3) The non-standard return quotation may include the effective return
obtained by compounding the monthly dividends; (4) The non-standard return
quotation may use the average price during the period, or its price on the
first day of the period.
Average annual total return quotations show the average annual percentage
change in value of $1,000 for one, five and ten-year periods unless the class
has been in existence for a shorter period. Average annual total return
assumes the reinvestment of all dividends. The Fund may also furnish average
annual total return quotations for other periods. Total return quotations
show the total of all income and capital gain paid to shareholders, assuming
reinvestment of all distributions, plus (or minus) the change in the value of
the original investment, expressed as a percentage of the purchase price.
Yields and returns described in this section may also be quoted on a "taxable
equivalent yield" basis by computing the taxable yield or return which a
hypothetical investor subject to a specified income tax rate must realize to
receive the same yield or return after taxes. When a taxable equivalent yield
is quoted, the following additional information will be furnished: (1) a
standardized current yield; (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.
Yield and return information may be useful in reviewing the performance of a
Fund and for providing a basis for comparison with other investment
alternatives. Comparative information about the yield or distribution rate
of the shares of the Fund and about average rates of return on certificates
of deposit, bank money market deposit accounts, money market mutual funds and
other short-term investments may also be included in advertisements and
communications of the Fund. Any such comparison will contain information
about the differences between the Fund and those investments.
From time to time, in advertisements and other types of literature, the
performance of the Fund may be compared to other groups of mutual funds.
This comparative performance may be expressed as a ranking or a rating
prepared by Lipper Analytical Services, Inc., Donoghue Organization, Inc.,
Morningstar, Inc., Value Line or other widely recognized independent services
which monitor the performance of mutual funds. Performance rankings and
ratings reported periodically in national financial publications such as
MONEY Magazine, FORBES, BARRON's, VALUE LINE, the WALL STREET JOURNAL and
MORNINGSTAR, and other such publications may also be used. A Fund may
illustrate performance or the characteristics of its respective investment
portfolios 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 or through use of standard benchmarks 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 values or prices and the Fund's (or other investments') investment
returns. The Fund may also illustrate or refer to its respective investment
portfolios, investment techniques and strategies, and general market or
economic trends in advertising or communications to shareholders or
prospective shareholders, including reprints of interviews or articles
written by or about, and including comments by, Fund managers. These
illustrations, references and comments ordinarily will relate to topics
addressed in the Fund's Prospectus and Statement of Additional Information.
ORGANIZATION OF THE FUNDS
Limited Term National Fund is a diversified series of Thornburg Limited Term
Municipal Fund, Inc., a Maryland corporation organized as a diversified,
open-end management investment company (the "Company"). The Company
currently offers two series of stock, Limited Term National Fund and Limited
Term California Fund, each in multiple classes, and the Board of Directors is
authorized to divide authorized but unissued shares into additional series
and classes.
Intermediate Municipal Fund, Government Fund and Income Fund are diversified
series of Thornburg Investment Trust, a Massachusetts business trust (the
"Trust") organized as a diversified, open-end management investment company
under a Declaration of Trust (the "Declaration"). The Trust currently has 12
authorized Funds, three of which are described in this Prospectus. The
Trustees are authorized to divide the Trust's shares into additional series
and classes.
No Fund is liable for the liabilities of any other Fund. However, because
the Company and the Trust share this Prospectus with respect to the Funds,
there is a possibility that one of these companies could be liable for any
misstatements, inaccuracies or incomplete disclosure in the Prospectus
respecting Funds offered by the other company. The Company and the Trust do
not concede, and specifically disclaim, any such liability.
Each Fund may hold special shareholder meetings and mail proxy materials,
These meetings may be called to elect or remove Directors or Trustees, change
fundamental investment policies, or for other purposes. Shareholders not
attending these meetings are encouraged to vote by proxy. Each Fund will
mail proxy materials in advance, including a voting card and information
about the proposals to be voted on. The number of votes you are entitled to
is based upon the number of shares you own. Shares do not have cumulative
voting rights or preemptive rights.
TMC AND TSC
The Funds are managed by Thornburg Management Company, Inc., (TMC). TMC
performs investment management services for each Fund under the terms of an
Investment Advisory Agreement which specifies that TMC will select
investments for the Fund, monitor those investments and the markets
generally, and perform related services. TMC also performs administrative
services specific to the Institutional Class under an Administrative Services
Agreement which requires that TMC will supervise, administer and perform
certain administrative services necessary for the maintenance of
Institutional Class shareholders. TMC's services to Limited Term National
Fund are supervised by the Directors of Thornburg Limited Term Municipal
Fund, Inc.; its services to the other Funds are supervised by the Trustees of
Thornburg Investment Trust.
TMC was established in 1982. Today, the Thornburg Funds include four other
mutual funds in addition to the Funds covered by this Prospectus. The
Thornburg Funds total over $1.6 billion in assets. Thornburg Management
Company Inc. is known as a provider of conservative investment products. For
more than a decade the Thornburg Funds have been committed to preserving and
increasing the real wealth of their shareholders. The key to growing real
wealth is increasing buying power after taxes, inflation, and investment
related expenses. TMC receives fees for managing each Fund computed in
accordance with the following table. These annual rates are calculated on
average daily net assets and are paid monthly.
Limited Term National Fund
Administrative
Net Assets of Fund Advisory Fee Rate Services Rate
------------------ ----------------- --------------
0 to $500 million .50% .05%
$500 million to $1 billion .40% .05%
$1 billion to $1.5 billion .30% .05%
$1.5 billion to $2 billion .25% .05%
Over $2 billion .225% .05%
Intermediate National Fund and Income Fund
Administrative
Net Assets of Fund Advisory Fee Rate Services Rate
------------------ ----------------- --------------
0 to $500 million .50% .05%
$500 million to $1 billion .45% .05%
$1 billion to $1.5 billion .40% .05%
$1.5 billion to $2 billion .35% .05%
Over $2 billion .275% .05%
Government Fund
Administrative
Net Assets of Fund Advisory Fee Rate Services Rate
------------------ ----------------- --------------
0 to $1 billion .375% .05%
$1 billion to $2 billion .325% .05%
Over $2 billion .275% .05%
Brian J. McMahon, a Managing Director of TMC, has primary responsibility for
the day-to-day management of the Municipal Funds. He has held this
responsibility for Limited Term National Fund since its inception in 1984 and
for Intermediate National Fund since its inception in 1991. Mr. McMahon is
assisted by other employees of TMC in managing the Municipal Funds.
Steven J. Bohlin, a Managing Director of TMC, has primary responsibility for
the day-to-day management of the Taxable Income Funds. He has held this
responsibility for Government Fund since its inception in 1987 and for Income
Fund since its inception in 1992. Mr. Bohlin is assisted by other employees
of TMC in managing the Taxable Income Funds.
TMC may, from time to time, agree to waive its fees or to reimburse a Fund
for expenses above a specified percentage of average daily net assets. TMC
retains the ability to be repaid by the Fund for these expense
reimbursements if expenses fall below the limit prior to the end of the
fiscal year. Fee waivers or expenses by a Fund will increase its yield.
In addition to TMC's fees, each Fund will pay all other costs and expenses of
its operations. No Fund will bear any costs of sales or promotion incurred
in connection with the distribution of Institutional Class shares, except as
described above under "Service Plan".
Thornburg Securities Corporation (TSC) distributes and markets the Thornburg
Funds. TMC or TSC may make payments from their own resources to assist in
the sales or promotion of the Funds.
H. Garrett Thornburg, Jr., a Director and Chairman of the Fund, is the
controlling stockholder of both TMC and TSC.
ADDITIONAL INFORMATION
Custodian and Transfer Agent
The custodian of each Fund's assets is State Street Bank & Trust Co.
National Financial Data Services is the transfer agent for the Funds and
performs bookkeeping, data processing and administrative services incident to
the maintenance of shareholder accounts.
General Counsel
Legal matters in connection with the issuance of shares of the Funds are
passed upon by White, Koch, Kelly & McCarthy, Professional Association, Post
Office Box 787, Santa Fe, New Mexico 87504-0787.
Investment Adviser
Thornburg Management Company, Inc.
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501
Distributor
Thornburg Securities Corporation
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501
Auditor
McGladrey & Pullen, LLP
555 Fifth Avenue
New York, New York 10017
Transfer Agent
State Street Bank & Trust Co.
c/o NFDS Servicing Agent
Post Office Box 419017
Kansas City, Missouri 64141-6017
Custodian
State Street Bank & Trust Co.
Boston, Massachusetts
No dealer, sales representative or any other person has been authorized to
give any information or to make any representation not contained in this
Prospectus and, if given or made, the information or representation must not
be relied upon as having been authorized by any Fund or Thornburg Securities
Corporation. This Prospectus constitutes an offer to sell securities of a
Fund only in those states where the Fund's shares have been registered or
otherwise qualified for sale. A Fund will not accept applications from
persons residing in states where the Fund's shares are not registered.
Thornburg Securities Corporation, Distributor
119 East Marcy Street, Santa Fe, New Mexico 87501 (888)598-0400.
<PAGE>
Statement of Additional Information
for
Institutional Class Shares
of
Thornburg Limited Term Municipal Fund National Portfolio
("Limited Term National Fund")
Thornburg Intermediate Municipal Fund
("Intermediate National Fund")
Thornburg Limited Term U.S. Government Fund
("Government Fund")
Thornburg Limited Term Income Fund
("Income Fund")
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501
Thornburg Limited Term Municipal Fund National Portfolio
("Limited Term National Fund") is an investment portfolio
established by Thornburg Limited Term Municipal Fund, Inc. (the
"Company"), and Thornburg Intermediate Municipal Fund
("Intermediate National Fund"), Thornburg Limited Term U.S.
Government Fund ("Government Fund") and Thornburg Limited Term
Income Fund ("Income Fund") are investment portfolios established
by Thornburg Investment Trust (the "Trust"). This Statement of
Additional Information relates to the investments made or 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 Institutional Class shares offered by the
Funds.
This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Funds' Institutional
Class Prospectus dated July 5, 1996. A copy of the Institutional
Class Prospectus for the Funds may be obtained at no charge by
writing to the distributor of the Funds' Institutional Class
shares, Thornburg Securities Corporation, at 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501.
Prior to June 28, 1985 the Company's name was "Tax-Free
Municipal Lease Fund, Inc."; and prior to October 1, 1995, the
Trust's name was "Thornburg Income Trust."
The date of this Statement of Additional Information is
July 5, 1996.<PAGE>
TABLE OF CONTENTS
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . . __
MUNICIPAL FUNDS. . . . . . . . . . . . . . . . . . . . . . . . __
Municipal Obligations. . . . . . . . . . . . . . . . . . . . . __
Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . __
Municipal Notes. . . . . . . . . . . . . . . . . . . . . . . . __
Tax-Exempt Demand Bonds. . . . . . . . . . . . . . . . . . . . __
Commercial Paper . . . . . . . . . . . . . . . . . . . . . . . __
Temporary Investments. . . . . . . . . . . . . . . . . . . . . __
Repurchase Agreements. . . . . . . . . . . . . . . . . . . . . __
U.S. Government Obligations. . . . . . . . . . . . . . . . . . __
TAXABLE INCOME FUNDS . . . . . . . . . . . . . . . . . . . . . __
Determining Portfolio Average Maturity -
Government Fund and Income Fund. . . . . . . . . . . . . . . __
Purchase of Certificates of Deposit -
Government Fund and Income Fund. . . . . . . . . . . . . . . __
Asset-Backed Securities -
Government Fund and Income Fund. . . . . . . . . . . . . . . __
Mortgage-Backed Securities and
Mortgage Pass-Through Securities . . . . . . . . . . . . . . __
Collateralized Mortgage Obligations ("CMO's"). . . . . . . . . __
FHLMC Collateralized Mortgage Obligations. . . . . . . . . . . __
Other Mortgage-Backed Securities . . . . . . . . . . . . . . . __
Other Asset-Backed Securities. . . . . . . . . . . . . . . . . __
Repurchase Agreements - Government Fund and Income Fund. . . . __
When Issued Securities - Government Fund and Income Fund . . . __
Reverse Repurchase Agreements -
Government Fund and Income Fund. . . . . . . . . . . . . . . __
Dollar Roll Transactions -
Government Fund and Income Fund. . . . . . . . . . . . . . . __
Lending of Portfolio Securities -
Government Fund and Income Fund. . . . . . . . . . . . . . . __
Other Investment Strategies - Income Fund. . . . . . . . . . . __
General Characteristics of Options - Income Fund . . . . . . . __
General Characteristics of Futures - Income Fund . . . . . . . __
Options on Securities Indices and
Other Financial Indices - Income Fund. . . . . . . . . . . . __
Currency Transactions - Income Fund. . . . . . . . . . . . . . __
Risks of Currency Transactions - Income Fund . . . . . . . . . __
Combined Transactions - Income Fund. . . . . . . . . . . . . . __
Swaps, Caps, Floors and Collars - Income Fund. . . . . . . . . __
Eurodollar Instruments - Income Fund . . . . . . . . . . . . . __
Risks of Strategic Transactions Outside
the United States - Income Fund. . . . . . . . . . . . . . . __
Use of Segregated and Other Special Accounts - Income Fund . . __
Foreign Securities - Income Fund . . . . . . . . . . . . . . . __
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . __
Investment Limitations - Limited Term National Fund. . . . . . --
Investment Limitations - Intermediate National Fund. . . . . . __
Investment Limitations - Government Fund . . . . . . . . . . . __
Investment Limitations - Income Fund . . . . . . . . . . . . . __
YIELD AND RETURN COMPUTATION . . . . . . . . . . . . . . . . . __
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . __
Federal Income Taxes - In General. . . . . . . . . . . . . . . __
Federal Income Taxation - Municipal Funds. . . . . . . . . . . __
State and Local Tax Aspects of the Municipal Funds . . . . . . __
Federal Income Taxes - Taxable Income Funds. . . . . . . . . . __
State and Local Income Tax Considerations. . . . . . . . . . . __
DISTRIBUTIONS AND SHAREHOLDERS ACCOUNTS. . . . . . . . . . . . __
Distributions. . . . . . . . . . . . . . . . . . . . . . . . . __
Accounts of Shareholders . . . . . . . . . . . . . . . . . . . __
INVESTMENT ADVISER, INVESTMENT ADVISORY AGREEMENT, AND
ADMINISTRATIVE SERVICES AGREEMENT. . . . . . . . . . . . . . . __
Investment Advisory Agreement. . . . . . . . . . . . . . . . . __
Administrative Services Agreement. . . . . . . . . . . . . . . __
SERVICE PLANS. . . . . . . . . . . . . . . . . . . . . . . . . __
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . __
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . __
Limited Term National Fund . . . . . . . . . . . . . . . . . . __
Intermediate National Fund; Government Fund; Income Fund . . . __
PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . . . . . __
Limited Term National Fund . . . . . . . . . . . . . . . . . . __
Intermediate National Fund . . . . . . . . . . . . . . . . . . __
Government Fund. . . . . . . . . . . . . . . . . . . . . . . . __
Income Fund. . . . . . . . . . . . . . . . . . . . . . . . . . __
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . __
DISTRIBUTOR. . . . . . . . . . . . . . . . . . . . . . . . . . __
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . __
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . __
<PAGE>
INVESTMENT POLICIES
MUNICIPAL FUNDS
The primary investment objective of Limited Term National Fund and
Intermediate National Fund (the "Municipal Funds") is to provide for their
respective shareholders as high a level of current investment income exempt
from federal income tax as is consistent, in the view of the Funds'
investment adviser, Thornburg Management Company, Inc. ("TMC"), with
preservation of capital. This objective of preservation of capital may
preclude the Municipal Funds from obtaining the highest possible yields.
The Municipal Funds will seek to achieve their primary investment
objective by investing in a diversified portfolio of obligations issued by
state and local governments the interest on which is exempt from federal
income tax ("Municipal Obligations"). The Funds may invest in Municipal
Obligations (or participation interest therein) that constitute leases or
installment purchase or conditional sale contracts by state of local
governments or authorities to obtain property or equipment ("Municipal
Leases").
The Limited Term National Fund will maintain a portfolio having a
dollar-weighted average maturity of normally not more than five years, with
the objective of reducing fluctuations in its net asset value relative to
municipal bond portfolios with longer average maturities while expecting
lower yields than those received on portfolios with longer average
maturities. The Intermediate National Fund will maintain a portfolio having
a dollar-weighted average maturity of normally three to ten years, with the
objective of reducing fluctuations in net asset value relative to long-term
municipal bond portfolios. The Intermediate National Fund may receive lower
yields than those received on long-term bond portfolios, while seeking higher
yields and expecting higher share price volatility than the Limited Term
National Fund.
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 by 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 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 Municipal Funds will hold cash
pending investment in portfolio securities or anticipated redemption
requirements. For an explanation of these ratings, please see "Ratings,"
page 6. 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 Municipal Funds are invested in
temporary investments for defensive purposes, each Municipal 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 each of
the Municipal Funds and may be changed only with the approval of a majority
of the outstanding voting securities of a given series of the Fund.
The ability of the Municipal 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 either of the Municipal 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. TMC reviews data respecting the
issuers of the Municipal 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.
Each of the Municipal Funds has reserved the right to invest up to 20%
of its 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 Municipal Funds do not
expect to find it necessary to make temporary investments.
Neither Municipal 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 either Municipal Fund
unless approved by a majority of the outstanding shares of the Fund.
The Municipal Funds' investment objectives and policies, unless
otherwise specified, are not fundamental policies and may be changed 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 Municipal 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 Policies of the Municipal Funds."
The issuer of a variable rate demand instrument may have the corresponding
right to prepay the principal amount prior to maturity.
The Municipal 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 the unit, or an equal aggregate principal
amount of another Municipal Obligation of the same issuer, issue and maturity
as the 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 for the Limited Term National Fund
under the supervision of the directors of the Company, and for the
Intermediate National Fund under the supervision of the trustees of the
Trust.
A Municipal 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
for the Limited Term National Fund by the Company's directors, and for the
Intermediate National Fund by the Trust's 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 Municipal 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
Company's directors for the Limited Term National Fund and by the Trust's
trustees for the Intermediate National Fund 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.
Neither Municipal Fund will 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 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, the 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 Municipal 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 "Taxes." 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 TMC's opinion
represent minimal credit risk. Investments in repurchase agreements are
limited to 5% of a Fund's net assets. See the next paragraph respecting
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. Neither of the Municipal Funds expect to find it
necessary to make such temporary investments.
Repurchase Agreements
Each Municipal 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. Neither Fund will 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
subject security 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 security. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the subject security by the Fund may be delayed or limited.
The Funds' investment adviser will monitor the value of the security 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 subject security declines below the repurchase price, TMC will
demand additional securities from the seller to increase the value of the
property held to at least that of the repurchase price.
U.S. Government Obligations
Each Fund's 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.
TAXABLE INCOME FUNDS
Government Fund and Income Fund (the "Taxable Income Funds") each has
the primary investment objective of providing, through investment in a
professionally managed portfolio of fixed income obligations as high a level
of current income as is consistent, in TMC's view, with safety of capital.
The Government Fund will seek to achieve its primary investment objective by
investing primarily in obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities and in participations in
such obligations or in repurchase agreements secured by such obligations.
The Income Fund will seek to achieve its primary objective by investing in
primarily in investment grade short and intermediate maturity bonds and asset
backed securities such as mortgage backed securities and collateralized
mortgage obligations. The Income Fund also may invest in other securities,
and utilize other investment strategies to hedge market risks, manage cash
positions or to enhance potential gain. Additionally, each of the Taxable
Income Funds has the secondary objective of reducing fluctuations in its net
asset value compared to longer term portfolios, and will seek to attain this
objective by investing in obligations with an expected dollar-weighted
average maturity of normally not more than five years.
Determining Portfolio Average Maturity - Government Fund and Income Fund
For purposes of each Taxable Income Fund's investment policy, an
instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features (such as put or demand
features) or a variable rate of interest which, in the judgment of TMC, will
result in the instrument being valued in the market as though it has an
earlier maturity.
In addition, each Taxable Income Fund may estimate the expected
maturities of certain securities it purchases in connection with achieving
its investment objectives. Certain obligations such as Treasury Bills and
Notes have stated maturities. However, certain obligations a Fund may
acquire, such as GNMA certificates, are interests in pools of mortgages or
other loans having varying maturities.
Due to prepayments of the underlying mortgage instruments or other
loans, such asset-backed securities do not have a known actual maturity (the
stated maturity date of collateralized mortgage obligations is, in effect,
the maximum maturity date). In order to determine whether such a security is
a permissible investment for a Fund (and assuming the security otherwise
qualifies for purchase by the Fund), the security's remaining term will be
deemed equivalent to the estimated average life of the underlying mortgages
at the time of purchase of the security by the Fund. Average life will be
estimated by the Fund based on TMC's evaluation of likely prepayment rates
after taking into account current interest rates, current conditions in the
relevant housing markets and such other factors as it deems appropriate.
There can be no assurance that the average life as estimated will be the
actual average life.
For example, the mortgage instruments in the pools underlying
mortgage-backed securities have original maturities ranging from 8 to 40
years. The maximum original maturity of the mortgage instruments underlying
such a security may, in some cases, be as short as 12 years. The average
life of such a security at the time of purchase by a Fund is likely to be
substantially less than the maximum original maturity of the mortgage
instruments underlying the security because of prepayments of the mortgage
instruments, the passage of time from the issuance of the security until its
purchase by a Fund and, in some cases, the wide dispersion of the original
maturity dates of the underlying mortgage instruments.
Certain securities which have variable or floating interest rates or
demand or put features may nonetheless be deemed to have remaining actual
lives which are less than their stated nominal lives. In addition, certain
asset-backed securities which have variable or floating interest rates may be
deemed to have remaining lives which are less than the stated maturity dates
of the underlying mortgages.
Purchase of Certificates of Deposit - Government Fund and Income Fund
In addition to the other securities each Taxable Income Fund may
purchase, each Taxable Income Fund is authorized to purchase bank
certificates of deposit under certain circumstances. The Government Fund may
under certain market conditions invest up to 20% of its assets in (i) time
certificates of deposit maturing in one year or less after the date of
acquisition which are issued by United States banks having assets of
$1,000,000,000 or more, and (ii) time certificates of deposit insured as to
principal by the Federal Deposit Insurance Corporation. If any certificate of
deposit (whether or not insured in whole or in part) is nonnegotiable, and it
matures in more than 7 days, it will be considered illiquid, and subject to
the Government Fund's fundamental investment restriction that no more than
10% of the Fund's net assets will be placed in illiquid investments.
The Income Fund may invest in certificates of deposit of large domestic
and foreign banks (i.e., banks which at the time of their most recent annual
financial statements show total assets in excess of one billion U.S.
dollars), including foreign branches of domestic banks, and certificates of
deposit of smaller banks as described below. Although the Income Fund
recognizes that the size of a bank is important, this fact alone is not
necessarily indicative of its creditworthiness. Investment in certificates
of deposit issued by foreign banks or foreign branches of domestic banks
involves investment risks that are different in some respects from those
associated with investment in certificates of deposit issued by domestic
banks. (See "Foreign Securities" below). The Income Fund may also invest in
certificates of deposit issued by banks and savings and loan institutions
which had at the time of their most recent annual financial statements total
assets of less than one billion dollars, provided that (i) the principal
amounts of such certificates of deposit are insured by an agency of the U.S.
Government, (ii) at no time will the Fund hold more that $100,000 principal
amount of certificates of deposit of any one such bank, and (iii) at the time
of acquisition, no more than 10% of the Fund's assets (taken at current
value) are invested in certificates of deposit of such banks having total
assets not in excess of one billion dollars.
Asset-Backed Securities - Government Fund and Income Fund
Each of the Funds may invest in asset-backed securities, which are
interests in pools in loans, described in the Prospectus.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
If otherwise consistent with its investment restrictions and the
Prospectus, each Taxable Income Fund may invest in mortgage-backed
securities, which are interests in pools of mortgage loans, including
mortgage loans made by savings and loan institutions, mortgage bankers,
commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related
and private organizations as further described below. A Fund also may invest
in debt securities which are secured with collateral consisting of mortgage
- -backed securities (see "Collateralized Mortgage Obligations"), and in other
types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of
the underlying mortgages, and expose the Fund to a lower rate or return upon
reinvestment of the prepayments. Additionally, the potential for prepayments
in a declining interest rate environment will tend to limit to some degree
the increase in net asset value of the Fund because the value of the
mortgage-backed securities held by the Fund may not appreciate as rapidly as
the price of non-callable debt securities. During periods of increasing
interest rates, prepayments likely will be reduced, and the value of the
mortgage-backed securities will decline.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or insurer of such
securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, or upon refinancing or
foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities (such as securities issued by the Government
National Mortgage Association) are described as "modified pass-through."
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a
wholly-owned United States Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee, with the
full faith and credit of the United States government, the timely payment of
principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
These guarantees, however, do not apply to the market value or yield of
mortgage-backed securities or to the value of Fund shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) mortgages from a list of
approved seller/servicers which include state and federally-chartered savings
loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed
as to timely payment of principal and interest by FNMA but are not backed by
the full faith and credit of the United States Government. FHLMC is a
corporate instrumentality of the United States Government and was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal
Home Loan Banks. FHLMC issues Participation Certificates ("PC's") which
represent interests in conventional mortgages from FHLMC's national
portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but PC's are not backed by the full faith and credit
of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage
loans as well as the guarantors of the mortgage-related securities. Pools
created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments. Such pools
may be purchased by the Income Fund, but will not be purchased by the
Government Fund. Timely payment of interest and principal of these pools may
be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private
insurers and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets the Income Fund's investment
quality standards. There can be no assurance that the private insurer or
guarantors can meet their obligations under the insurance policies or
guarantee arrangements. The Income Fund may buy mortgage-related securities
without insurance or guarantees, if through an examination of the loan
experience and practices of the originators/servicers and poolers, TMC
determines that the securities meet the Income Fund's quality standards.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable.
Collateralized Mortgage Obligations ("CMO's")
A CMO is a hybrid between a mortgage-backed bond and a mortgage
pass-through security. Similar to a bond, interest and prepaid principal are
paid, in most cases, semiannually. CMO's may be collateralized by whole
mortgage loans but are more typically collateralized by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA, and
their income streams.
CMO's are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMO's provide for a modified form
of call protection through a de facto breakdown of the underlying pool of
mortgages according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal only
after the first class has been retired. An investor is partially guarded
against unanticipated early return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation issues multiple series,
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal
on the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear
current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C
Bond currently being paid off. When the Series A, B, and C Bonds are paid
in full, interest and principal on the Series Z Bond begins to be paid
currently. With some CMO's, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
FHLMC Collateralized Mortgage Obligations
FHLMC CMO's are debt obligations of FHLMC issued in multiple classes
having different maturity dates which are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PC's, payments
of principal and interest on the CMO's are made semiannually, as opposed to
monthly. The amount of principal payable on each semiannual payment date is
determined in accordance with FHLMC's mandatory sinking fund schedule, which,
in turn, is equal to approximately 100% of FHA prepayment experience applied
to the mortgage collateral pool. All sinking fund payments in the CMO's are
allocated to the retirement of the individual classes of bonds in the order
of their stated maturities. Payment of principal on the mortgage loans in
the collateral pool in excess of the amount of FHLMC's minimum sinking fund
obligation for any payment date are paid to the holders of the CMO's as
additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMO's is
actually repaid is likely to be such that each class of bonds will be retired
in advance of its scheduled date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMO's are
identical to those of FHLMC PC's. FHLMC has the right to substitute
collateral in the event of delinquencies or defaults.
Other Mortgage-Backed Securities
TMC expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. The mortgages underlying these securities may include
alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. Neither the Government Fund
nor the Income Fund will purchase mortgage-backed securities or any other
assets which, in the opinion of TMC, are illiquid and exceed, as a percentage
of the Fund's assets, the percentage limitations on the Fund's investment in
securities which are not readily marketable, as discussed below. TMC will,
consistent with the Funds' respective investment objectives, policies and
quality standards, consider making investments in such new types of
mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgage-backed securities
are now being applied to a broad range of assets. Through the use of trusts
and special purpose corporations, various types of assets, including
automobile loans, computer leases and credit card receivables, are being
securitized in pass-through structures similar to the mortgage pass-through
structures described above or in structures similar to the CMO pattern.
Consistent with the Funds' respective investment objectives and policies,
each Fund may invest in these and other types of asset-backed securities that
may be developed in the future. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments with interest rate fluctuations.
Several types of asset-backed securities have already been offered to
investors, including Certificates of Automobile Receivables ("CARS"). CARS
represent undivided fractional interests in a trust whose assets consist of
a pool of motor vehicle retail installment sales contracts and security
interests in the vehicles securing the contracts. Payments of principal and
interests on CARS are passed through monthly to certificate holders, and are
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. An investor's return on CARS may be affected by
early prepayment of principal on the underlying vehicle sales contracts. If
the letter of credit is exhausted, the trust may be prevented from realizing
the full amount due on a sales contract because of state law requirements and
restrictions relating to foreclosure sales of vehicles and the obtaining of
deficiency judgments following such sales or because of depreciation, damage
or loss of a vehicle, the application of federal and state bankruptcy and
insolvency laws, or other factors. As a result, certificate holders may
experience delays in payments or losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of bankruptcy laws and of a number of state and federal consumer
credit laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance due. There is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool assets, to ensure that the receipt of payment
on the underlying pool occurs in a timely fashion. Protection against losses
results from payment of the insurance obligations on at least a portion of
the assets in the pool by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Income Fund, as a possible purchaser of such securities,
will not pay any additional or separate fees for credit support. The degree
of credit support provided for each issue is generally based on historical
information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or
failure of the credit support could adversely affect the return on an
investment in such a security.
The Income Fund may also invest in residual interests in asset-backed
securities. In the case of asset-backed securities issued in a pass-through
structure, the cash flow generated by the underlying assets is applied to
make required payments on the securities and to pay related administrative
expenses. The residual in an asset-backed security pass-through structure
represents the interest in any excess cash flow remaining after making the
foregoing payments. The amount of the residual will depend on, among other
things, the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses
and the actual prepayment experience on the underlying assets. Asset-backed
security residuals not registered under the Securities Act of 1933 may be
subject to certain restrictions on transferability. In addition, there may
be no liquid market for such securities.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such
developments may require a Fund holding these securities to dispose of the
securities.
Repurchase Agreements - Government Fund and Income Fund
Either Taxable Income Fund may enter into repurchase agreements with
member banks of the Federal Reserve System or any domestic broker-dealer
which is recognized as a reporting government securities dealer if the
creditworthiness of the bank or broker-dealer has been determined by TMC to
be at least as high as that of other obligations the purchasing Fund may
purchase or at least equal to that of issuers of commercial paper rated
within the two highest grades assigned by Moody's or S&P. These transactions
may not provide the purchasing Fund with collateral marked-to-market during
the term of the commitment.
A repurchase agreement, which provides a means for a Fund to earn income
on funds for periods as short as overnight, is an arrangement under which
the Fund purchases a security ("Obligation") and the seller agrees, at the
time of sale, to repurchase the Obligation at a specified time and price.
The repurchase price may be higher than the purchase price, the difference
being interest at a stated rate due to the Fund together with the repurchase
price on repurchase. In either case, the income to the Fund is unrelated to
the interest rate on the Obligation. Obligations will be held by the Fund's
custodian or in the Federal Reserve Book Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a
loan from the purchasing Fund to the seller of the Obligations subject to the
repurchase agreement and is therefore subject to that Fund's investment
restriction applicable to loans. It is not clear whether a court would
consider the Obligation purchased by a Fund subject to a repurchase agreement
as being owned by the Fund or as being collateral for a loan by the Fund to
the seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the Obligation before repurchase of
the Obligation under a repurchase agreement, the Fund may encounter delay and
incur costs before being able to sell the security. Delays may involve loss
of interest or decline in the price of the Obligation. If the court
characterized the transaction as a loan and the Fund has not perfected a
security interest in the Obligation, the Fund may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of
the seller. As an unsecured creditor, the Fund would be at risk of losing
some or all of the principal and income involved in the transaction. As with
any unsecured debt obligation purchased for the Fund, TMC seeks to minimize
the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also
the risk that the seller may fail to repurchase the Obligation, in which case
the purchasing Fund may incur a loss if the proceeds to the Fund of the sale
to a third party are less than the repurchase price. However, if the market
value (including interest) of the Obligation subject to the repurchase
agreement becomes less than the repurchase price (including interest), the
Fund will direct the seller of the Obligation to deliver additional
securities so that the market value (including interest) of all securities
subject to the repurchase agreement will equal or exceed the repurchase
price. It is possible that the Fund will be unsuccessful in seeking to
impose on the seller a contractual obligation to deliver additional
securities.
When Issued Securities - Government Fund and Income Fund
Either Taxable Income Fund may purchase securities offered on a
"when-issued" or "forward delivery" basis. When so offered, the price, which
is generally expressed in yield terms, is fixed at the time the commitment to
purchase is made, but delivery and payment for the when-issued or forward
delivery securities take place at a later date. During the period between
purchase and settlement, no payment is made by the purchaser to the issuer
and no interest on the when-issued or forward delivery security accrues to
the purchaser. To the extent that assets of a Fund are not invested prior to
the settlement of a purchase of securities, the Fund will earn no income;
however, it is intended that each Fund will be fully invested to the extent
practicable and subject to the Fund's investment policies. While when-issued
or forward delivery securities may be sold prior to the settlement date, it
is intended that each Fund will purchase such securities with the purpose of
actually acquiring them unless sale appears desirable for investment reasons.
At the time a Fund makes the commitment to purchase a security on a
when-issued or forward delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
market value of when-issued or forward delivery securities may be more or
less than the purchase price. Neither Fund believes that its net asset
value or income will be adversely affected by its purchase of securities on
a when-issued or forward delivery basis. Each Fund will establish a
segregated account for commitments for when-issued or forward delivery
securities as described above.
Reverse Repurchase Agreements - Government Fund and Income Fund
Either Taxable Income Fund may enter into reverse repurchase agreements
by transferring securities to another person in return for proceeds equal to
a percentage of the value of the securities, subject to its agreement to
repurchase the securities from the other person for an amount equal to the
proceeds plus an interest amount. Neither Fund will enter into any such
transaction if, as a result, more than 5% of the Fund's total assets would
then be subject to reverse repurchase agreements. See the "Investment
Restrictions" applicable to each Fund, below.
Dollar Roll Transactions - Government Fund and Income Fund
Either Taxable Income Fund may enter into "dollar roll" transactions,
which consist of the sale by the Fund to a bank or broker-dealer (the
"counterparty") of GNMA certificates or other mortgage-backed securities
together with a commitment to purchase from the counterparty similar, but not
identical, securities at a future date at the same price. The counterparty
receives all principal and interest payments, including prepayments, made on
the security while it is the holder. The selling Fund receives a fee from
the counterparty as consideration for entering into the commitment to
purchase. Dollar rolls may be renewed over a period of several months with
a new purchase and repurchase price fixed and a cash settlement made at each
renewal without physical delivery of securities. Moreover, the transaction
may be preceded by a firm commitment agreement pursuant to which the Fund
agrees to buy a security on a future date.
Dollar rolls are treated for purposes of the Investment Company Act of
1940 (the "1940 Act") as borrowings of the Fund entering into the transaction
because they involve the sale of a security coupled with an agreement to
repurchase, and are subject to the investment restrictions applicable to any
borrowings made by the Fund. Like all borrowings, a dollar roll involves
costs to the borrowing Fund. For example, while the Fund receives a fee as
consideration for agreeing to repurchase the security, the Fund forgoes the
right to receive all principal and interest payments while the counterparty
holds the security. These payments to the counterparty may exceed the fee
received by the Fund, thereby effectively charging the Fund interest on its
borrowing. Further, although the Fund can estimate the amount of expected
principal prepayment over the term of the dollar roll, a variation in the
actual amount of prepayment could increase or decrease the cost of the Fund's
borrowing.
Dollar rolls involve potential risks of loss to the selling Fund which
are different from those related to the securities underlying the
transactions. For example, if the counterparty becomes insolvent, the Fund's
right to purchase from the counterparty may be restricted. Additionally, the
value of such securities may change adversely before the Fund is able to
purchase them. Similarly, the Fund may be required to purchase securities in
connection with a dollar roll at a higher price than may otherwise be
available on the open market. Since, as noted above, the counterparty is
required to deliver a similar, but not identical security to the Fund, the
security which the Fund is required to buy under the dollar roll may be worth
less than an identical security. Finally, there can be no assurance that the
Fund's use of the cash that it receives from a dollar roll will provide a
return that exceeds borrowing costs.
Lending of Portfolio Securities - Government Fund and Income Fund
Each Taxable Income Fund may seek to increase its income by lending
portfolio securities. Under present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the Securities and
Exchange Commission, such loans may be made to member firms of the New York
Stock Exchange, and would be required to be secured continuously by
collateral in cash, cash equivalents or U.S. Treasury bills maintained on a
current basis at an amount at least equal to the market value and accrued
interest of the securities loaned. The lending Fund would have the right to
call a loan and obtain the securities loaned on no more than five days'
notice. During the existence of a loan, the Fund would continue to receive
the equivalent of the interest paid by the issuer on the securities loaned
and would also receive compensation based on investment of the collateral.
As with other extensions of credit there are risks of delay in recovery or
even loss of rights in the collateral should the borrower of the securities
fail financially. However, the loans would be made only to firms deemed by
TMC to be of good standing, and when, in the judgment of TMC, the
consideration which can be earned currently from securities loans of this
type justifies the attendant risk.
Other Investment Strategies - Income Fund
The Income Fund may, but is not required to, utilize various other
investment strategies as described below to hedge various market risks (such
as interest rates, currency exchange rates, and broad or specific equity
market movements), to manage the effective maturity or duration of
fixed-income securities or portfolios, or to enhance potential gain. Such
strategies are used by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new investments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Income Fund
may purchase and sell exchange-listed and over-the-counter put and call
options on securities, financial futures, equity and fixed-income indices and
other financial instruments, purchase and sell financial futures contracts,
enter into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currency or currency futures (collectively, all the above are called
"Strategic Transactions"). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or
to be purchased for the Income Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in
the derivatives markets as a temporary substitute for purchasing or selling
particular securities. Some Strategic Transactions may also be used to
enhance potential gain although no more than 5% of the Fund's assets will be
committed to Strategic Transactions entered into for purposes not related to
bona fide hedging or risk management. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any
Strategic Transaction is a function of numerous variables including market
conditions. The ability of the Income Fund to utilize these Strategic
Transactions successfully will depend on TMC's ability to predict pertinent
market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to
the extent TMC's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in
losses to the Income Fund, force the sales of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the
Fund to hold a security it might otherwise sell. The use of currency
transactions can result in the Fund incurring losses as a result of a number
of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency.
The use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of
the Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without
incurring substantial losses, if at all. Although the contemplated use of
these futures contracts and options thereon should tend to minimize the risk
of loss due to a decline in the value of the hedged position, at the same
time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited
to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized.
General Characteristics of Options - Income Fund
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument as to which the options relate. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving
options require segregation of Income Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Income Fund's purchase of a put option on
a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell the
instrument at the option exercise price. A call option, upon payment of a
premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price. The
Fund's purchase of a call option on a security, financial future, index,
currency or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase the
instrument. An American-style put or call option may be exercised at any
time during the option period while a European-style put or call options may
be exercised only upon expiration or during a fixed period prior thereto.
The Income Fund is authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are
issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties
to such options. The discussion below uses the OCC as a paradigm, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options
generally settle by physical delivery of the underlying security or currency,
although in the future cash settlement may become available. Index options
and Eurodollar instruments are cash settled for the net amount, if any, to
the extent the option is "in-the-money" (i.e., where the value of the
underlying instrument exceeds, in the case of a call option, or is less than,
in the case of a put option, the exercise price of the option) at the time
the option is exercised. Frequently, rather than taking or making delivery
of the underlying instrument through the process of exercising the option,
listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
The Income Fund's ability to close out its position as a purchaser or
seller of an OCC or exchange listed put or call option is dependent, in part,
upon the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options
or underlying securities including reaching daily price limits; (iv)
interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the
trading of options (or a particular class or series of options), in which
event the relevant market for that option on that exchange would cease to
exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options,
which generally have standardized terms and performance mechanics, all the
terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guaranties and security, are set by negotiation of
the parties. The Income Fund will only enter into OTC options that have a
buy-back provision permitting the Fund to require the Counterparty to buy
back the option at a formula price within seven days. The Fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails
to make or take delivery of the security, currency or other instrument
underlying an OTC option it has entered into with the Income Fund or fails to
make a cash settlement payment due in accordance with the terms of that
option, the Fund will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, TMC must assess the
creditworthiness of each Counterparty or any guarantor or credit enhancement
of the Counterparty's credit to determine the likelihood that the terms of
the OTC option will be satisfied. The Income Fund will engage in OTC option
transactions only with United States government securities dealers recognized
by the Federal Reserve Bank in New York as "primary dealers," broker dealers,
domestic or foreign banks or other financial institutions which have received
a short-term credit rating of "A-1" from Standard & Poor's Corporation or
"P-1" from Moody's Investor Services or have been determined by TMC to have
an equivalent credit rating. The staff of the SEC currently takes the
position that the amount of the Income Fund's obligation pursuant to an OTC
option is illiquid, and is subject to the Income Fund's limitation on
investing no more than 15% its assets in illiquid instruments.
If the Income Fund sells a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale of put options can
also provide income.
The Income Fund may purchase and sell call options on U.S. Treasury and
agency securities, foreign sovereign debt, mortgage-backed securities,
corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and related futures
on such securities other than futures on individual corporate debt and
individual equity securities. All calls sold by the Fund must be "covered"
or must meet the asset segregation requirements described below as long as
the call is outstanding (i.e., the Fund must own the securities or futures
contract subject to the call). Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security and may require
the Fund to hold a security which it might otherwise have sold.
The Income Fund may purchase and sell put options that relate to U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) or futures on such securities other than futures
on individual corporate debt and individual equity securities. The Fund will
not sell put options if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover its potential obligations under
its hedging, duration management, risk management, and other Strategic
Transactions other than those with respect to futures and options thereon.
In selling put options, there is a risk that the Fund may be required to buy
the underlying security at a disadvantageous price above the market price.
General Characteristics of Futures - Income Fund
The Income Fund may purchase and sell financial futures contracts or
purchase put and call options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration management and
for risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for
a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar
to options on securities except that an option on a futures contract gives
the purchaser the right in return for the premium paid to assume a position
in a futures contract.
The Income Fund's use of financial futures and options thereon will in
all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the Commodity Futures Trading
Commission and will be entered into only for bona fide hedging, risk
management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option
thereon requires the Fund to deposit with a financial intermediary as
security for its obligations an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 5% of the face amount of
the contract, but may be higher in some circumstances. Additional cash or
assets (variation margin) may be required to be deposited thereafter on a
daily basis as the mark to market value of the contract fluctuates. The
purchase of options on financial futures involves payment of a premium for
the option without any further obligation on the part of the Fund. If the
Fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position will be offset
prior to settlement and that delivery will not occur.
The Income Fund will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and
options thereon would exceed 5% of the Fund's total assets (taken at current
value); however, in the case of an option that is in-the-money at the time of
the purchase, the segregation requirements with respect to futures and
options thereon are described below.
Options on Securities Indices and Other Financial Indices - Income Fund
The Income Fund also may purchase and sell call and put options on
securities indices and other financial indices and, in so doing can achieve
many of the same objectives it would achieve through the sale or purchase of
options on individual securities or other instruments. Options on securities
indices and other financial indices are similar to options on a security or
other instrument except that, rather than settling by physical delivery of
the underlying instrument, they settle by cash settlement (i.e., an option on
an index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess
of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this
amount. The gain or loss on an option on an index depends on price movements
in the instruments making up the market, market segment, industry or other
composite on which the underlying index is based rather than price movements
in individual securities, as is the case with respect to options on
securities.
Currency Transactions - Income Fund
The Income Fund may engage in currency transactions with Counterparties
in order to hedge the value of currencies against fluctuations in relative
value. Currency transactions include forward currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell ( with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows
based on the notional difference among two or more currencies and operates
similarly to an interest rate swap, which is described below.
The Income Fund's dealings in forward currency contracts and other
currency transactions such as futures, options, options on futures and swaps
will be limited to hedging involving either specific transactions or
portfolio positions. Transactions hedging is entering into a currency
transaction with respect to specific assets or liabilities of the Fund, which
will generally arise in connection with the purchase or sale of its portfolio
securities. Position hedging is entering into a currency transaction with
respect to portfolio security positions denominated or generally quoted in
that currency.
The Income Fund will not enter into a transaction to hedge currency
exposure to an extent greater, after netting all transactions intended to
wholly or partially offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held
in its portfolio that are denominated or generally quoted in or currently
convertible into such currency other than with respect to proxy hedging as
described below.
The Income Fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in
which the Fund expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Income Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to
which the Fund's portfolio is exposed is difficult to hedge or to hedge
against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency whose changes in value are generally considered to be
linked to a currency or currencies in which some or all of the Fund's
portfolio securities are or are expected to be denominated, and to buy U.S.
dollars. The amount of the contract would not exceed the value of the Fund's
securities denominated in linked currencies. For example, if TMC considers
the Austrian schilling is linked to the German deutschemark (the "D-mark"),
the Fund holds securities denominated in Austrian schillings and TMC believes
that the value of schillings will decline against the U.S. dollar, TMC may
enter into a contract to sell D-marks and buy dollars. Hedging involves some
of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that
is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during
the particular time that the Fund is engaging in proxy hedging. If the Fund
enters into a currency hedging transaction, the Fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions - Income Fund
Currency transactions are subject to risks different from other
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales
of currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions
imposed by governments. These can result in losses to the Income Fund if it
is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
ineffective, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur
at a bank based in the issuing nation. Trading options on currency futures
is relatively new, and the ability to establish and close out positions on
such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to the issuing country's economy.
Combined Transactions - Income Fund
The Income Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and any combination of
futures, options and currency transactions ("combined" transactions), instead
of a single Strategic Transaction, as part of a single or combined strategy
when, in the opinion of TMC, it is in the best interests of the Fund to do
so. A combined transaction will usually contain elements of risk that are
present in each of its component transactions. Although combined
transactions are normally entered into based on TMC's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve
the desired portfolio management goal, it is possible that the combination
will instead increase such risks or hinder achievement of the portfolio
management objective.
Swaps, Caps, Floors and Collars - Income Fund
Among the Strategic Transactions into which the Income Fund may enter
are interest rate, currency and index swaps and the purchase or sale or
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a
later date. The Income Fund intends to use these transactions as hedges and
not as speculative investments and will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. An interest rate swap is an
agreement between two parties to exchange payments that are based on
specified interest rates and a notional amount. The exchange takes place
over a specified period of time. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the
relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. Although swaps can take a variety of forms, typically one
party pays fixed and receives floating rate payments and the other party
receives fixed and pays floating rate payments. An interest rate cap is an
agreement between two parties over a specified period of time where one party
makes payments to the other party equal to the difference between the current
level of an interest rate index and the level of the cap, if the specified
interest rate index increases above the level of the cap. An interest rate
floor is similar except the payments are the difference between the current
level of an interest rate index and the level of the floor if the specified
interest rate index decreases below the level of the floor. An interest rate
collar is the simultaneous execution of a cap and floor agreement on a
particular interest rate index. The purchase of a cap entitles the purchaser
to receive payments on a notional principal amount from the party selling the
cap to the extent that a specified index exceeds a predetermined interest
rate or amount. Purchase of a floor entitles the purchaser to receive
payments on a notional principal amount from the party selling the floor to
the extent that a specified index falls below a predetermined interest rate
or amount. A collar is a combination of a cap and a floor that preserves a
certain return within a predetermined range of interest rates or values.
The Income Fund may enter into swaps, caps, floors or collars on either
an asset-based or liability-based basis, depending on whether it is hedging
its assets or its liabilities, and will usually enter into swaps on a net
basis, i.e., the two payment streams are netted out in a cash settlement on
the payment date or dates specified in the instrument, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors and collars are entered into
for good faith hedging purposes, TMC and the Fund believe such obligations do
not constitute senior securities under the 1940 Act and, accordingly, will
not treat them as being subject to its borrowing restrictions. The Fund will
not enter into any swap, cap, floor or collar transaction unless, at the time
of entering into the transaction, the unsecured long term debt rating of the
Counterparty combined with any credit enhancements, satisfies credit criteria
established by the Trust's trustees. If there is a default by the
Counterparty, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized
swap documentation. As a result, the swap market has become relatively
liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been fully developed and, accordingly,
they are less liquid than swaps.
Eurodollar Instruments - Income Fund
The Income Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures contracts or
options thereon which are linked to the London Interbank Offered Rate
("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain
a fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options
thereon to hedge against changes in the LIBOR, to which many interest rate
swaps and fixed income instruments are linked.
Risks of Strategic Transactions Outside the United States - Income Fund
When constructed outside the United States, Strategic Transactions may
not be regulated as rigorously as in the United States, may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions
also could be adversely affected by: (i) other complex foreign political,
legal and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Income
Fund's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the United States, and (v) lower trading volume and
liquidity.
Use of Segregated and Other Special Accounts - Income Fund
Some transactions which the Income Fund may enter into, including many
Strategic Transactions, require that the Income Fund segregate liquid high
grade debt assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. Transactions which require segregation include
reverse repurchase agreements, dollar rolls, undertakings by the Fund to
purchase when-issued securities, the Fund's sales of put or call options, the
Fund's sales of futures contracts, currency hedging transactions (including
forward currency contracts, currency futures and currency swaps) and swaps,
floors and collars to the extent of the Fund's uncovered obligation under the
transaction. In general, the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or an amount of
cash or liquid high grade debt securities at least equal to the current
amount of the obligation must be segregated with the custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them.
For example, a call option written by the Fund will require the Fund to hold
the securities without additional consideration or to segregate liquid
high-grade assets sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require
the Fund to own portfolio securities which correlate with the index or to
segregate liquid high grade debt assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by
the Fund requires the Fund to segregate liquid, high grade assets equal to
the exercise price.
Except when the Income Fund enters into a forward contract for the
purchase or sale of a security denominated in a particular currency, which
requires no segregation, a currency contract which obligates the Fund to buy
or sell currency will generally require the Fund to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Fund's obligations, or to segregate liquid high grade debt assets equal to
the amount of the Fund's obligation.
OTC options entered into by the Income Fund, including those on
securities, currency, financial instruments or indices, OCC issued and
exchange listed index options, swaps, caps, floors and collars will generally
provide for cash settlement. As a result, with respect to these instruments
the Fund will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise
price in the case of a put, or the in-the-money amount in the case of a call.
In addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. Other OCC issued and exchange listed options sold by
the Fund, other than those above, generally settle with physical delivery,
and the Fund will segregate an amount of assets equal to the full value of
the option. OTC options settling with physical delivery, if any, will be
treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Income Fund
must deposit initial margin and possible daily variation margin in addition
to segregating assets sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such assets may consist of cash, cash
equivalents, or high grade liquid debt instruments.
With respect to swaps, the Income Fund will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid high
grade securities having a value equal to the accrued excess. Caps, floors
and collars require segregation of assets with a value equal to the Fund's
net obligation, if any.
Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Income Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options
and Strategic Transactions. For example, the Fund could purchase a put
option if the strike price of that option is the same or higher than the
strike price of a put option sold by the Fund. Moreover, instead of
segregating assets if the Fund held a futures or forward contract, it could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. Other Strategic
Transactions may also be offset in combinations. If the offsetting
transaction terminates at the time of or after the primary transaction, no
segregation is required. If it terminates prior to that time, assets equal
to any remaining obligation would need to be segregated.
The Income Fund's activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. See "Taxes."
Foreign Securities - Income Fund
The Income Fund may invest in securities of foreign issuers. Investing
in foreign issuers involves certain special considerations, including those
set forth below, which are not typically associated with investing in United
States issuers. As foreign companies are not generally subject to uniform
accounting and auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies, there may
be less publicly available information about a foreign company than a
domestic company. Volume and liquidity in most foreign bond markets is less
than in the United States and, at times, volatility of price can be greater
than in the United States. There is generally less government supervision
and regulation of brokers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Securities issued or guaranteed by foreign national
governments, their agencies, instrumentalities, or political subdivisions,
may or may not be supported by the full faith and credit and taxing power of
the foreign government. The Income Fund's ability and decisions to purchase
and sell portfolio securities may be affected by laws or regulations relating
to the convertibility and repatriation of assets. Further, it may be more
difficult for the Fund's agents to keep currently informed about corporate
actions which may affect the prices of portfolio securities. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect United States investments in those
countries, and it may be more difficult to obtain and enforce a judgment
against a foreign issuer. Foreign securities may be subject to foreign
government taxes which will reduce the yield on such securities.
INVESTMENT LIMITATIONS
Investment Limitations - Limited Term National Fund
Thornburg Limited Term Municipal Fund, Inc. has adopted the following
fundamental investment policies applicable to Limited Term National Fund
which may not be changed unless approved by a majority of the outstanding
shares of the Fund. The Limited Term National 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) 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;
(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 the 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 Fund 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 objective, 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 or this Statement of Additional Information;
(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 is 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 the 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 the Fund's total assets would be invested in any one
industry; or
(17) Purchase or retain the securities of any issuer other than the
securities of the Fund 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.
For the purpose of applying the limitations set forth in paragraphs (2)
and (12) 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 a Fund as described in the Prospectus or
this Statement of Additional Information shall not be deemed an "issuer" of
a security or a "guarantor" of a Municipal Lease subject to that agreement.
The Limited Term National Fund will not 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 purchases of (i)
securities of the United States government and its agencies,
instrumentalities and authorities, or (ii) tax exempt securities issued by
different governments, agencies, or political subdivisions, because these
issuers are not considered to be members of any one industry.
With respect to temporary investments, in addition to the foregoing
limitations, the Fund will not 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 Limited Term National Fund has the right to pledge,
mortgage or hypothecate its assets in order to comply with certain state
statutes on investment restrictions, the Fund will not, as a matter of
operating policy(which policy may be changed by the Board of Directors
without shareholder approval), pledge, mortgage or hypothecate its 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 Limited Term National Fund acquires disposable assets
as a result of the exercise of a security interest relating to Municipal
Obligations, the Fund will dispose of such assets as promptly as possible.
Investment Limitations - Intermediate National Fund
Thornburg Investment Trust has adopted the following fundamental
investment policies respecting the Intermediate National Fund which may not
be changed unless approved by a majority of the outstanding shares of the
Fund.
The Intermediate National 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;
(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 the 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 Fund 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;
(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 is 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 the 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 the 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 the Fund itself if, to the Fund's knowledge, those
officers and trustees 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).
For the purpose of applying the limitations set forth in paragraphs (2)
and (12) 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 the 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 or
in this Statement of Additional Information shall not be deemed an "issuer"
of a security or a "guarantor" pursuant to the agreement.
With respect to temporary investments, in addition to the foregoing
limitations the Intermediate National Fund will not 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 Fund has the right to pledge, mortgage or hypothecate its
assets, in order to comply with certain state statutes on investment
restrictions, the Fund will not, as a matter of operating policy (which
policy may be changed by its Trustees without shareholder approval), pledge,
mortgage or hypothecate its 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 Fund acquires disposable assets as a result of the
exercise of a security interest relating to Municipal Obligations, it will
dispose of such assets as promptly as possible.
Investment Limitations - Government Fund
As a matter of fundamental investment policy, the Government Fund will
not:
(1) Invest more than 20% of the Fund's total assets in securities other
than obligations issued or guaranteed by the United States Government or its
agencies, instrumentalities and authorities, generally described (but not
limited) under the heading "Types of Obligations the Fund May Acquire", and
then only in the nongovernmental obligations described in the Prospectus;
(2) 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;
(3) Borrow money, except (a) as a temporary measure, and then only in
amounts not exceeding 5% of the value of the Fund's total assets or (b) from
banks, provided that immediately after any such borrowing all borrowings of
the Fund do not exceed 10% of the Fund's total assets. The exceptions to
this restriction are not for investment leverage purposes but are solely for
extraordinary or emergency purchases or to facilitate management of the
Fund's portfolio by enabling the Fund to meet redemption requests when the
liquidation of portfolio instruments is deemed to be disadvantageous. The
Fund will not purchase securities while borrowings are outstanding. For
purposes of this restriction (i) the security arrangements described in
restriction (4) below will not be considered as borrowing money, and (ii)
reverse repurchase agreements will be considered as borrowing money;
(4) Mortgage, pledge or hypothecate any assets except to secure
permitted borrowings. Arrangements to segregate assets with the Fund's
custodian with respect to when-issued and delayed delivery transactions, and
reverse repurchase agreements, and deposits made in connection with futures
contracts, will not be considered a mortgage, pledge or hypothecation of
assets;
(5) 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 federal securities laws;
(6) Purchase or sell real estate and real estate mortgage loans, but
this shall not prevent the Fund from investing in obligations of the U.S.
Government or its agencies, relating to real estate mortgages as described
generally in the Prospectus;
(7) Purchase or sell commodities or commodity futures contracts or oil,
gas or other mineral exploration or development programs. Investment in
futures contracts respecting securities and in options on these futures
contracts will not be considered investment in commodity futures contracts;
(8) Make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objectives and policies; (b) repurchase
agreements with banks, brokers, dealers and other financial institutions; and
(c) loans of securities;
(9) Purchase any security on margin, except for such short-term credits
as are necessary for the clearance of transactions. For purposes of this
restriction, the Fund's entry into futures contracts will not be considered
the purchase of securities on margin;
(10) Make short sales of securities;
(11) 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 obligations of, or guaranteed by, the United
States government, its agencies, instrumentalities and authorities;
(12) Invest more than 5% of its total assets in securities which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933. The Fund has no present intention to purchase any
such restricted securities;
(13) Purchase securities of any issuer if the purchase at the time
thereof would cause more than 10% of the voting securities or more than 10%
of any class of securities of any such issuer to be held by the Fund;
(14) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
(15) Purchase securities (other than securities of the United States
government, its agencies, instrumentalities and authorities) if, as a result,
more than 25% of the Fund's total assets would be invested in any one
industry;
(16) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those officers and
Trustees 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;
(17) Enter into any reverse repurchase agreement if, as a result
thereof, more than 5% of its total assets would be subject to its obligations
under reverse purchase agreements at any time;
(18) Purchase or sell any futures contract if, as a result thereof, the
sum of the amount of margin deposits on the Fund's existing futures positions
and the amount of premiums paid for related options would exceed 5% of the
Fund's total assets;
(19) Purchase any put or call option not related to a futures contract;
(20) 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 securities which
are considered illiquid because they are subject to legal or contractual
restrictions on resale ("restricted securities") or because no market
quotations are readily available; or enter into a repurchase agreement
maturing in more than seven days, if as a result such repurchase agreements
together with restricted securities and securities for which there are no
readily available market quotations would constitute more than 10% of the
Fund's net assets; or
(21) Issue senior securities, as defined under the Investment Company
Act of 1940, except that the Fund may enter into repurchase agreements and
reverse repurchase agreements, lend its portfolio securities, borrow, and
enter into when-issued and delayed delivery transactions as described in the
Prospectus or this Statement of Additional Information and as limited by the
foregoing investment limitations.
Whenever an investment policy or restriction states a minimum or maximum
percentage of the Government Fund's assets which may be invested in any
security or other assets, it is intended that the minimum or maximum
percentage limitations will be determined immediately after and as a result
of the Fund's acquisition of the security or asset. Accordingly, any later
increase or decrease in the relative percentage of value represented by the
asset or security resulting from changes in asset values will not be
considered a violation of these restrictions.
Although the Government Fund has the right to pledge, mortgage or
hypothecate its assets subject to the restrictions described above, in order
to comply with certain state statutes on investment restrictions, the Fund
will not, as a matter of operating policy (which policy may be changed by the
Trustees without shareholder approval), mortgage, pledge or hypothecate its
portfolio securities to the extent that at any time the percentage of pledged
securities will exceed 10% of its total assets.
Investment Limitations - Income Fund
As a matter of fundamental policy, the Income Fund may not:
(1) with respect to 75% of its total assets taken at market value,
purchase more than 10% of the voting securities of any one issuer or invest
more than 5% of the value of its total assets in the securities of any one
issuer, except obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities and except securities of other investment
companies;
(2) borrow money, except as a temporary measure for extraordinary or
emergency purposes or except in connection with reverse repurchase
agreements; provided that the Fund maintains asset coverage of 300% for all
borrowings;
(3) purchase or sell real estate (except that the Fund may invest in
(i) securities of companies which deal in real estate or mortgages, and (ii)
securities secured by real estate or interests therein and that the Fund
reserves freedom of action to hold and sell real estate acquired as a result
of the Fund's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;
(4) act as underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Fund;
(5) make loans to any other person, except (a) loans of portfolio
securities, and (b) to the extent that the entry into repurchase agreements
and the purchase of debt securities in accordance with its investment
objectives and investment policies may be deemed to be loans;
(6) issue senior securities, except as appropriate to evidence
indebtedness which it is permitted to incur, and except for shares of the
separate classes of a fund or series of the Trust provided that collateral
arrangements with respect to currency-related contracts, futures contracts,
options, or other permitted investments, including deposits of initial and
variation margin, are not considered to be the issuance of senior securities
for purposes of this restriction;
(7) purchase any securities which would cause more than 25% of the
market value of its total assets at the time of such purchase to be invested
in the securities of one or more issuers having their principal business
activities in the same industry, provided that there is no limitation with
respect to investments in obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities (for the purposes of this
restriction, telephone companies are considered to be in a separate industry
from gas and electric public utilities, and wholly-owned finance companies
are considered to be in the industry of their parents if their activities are
primarily related to financing the activities of the parents).
As a matter of nonfundamental policy the Income Fund may not:
(a) purchase or retain securities of any open-end investment company,
or securities of any closed-end investment company except by purchase in the
open market where no commission or profit to a sponsor or dealer results from
such purchases, or except when such purchase, though not made in the open
market, is part of a plan of merger, consolidation, reorganization or
acquisition of assets. The Fund will not acquire any security issued by
another investment company ( the "acquired company") if the Fund thereby
would own (i) more than 3% of the total outstanding voting securities of the
acquired company, or (ii) securities issued by the acquired company having an
aggregate value exceeding 5% of the Fund's total assets, or (iii) securities
issued by investment companies having an aggregate value exceeding 10% of the
Fund's total assets;
(b) pledge, mortgage or hypothecate its assets in excess, together with
permitted borrowings, of 1/3 of its total assets;
(c) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the Fund
or a member, officer, director or trustee of the investment adviser of the
Fund if one or more of such individuals owns beneficially more than one-half
of one percent (1/2%) of the outstanding shares or securities or both (taken
at market value) of such issuer and such shares or securities together own
beneficially more than 5% of such shares or securities or both;
(d) purchase securities on margin or make short sales, unless, by
virtue of its ownership of other securities, it has the right to obtain
securities equivalent in kind and amount to the securities sold and, if the
right is conditional, the sale is made upon the same conditions, except in
connection with arbitrage transactions, and except that the Fund may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities;
(e) invest more than 15% of its net assets in the aggregate in
securities which are not readily marketable, the disposition of which is
restricted under Federal securities laws, and in repurchase agreements not
terminable within 7 days provided the Fund will not invest more than 5% of
its total assets in restricted securities;
(f) purchase securities of any issuers with a record of less than three
years of continuous operations, including predecessors, except U.S.
government securities, securities of such issuers which are rated by at least
one nationally recognized statistical rating organization, municipal
obligations and obligations issued or guaranteed by any foreign government or
its agencies or instrumentalities, if such purchase would cause the
investments of the Fund in all such issuers to exceed 5% of the total assets
of the Fund taken at market value;
(g) purchase more than 10% of the voting securities of any one issuer,
except securities issued by the U.S. Government, its agencies or
instrumentalities;
(h) buy options on securities or financial instruments, unless the
aggregate premiums paid on all such options held by the Fund at any time do
not exceed 20% of its net assets; or sell put options in securities if, as a
result, the aggregate value of the obligations underlying such put options
would exceed 50% of the Fund's net assets;
(i) enter into futures contracts or purchase options thereon unless
immediately after the purchase, the value of the aggregate initial margin
with respect to all futures contracts entered into on behalf of the Fund and
the premiums paid for options on futures contracts does not exceed 5% of the
fair market value of the Fund's total assets; provided that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in computing the 5% limit;
(j) invest in oil, gas or other mineral leases, or exploration or
development programs (although it may invest in issuers which own or invest
in such interests);
(k) borrow money except as a temporary measure, and then not in excess
of 5% of its total assets (taken at market value) unless the borrowing is
from banks, in which case the percentage limitation is 10%; reverse
repurchase agreements and dollar rolls will be considered borrowings for this
purpose, and will be further subject to total asset coverage of 300% for such
agreements;
(l) purchase warrants if as a result warrants taken at the lower of
cost or market value would represent more than 5% of the value of the Fund's
total net assets or more than 2% of its net assets in warrants that are not
listed on the New York or American Stock Exchanges or on an exchange with
comparable listing requirements (for this purpose, warrants attached to
securities will be deemed to have no value); or
(m) make securities loans if the value of such securities loaned
exceeds 30% of the value of the Fund's total assets at the time any loan is
made; all loans of portfolio securities will be fully collateralized and
marked to market daily. The Fund has no current intention of making loans of
portfolio securities that would amount to greater than 5% of the Fund's total
assets;
(n) purchase or sell real estate limited partnership interests.
Restrictions with respect to repurchase agreements shall be construed to be
for repurchase agreements entered into for the investment of available cash
consistent with the Income Fund's repurchase agreement procedures, not
repurchase commitments entered into for general investment purposes.
YIELD AND RETURN COMPUTATION
Performance and Portfolio Information
The yield and return of a Fund or any Fund class may, from time to time,
be quoted in reports, sales literature and advertisements published by the
Fund, the Distributor, or investment dealers offering the Fund. Any such
quotation must include a standardized calculation which computes yield for a
30-day or one month period by dividing net investment income per share
during the period by the maximum offering price on the last day of the
period. The standardized calculation will 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. With respect to
mortgage-backed securities or other receivables-backed obligations, the Fund
will amortize the discount or premium on the outstanding principal balance,
based upon the cost of the security, over the remaining term of the security.
Gains or losses attributable to actual monthly paydowns on mortgage-backed
obligations will be reflected as increases or decreases to interest income
during the period when such gains or losses are realized. Provided that any
such quotation is also accompanied by the standardized calculation referred
to above, a Fund may also quote non-standardized performance data 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 purchase discount or premium less all accrued expenses. The
primary differences between the results 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;
(3) The non-standardized calculation may reflect the average offering price
per share for the period or the beginning offering price per share for the
period, whereas the standardized calculation always will 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 the Fund's return is
quoted in reports, sales literature or advertisements using a public offering
price which is less than the Fund's maximum public offering price, the return
computed by using the Fund's maximum public offering price also will be
quoted in the same piece; (5) The non-standardized return quotation may
include the effective return obtained by compounding the monthly dividends.
Any performance quotation also must include average annual total return
quotation for the one, 5 and 10 year period 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 that
would equate the initial amount invested at the maximum public offering price
to the ending redeemable value. To the extent that a Fund has been in
operation less than one, 5 or 10 years, the time period during which the Fund
has been in operation will be substituted for any one, 5 or 10 year period
for which a total return quotation is not obtainable.
Any quoted performance should not be considered a representation of the
performance in the future since the performance is not fixed. Actual
performance will depend not only the type, quality and maturities of the
investments held by the Fund and changes in interest rates on such
investments, but also on changes in the Fund's expenses during the period.
In addition, a change in the Fund's net asset value will affect its
performance.
From time to time, in advertisements and other types of literature, the
performance of a Fund may be compared to other groups of mutual funds. This
comparative performance may be expressed as a ranking prepared by Lipper
Analytical Services, Inc. or other widely recognized independent services
which monitor the performance of mutual funds. These performance analyses
ordinarily will include the reinvestment of dividends and capital gains
distributions, but do not take sales charges into consideration and are
prepared without regard to tax consequences. Performance rankings and
ratings reported periodically in national financial publications such as
MONEY magazine, FORBES and BARRON's also may be used.
A Fund also may illustrate performance or the characteristics of its
investment portfolio 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 or 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 in some cases 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.
Yield and return information may be used in reviewing the performance of
a Fund's investments and for providing a basis for comparison with other
investment alternatives. However, each Fund's return fluctuates, unlike
certain bank deposits or other investments which pay a fixed return for a
stated period of time.
TAXES
Federal Income Taxes - In General
Each Fund has elected and intends to qualify for treatment as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code").
If in any year a Fund fails to qualify for the treatment conferred by
Subchapter M of the Code, the Fund would be taxed as a corporation on its
income. Distributions to the shareholders would be treated as ordinary
income to the extent of the Fund's earnings and profits, and would be treated
as nontaxable returns of capital to the extent of the shareholders'
respective bases in their shares. Further distributions would be treated as
amounts received on a sale or exchange or property. Additionally, if in any
year the 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 Fund intends to
distribute all of its net income currently, it could have undistributed net
income if, for example, expenses of the Fund were reduced or disallowed on
audit.
The Code imposes a nondeductible 4% excise tax on regulated investment
companies which do not distribute to shareholders by the end of each calendar
year the sum of (i) 98% of the company's net ordinary income realized in the
year, (ii) 98% of the company's net capital gain income for the 12-month
period ending on October 31 of that year, and (iii) the excess of (A) the sum
of the amounts in (i) and (ii) for the prior calendar year plus all amounts
from earlier years which are not treated as having been distributed under
this provision, over (B) actual distributions for the preceding calendar
years. The effect of this excise tax will be to cause each Fund to
distribute substantially all of its income during the calendar year in which
the income is earned. Shareholders will be taxed on the full amount of the
distribution declared by their Fund for each such year, including declared
distributions not actually paid until January 31 of the next calendar year.
Each shareholder will be notified annually by their Fund as to the
amount and characterization of distributions paid to or reinvested by the
shareholder for the preceding taxable year. The Fund may be required to
withhold federal income tax at a rate of 31% from distributions otherwise
payable to a shareholder if (i) the shareholder has failed to furnish the
Fund with his taxpayer identification number, (ii) the Fund is notified that
the shareholder's number is incorrect, (iii) the Internal Revenue Service
notifies the Fund that the shareholder has failed properly to report certain
income, or (iv) when required to do so, the shareholder fails to certify
under penalty of perjury that he is not subject to this withholding.
Federal Income Taxation - Municipal Funds
The Municipal Funds each intend to satisfy conditions (including
requirements as to the proportion of its assets invested in Municipal
Obligations) which will enable the Fund 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 Fund, 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 apply. A Municipal 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 the Fund's total assets
consisted of assets other than Municipal Obligations. Additionally, if in
any year the 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 each Fund intends to
distribute all of its net income currently, it could have undistributed net
income if, for example, expenses of the Fund were reduced or disallowed on
audit.
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 a Municipal Fund 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 shares.
Distributions by each Municipal Fund 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), short-term capital gains
realized by the Fund, if any, and realized amounts attributable to market
discount on bonds, 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 a Municipal Fund, whether or
not 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 gain 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 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 such 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.
As is the case with other types of income, including other tax-exempt
interest income, Exempt Interest Dividends received by an individual
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 or head of household,
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.
For taxable years beginning after December 31, 1986, 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. Each Fund 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 such treatment.
In addition, the Code provides that a portion of the adjusted current
earnings of a corporation reported on its financial statement and not
otherwise included in the minimum tax base will be included for purposes of
calculating the alternative minimum tax for such years. 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 taxable 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 acquired after August 7, 1986, for taxable years beginning
after 1986. Commercial banks, thrift institutions and other financial
institutions may not deduct their cost of carrying shares acquired after
August 7, 1986, for taxable years ending after December 31, 1986.
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 6 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 their shareholders.
State and Local Tax Aspects of the Municipal Funds
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.
The laws of the several states and local taxing authorities vary with
respect to the taxation of such distributions, and shareholders of each Fund
are advised to consult their own tax advisers in that regard. Each Fund will
advise shareholders within 60 days of the end of each calendar year as to the
percentage of income derived from each state in which the Fund has any
Municipal Obligations in order to assist shareholders in the preparation of
their state and local tax returns.
Federal Income Taxes - Taxable Income Funds
Each of the Taxable Income Funds has elected and intends to qualify for
treatment as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). Distributions representing net
interest and net short-term capital gains will be taxable as ordinary income
to the recipient shareholders, whether the distributions are actually taken
in cash or are reinvested by the recipient shareholders in additional shares.
Fund distributions will not be eligible for the dividends received deduction
for corporations. Distributions of net long-term capital gains, if any, will
be treated as long-term capital gains to the distributee shareholders,
whether the distributions are actually taken as cash or are reinvested by the
recipient shareholders in additional 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. Effective for sales charges incurred
after October 3, 1989 if the shareholder disposes of shares within 90 days
after purchasing them, and later acquires shares for which the sales charge
is eliminated or reduced pursuant to a reinvestment right, then the original
sales charge to the extent of the reduction is not included in the basis of
the shares sold for determining gain or loss. Instead, the reduction is
included in determining the basis of the reinvested shares.
Distributions by a Fund result in a reduction in the net asset value of
the Fund's shares. Should distributions reduce the net asset value below a
shareholder's cost basis, the distribution would nevertheless be taxable to
the shareholder as ordinary income or capital gain as described above, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time includes the amount of the forthcoming distribution. Those
purchasing just prior to a distribution will then receive a partial return of
capital upon the distribution, which will nevertheless be taxable to them.
If a Fund holds zero coupon securities or other securities which are
issued at discount, a portion of the difference between the issue price and
the face amount of zero coupon securities ("original issue discount") will be
treated as ordinary income if the Fund holds securities with original issue
discount each year, although no current payments will be received by the Fund
with respect to that income. This original issue discount will comprise a
part of that investment company taxable income of the Fund which must be
distributed to shareholders in order to maintain its qualification as a
regulated investment company and to avoid federal income tax on the Fund.
Taxable shareholders of the Fund will be subject to income tax on original
issue discount, whether or not they elect to receive their distributions in
cash.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a mutual fund accrues interest or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on a disposition of debt securities denominated in a foreign
currency and on disposition of certain futures contracts, forward contracts
and options, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract
and the date of disposition are also treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of the Income Fund's investment company
taxable income to be distributed to its shareholders as ordinary income.
The foregoing is a general and abbreviated summary of the provisions of
the Internal Revenue Code and Treasury Regulations presently in effect as
they directly govern the taxation of the Fund and its 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 and state taxation of the Fund and the income tax consequences to its
shareholders.
State and Local Income Tax Considerations
Each Taxable Income Fund is a series of Thornburg Investment Trust,
which is organized as a Massachusetts business trust. The income tax
treatment of the shareholders in the respective states will depend upon the
specific laws applicable in those states, and prospective investors are urged
to confer with their own tax advisers concerning their particular situations.
DISTRIBUTIONS AND SHAREHOLDERS ACCOUNTS
Distributions
All of the net income of each Fund is declared daily as a dividend on
shares for which the Fund has received payment. Net income of each Fund
consists of all interest income accrued on that Fund's portfolio assets less
all expenses of the Fund. Expenses of each Fund are accrued each day.
Dividends are paid monthly and are reinvested in additional shares of the
Fund 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 each 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.
Accounts of Shareholders
When an investor makes an initial investment in shares of a Fund, the
Transfer Agent will open an account on the books of the 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 also will 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
information for income tax purposes.
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 the Fund at
net asset value on the payment or distribution date, as the case may be.
Upon written notice to the Transfer Agent, a shareholder may elect to receive
monthly distributions of net interest income in cash. Such an election will
remain in effect until changed by written notice to the Transfer Agent, which
change may be made at any time in the sole discretion of the shareholder.
The issuance and delivery of certificates for shares is not required,
and shareholders may be 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, unless the
shareholder has elected the Fund's telephone redemption or systematic
withdrawal features, which are described in the Prospectus. 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 "Selling Fund Shares".
INVESTMENT ADVISER, INVESTMENT ADVISORY AGREEMENT,
AND ADMINISTRATIVE SERVICES AGREEMENT
Investment Advisory Agreement
Pursuant to an Investment Advisory Agreement in respect of each Fund,
Thornburg Management Company, Inc. ("TMC"), 119 East Marcy Street, Suite 202,
Santa Fe, New Mexico 87501, acts as investment adviser for, and will manage
the investment and reinvestment of the assets of, the Funds in accordance
with the Funds' respective investment objectives and policies, subject to the
general supervision and control of the directors of Thornburg Limited Term
Municipal Fund, Inc. with respect to Limited Term National Fund, and subject
to the general supervision and control of the trustees of Thornburg
Investment Trust with respect to Intermediate National Fund, Government Fund
and Income Fund.
TMC is also investment adviser to Thornburg Limited Term Municipal Fund
California Portfolio, a fund series of Thornburg Limited Term Municipal Fund,
Inc. having aggregate assets of $96,280,000 as of June 30, 1996, and
Thornburg New Mexico Intermediate Municipal Fund, Thornburg Florida
Intermediate Municipal Fund and Thornburg Value Fund, separate series of
Thornburg Investment Trust having assets of $128,380,000, $19,730,000, and
$13,590,000, respectively as of June 30, 1996. TMC is a subadviser to Daily
Tax-Free Income Fund, Inc., a registered investment company.
TMC is paid a fee by each Fund, in the percentage amounts described in
the Prospectus. All fees and expenses are accrued daily and deducted before
payment of dividends.
In addition to the fees of TMC, each Fund will pay all other costs and
expenses of its operations. Each Fund also will bear the expenses of
registering and qualifying the Fund and its shares for distribution under
federal and state securities laws, including legal fees. The management fee
will be reduced, or TMC will assume certain Fund expenses, in an amount
necessary to prevent each Fund's total expenses (including the investment
adviser's fee, but excluding interest, taxes, brokerage and other amounts to
the extent permitted by applicable rules) from exceeding applicable state
limitations on expenses. Currently, the Company and the Trust believe the
most restrictive expense ratio limitation applicable to their respective
Funds 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.
The Company's directors (including a majority of the directors who are
not "interested persons" within the meaning of the Investment Company Act of
1940) have approved the Investment Advisory Agreement applicable to Limited
Term National Fund, and the Trust's trustees (including a majority of the
trustees who are not "interested persons") have similarly approved the
Investment Advisory Agreement applicable to Intermediate National Fund,
Government Fund and Income Fund. The shareholders of each of the Funds
approved a restatement of the Investment Advisory Agreement applicable to
each Fund at special meetings of shareholders on April 16, 1996, to reduce
the advisory fees under those agreements and to remove from those agreements
the requirement that TMC would provide certain administrative services.
Instead, those services are provided under the terms of an Administrative
Services Agreement applicable to each class of shares issued by each Fund.
The Administrative Services Agreements are described below.
The Investment Advisory Agreement applicable to each Fund 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.
For the three most recent fiscal periods with respect to each Fund, the
amounts paid to TMC by each Fund under the Investment Advisory Agreement
applicable to each Fund were as follows:
June 30, 1994 June 30, 1995 June 30, 1996
------------- ------------- -------------
Limited Term National Fund $7,033,240 $6,805,432 $6,584,835
Sept 30, 1994 Sept 30, 1995 Sept 30, 1996
------------- ------------- -------------
Intermediate National Fund $335,046 $1,062,263 $1,161,410
Government Fund $808,403 977,258 $735,085
Income Fund N/A N/A N/A
TMC has waived its rights to fees in the foregoing periods as follows:
June 30, 1994 June 30, 1995 June 30, 1996
------------- ------------- -------------
Limited Term National Fund - 0 - $16,669 - 0 -
Sept 30, 1993 Sept 30, 1994 Sept 30, 1995
------------- ------------- -------------
Intermediate National Fund $462,663 $199,442 $191,779
Government Fund - 0 - - 0 - $24,278
Income Fund $58,431 $135,344 $163,741
The foregoing figures are based upon the rates applicable before restatement
of the Investment Advisory Agreement for each Fund. 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 June
30, 1996, Limited Term National Fund reimbursed TMC $99,720 for accounting
expenses incurred on behalf of the Fund, and during the fiscal year ended
September 30, 1995, Intermediate National Fund and Government Fund reimbursed
TMC $21,298 and $15,637, respectively, for accounting services.
H. Garrett Thornburg, Jr., Treasurer, Director and Chairman of the Board
of Thornburg Limited Term Municipal Fund, Inc., and President and Trustee of
Thornburg Investment Trust, is also Director and controlling shareholder of
TMC.
Administrative Services Agreement
Administrative services are provided to each class of shares issued by
each of the Funds under an Administrative Services Agreement which requires
the delivery of administrative functions necessary for the maintenance of the
shareholders of the class, supervision and direction of shareholder
communications, assistance and review in preparation of reports and other
communications to shareholders, administration of shareholder assistance,
supervision and review of bookkeeping, clerical, shareholder and account
administration and accounting functions, supervision or conduct of regulated
regulatory compliance and legal affairs, and review and administration of
functions delivered by outside service providers to or for shareholders, and
other related or similar functions as may from time to time be agreed. The
Administrative Services Agreement specific to each Fund's Institutional
Class shares provides that the class will pay a fee calculated at an annual
percentage of .05% of 1% of the class's average daily net assets, paid
monthly, together with any applicable sales or similar tax. Services are
currently provided under these agreements by TMC. The agreements applicable
to each class may be terminated by either party, at any time without penalty,
upon 60 days' written notice, and will terminate automatically upon
assignment. Termination will not affect the service provider's right to
receive fees earned before termination. The agreements further provide that
in the absence of willful misfeasance, bad faith or gross negligence on the
part of the service provider, or reckless disregard of its duties thereunder,
the provider will not be liable for any action or failure to act in
accordance with its duties thereunder.
SERVICE PLANS
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 Institutional Class shares of each Fund. The
Plan permits each Fund to pay to TMC (in addition to the management and
administration fees and reimbursements described above) an annual amount not
exceeding .25 of 1% of the Fund's Institutional Class 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, and in connection with
the distribution of Institutional Class shares. 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 information
respecting shareholder account transactions, and serving as a source of
information to customers concerning the Funds and transactions with the
Funds. TMC has no current intention to request or receive any reimbursement
under the Service Plans applicable to the Institutional Classes of any of the
Funds. The Service Plan does not provide for accrued by unpaid
reimbursements to be carried over and paid to TMC in later years.
PORTFOLIO TRANSACTIONS
TMC, in effecting purchases and sales of portfolio securities for the
account of each 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. Portfolio 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 of
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 each of the Funds to select dealers which, in addition, furnish
research information including 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 also may 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 Directors or Trustees of each
Fund.
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 a Fund 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
Fund and the other clients, the size of investment commitments generally held
by the Fund and the other clients and opinions of the persons responsible for
recommending investments to the Fund and such other clients. While this
procedure could have a detrimental effect on the price or amount of the
securities available to a Fund from time to time, it is the opinion of the
Funds' Directors or Trustees that the benefits available from TMC's
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions. Each Fund's Directors or Trustees will review
simultaneous transactions.
The Funds' respective portfolio turnover rates for the two most recent
fiscal years are as follows:
Year ended Year ended
June 30, 1995 June 30, 1996
------------- -------------
Limited Term National Fund 23.02% 20.59%
Year ended Year ended
Sept 30, 1994 Sept 30, 1995
------------- -------------
Intermediate National Fund 48.30% 32.20%
Government Fund 78.62% 28.31%
Income Fund 83.96% 43.12%
MANAGEMENT
Limited Term National Fund
Limited Term National Fund is a separate "series" or investment
portfolio of Thornburg Limited Term Municipal Fund, Inc., a Maryland
corporation (the "Company"). The management of Limited Term National Fund,
including general supervision of TMC's performance of duties under the
Investment Advisory Agreement and Administrative Services Agreements
applicable to the Fund, is the responsibility of the Board of Directors of
the Company. There are six Directors of the Company, three of whom are
"interested persons" (as the term "interested" is defined in the Investment
Company Act of 1940) and three of whom are "disinterested" persons. The
names of the Directors and officers and their principal occupations and other
affiliations during the past five years are set forth below, with those
Directors who are "interested persons" of the Company indicated by an
asterisk:
H. Garrett Thornburg, Jr.,* 50, Director, Chairman and Treasurer of the
Company; President and Trustee of Thornburg Investment Trust; 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; Director, President
and Treasurer of TMC.
J. Burchenal Ault, 69, Director of the Company; Consultant to and
fundraiser for charities, 1990 to present; Trustee of Thornburg Investment
Trust since June 1987; Director of Farrer, Strauss & Giroux (publishers).
Eliot R. Cutler ,* 49, Director of the Company; Partner, Cutler &
Stanfield, Attorneys, Washington, D.C.
James E. Monaghan, Jr., 48, Director of the Company; President, Monaghan
& Associates, Inc. and Strategies West, Inc. Denver, Colorado, (business
consultants).
A. G. Newmyer III, 47, Director of the Company; President, from 1983 to
December 1992, and Senior Officer from January 1993, Newmyer Associates,
Inc., Washington, D.C., (business consultants).
Richard M. Curry ,* 56, Director of the Company; Senior Vice President
McDonald & Co., Cleveland, Ohio (securities dealers).
Brian J. McMahon, 40, President of the Company; Vice President of
Thornburg Investment Trust since June 1987 and a Trustee since June, 1996;
Managing Director of TMC and Vice President since December 1995.
Steven J. Bohlin, 38, Vice President of the Company; Vice President and
Treasurer of Thornburg Investment; Managing Director of Tmc, and Vice
President, since April 1991.
William Fries, 56, Vice President of the Company; Vice President of
Thornburg Investment Trust; Managing Director of TMC since May 1995 and Vice
President since December 1995; Vice President of USAA Investment Management
Company from 1982 to 1995.
Ken Ziesenheim, 41, Vice President of the Company; Vice President of
Thornburg Investment Trust; Managing Director and Vice President of TMC since
1995; Senior Vice President of Financial Services, Raymond James &
Associates, Inc. from 1991 to 1995.
Dawn B. Shapland, 49, Secretary of the Company; Secretary and Assistant
Treasurer of Thornburg Investment Trust; Managing Director and Secretary of
TMC.
John Ariola, 27, Assistant Vice President of the Company since July
1992; Assistant Vice President of Thornburg Investment Trust since June 1992;
Accountant for the Company and Thornburg Investment Trust since June 1991;
Associate of TMC since 1991; Staff Auditor, Inventory Auditors, Albuquerque,
New Mexico from June 1987 to June 1991.
Susan Rossi, 35, Assistant Vice President of the Company since July
1992; Assistant Vice President of Thornburg Investment Trust since June 1992;
Associate of TMC, and Vice President since December 1995.
George Strickland, 33, Assistant Vice President of the Company since
July 1992; Assistant Vice President of Thornburg Investment Trust since June
1992; Associate of TMC since July 1991 and Vice President since December
1995; Investor Representative, Calvert Group, Washington, D.C., 1989 to 1991.
Jonathan Ullrich, 27, Assistant Vice President of the Company since July
1992; Assistant Vice President of Thornburg Investment Trust since 1992;
Associate of TMC since September 1991 and Assistant Vice President since
December 1995; student, Brown University, 1987 to 1991.
Christine E. Thompson, 30, Assistant Vice President of the Company and
of Thornburg Investment Trust since June 1993; Associate of TMC since June
1992 and Vice President since December 1995; 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 Directors affiliated with TMC will serve without any
compensation from the Company. The Company pays each Director who is not an
employee of TMC or an affiliated company a quarterly fee of $1,000 plus a
$500 fee for each meeting of the Board of Directors attended by the Director.
In addition, the Company pays a $1,000 annual stipend to each member of the
audit committee, and reimburses all Directors for travel and out-of-pocket
expenses incurred in connection with attending such meetings.
Intermediate National Fund; Government Fund; Income Fund
Intermediate National Fund, Government Fund and Income Fund are separate
"series" or investment portfolios of Thornburg Investment Trust, a
Massachusetts business trust (the "Trust"). The management of Intermediate
National Fund, Government Fund and Income, including the general supervision
of TMC's performance of its duties under the Investment Advisory Agreements
and Administrative Services Agreements applicable to the Funds, is the
responsibility of the Trust's Trustees. There are six Trustees, two of whom
are "interested persons" (as the term "interested" is defined in the
Investment Company Act of 1940) and four of whom are "disinterested" persons.
The names of Trustees and officers and their principal occupations and
affiliations during the past five years are set forth below, with the Trustee
who is an "interested person" of the Trust indicated by an asterisk.
H. Garrett Thornburg, Jr.*, 50, Trustee and President of the Trust;
Director, Chairman and Treasurer of Thornburg Limited Term Municipal Fund,
Inc.; 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,
Treasurer and Director of TMC.
David A. Ater, 49, Trustee of the Trust; 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 of the Trust; Independent fund raising
counsel; 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.; Director of Farrar,
Strauss & Giroux, (publishers).
Forrest S. Smith, 65, Trustee of the Trust; Attorney in private
practice, Santa Fe, New Mexico; shareholder, Catron, Catron & Sawtell (law
firm), Santa Fe, New Mexico.
Brian J. McMahon*, 40, Trustee since June 1996 and Vice President of the
Trust; President of Thornburg Limited Term Municipal Fund, Inc.; Managing
Director of TMC and a Senior Vice President since December 1995.
Steven J. Bohlin, 38, Vice President and Treasurer of the Trust; Vice
President of Thornburg Limited Term Municipal Fund, Inc.; Managing Director
of TMC and a Vice President since December 1995.
Dawn B. Shapland, 49, Secretary and Assistant Treasurer of the Trust;
Secretary, Thornburg Limited Term Municipal Fund, Inc.; Vice President, Daily
Tax Free Income Fund, Inc. since 1989; Managing Director and Secretary of
TMC.
William Fries, 56, Vice President of the Trust; Managing Director and
Vice President of TMC since May 1995 and Vice President since December 1995;
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 of the Trust; Managing Director and
Vice President of TMC since 1995; 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, 27, Assistant Vice President of the Trust; 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.
Susan Rossi, 34, Assistant Vice President of the Trust; Assistant Vice
President of Thornburg Limited Term Municipal Fund, Inc. since July 1992;
Associate of TMC since June 1990 and Vice President since December 1995.
George Strickland, 33, Assistant Vice President of the Trust; Assistant
Vice President of Thornburg Limited Term Municipal Fund, Inc. since July
1992; Associate of TMC since July 1991 and Vice President since December
1995; Investor Representative, Calvert Group, Washington, D.C., 1989 to 1991.
Jonathan Ullrich, 27, Assistant Vice President of the Trust; Assistant
Vice President of Thornburg Limited Term Municipal Fund, Inc. since July
1992; Associate of TMC since September 1991 and Assistant Vice President
since December 1995; Student, Brown University, 1987 to 1991.
Christine E. Thompson, 30, Assistant Vice President of the Trust;
Assistant Vice President of Thornburg Limited Term Municipal fund, Inc. since
June 1993; Associate of TMC since June 1992 and Vice President since December
1995; Office Manager Town and Country Janitorial Services, Inc., Greenland,
N.H., 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, Executive Vice President of Daily Tax-Free Income Fund,
Inc., and a Chairman and Treasurer of Thornburg Limited Term Municipal Fund,
Inc.
The officers and Trustees affiliated with TMC serve without any
compensation from the Trust. The Trust pays each Trustee who is not an
employee of TMC or an affiliated person a quarterly fee of $1,000 plus $500
for each meeting of the Trustees attended by the Trustee. In addition, the
Trust pays a $1,000 annual stipend to each member of each committee
established by the Trustees, and reimburses all Trustees for travel and
out-of-pocket expenses incurred in connection with attending those meetings.
The Trustees have established one committee, the audit committee, on which
Messrs. Ater, Ault and Smith currently serve.
PRINCIPAL HOLDERS OF SECURITIES
Limited Term National Fund
As of June 30, 1996, Limited Term National Fund had an aggregate of
69,742,925.942 shares outstanding, of which none were Institutional Class
shares. No persons are known to have held of record or beneficially 5% or
more of Limited Term National Fund's outstanding shares on June 30, 1996. On
the same date, the officers, Directors and related persons of Thornburg
Limited Term Municipal Fund, Inc., as a group, held less than one percent of
the outstanding shares of the Fund.
Intermediate National Fund
As of June 30, 1996, Intermediate National Fund had an aggregate of
18,753,179.662 shares outstanding, of which none were Institutional Class
shares. No persons are known to have held of record or beneficially 5% or
more of Intermediate National Fund's outstanding shares on June 30, 1996. On
the same date, the officers, Trustees and related persons of Thornburg
Investment Trust, as a group, held less than one percent of the outstanding
shares of the Fund.
Government Fund
As of June 30, 1996, Government Fund had an aggregate of 11,877,908.59
shares outstanding, of which none were Institutional Class shares. No
persons are known to have held of record or beneficially 5% or more of
Government Fund's outstanding shares on June 30, 1996. On the same date, the
officers, Trustees and related persons of Thornburg Investment Trust, as a
group, held less than one percent of the outstanding shares of the Fund.
Income Fund
As of June 30, 1996, Income Fund had an aggregate of 2,108,053.015
shares outstanding, of which none were Institutional Class shares. No
persons are known to have held of record or beneficially 5% or more of Income
Fund's outstanding shares on June 30, 1996. On the same date, the Thornburg
Management Company, Inc. Profit Sharing Plan held 55,216.818 shares of the
Fund, representing approximately 4.73% of the issued and outstanding shares
of that Fund on that date.
NET ASSET VALUE
Each Fund 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 Fund. 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.
DISTRIBUTOR
Pursuant to a Distribution Agreement with Thornburg Limited Term
Municipal Fund, Inc., Thornburg Securities Corporation ("TSC") acts as
principal underwriter of Limited Term National Fund Institutional Class
shares, and pursuant to a separate Distribution Agreement with Thornburg
Investment Trust, TSC also acts as principal underwriter of Institutional
Class shares of Intermediate National Fund, Government Fund and Income Fund.
The Funds do not bear selling expenses except (i) those involved in
registering its shares with the Securities and Exchange Commission and
qualifying them or the Fund with state regulatory authorities, and (ii)
expenses paid under the Service Plans and 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 Agreements, except that termination other than upon
assignment requires six months' notice.
H. Garrett Thornburg, Jr., Treasurer, a Director and Chairman of the
Board of Thornburg Limited Term Municipal Fund, Inc. and President and a
Trustee of Thornburg Investment Trust, 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 Limited Term National Fund for its fiscal year
ending June 30, 1996, and is the independent auditor of Intermediate National
Fund, Government Fund, and Income Fund for their fiscal year ended September
30, 1996.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities, including Schedule of Investments,
as of June 30, 1995, Statement of Operations for the year ended June 30, 1995
and Statement of Changes in Net Assets for the two years in the period ended
June 30, 1995, Notes to Financial Statements and Financial Highlights, and
Independent Auditor's Report dated July 28, 1995, for Limited Term National
Fund are incorporated herein by reference from the Fund's Annual Report to
Shareholders, June 30, 1995.
Unaudited Statement of Assets and Liabilities, including Schedule of
Investments, as of December 31, 1995, Statement of Operations and Statement
of Changes in Net Assets for the period ended December 31, 1995, Statement of
Changes in Net Assets for the year ended June 30, 1995, Notes to Financial
Statements and Financial Highlights, for Limited Term National Fund are
incorporated by reference from the Fund's Semiannual Report to Shareholders,
December 31, 1995.
Statements of Assets and Liabilities, including Schedules of
Investments, as of September 30, 1995, Statements of Operations for the year
ended September 30, 1995 and Statements of Changes in Net Assets for the two
years in the period ended September 30, 1995, Notes to Financial Statements
and Financial Highlights, and Independent Auditor's Reports dated October 27,
1995, for Intermediate National Fund, Government Fund and Income Fund, are
incorporated by reference from the Funds' Annual Reports to Shareholders,
September 30, 1995.
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