<PAGE>
Statement of Additional Information
for
Thornburg Limited Term Municipal Fund National Portfolio
("Limited Term National Fund")
Thornburg Limited Term Municipal Fund California Portfolio
("Limited Term California Fund")
Thornburg Intermediate Municipal Fund
("Intermediate National Fund")
Thornburg New Mexico Intermediate Municipal Fund
("Intermediate New Mexico Fund")
Thornburg Florida Intermediate Municipal Fund
("Intermediate Florida Fund")
Thornburg New York Intermediate Municipal Fund
("Intermediate New York Fund")
Thornburg Limited Term U.S. Government Fund
("Government Fund")
Thornburg Limited Term Income Fund
("Income Fund")
Thornburg Value Fund
("Value Fund")
Thornburg Global Value Fund
("Global Value Fund")
119 East Marcy Street, Suite 202
Santa Fe, New Mexico 87501
Thornburg Limited Term Municipal Fund National Portfolio ("Limited
Term National Fund") and Thornburg Limited Term Municipal Fund California
Portfolio ("Limited Term California Fund") are investment portfolios
established by Thornburg Limited Term Municipal Fund, Inc. (the "Company").
Thornburg Intermediate Municipal Fund ("Intermediate National Fund"),
Thornburg New Mexico Intermediate Municipal Fund ("Intermediate New Mexico
Fund"), Thornburg Florida Intermediate Municipal Fund ("Intermediate
Florida Fund"), Thornburg New York Intermediate Municipal Fund
("Intermediate New York Fund"), Thornburg Limited Term U.S. Government Fund
("Government Fund"), Thornburg Limited Term Income Fund ("Income Fund"),
Thornburg Value Fund ("Value Fund"), and Thornburg Global Value Fund
("Global Value 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 Class A, Class C or Class
D shares offered by the Funds.
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Funds' Prospectus dated February 1,
2000. A copy of the Prospectus and the most recent Annual and Semiannual
Reports for each of the Funds may be obtained at no charge by writing to
the distributor of the Funds' 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 February 1, 2000,
as revised March 31, 2000.
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TABLE OF CONTENTS
ORGANIZATION OF THE FUNDS . . . . . . . . . . . . . . . . . . .__
INVESTMENT POLICIES. . . . . . . . . . . . . . . . . . . . . . __
Municipal Funds. . . . . . . . . . . . . . . . . . . . . . . __
Funds Investments-In General . . . . . . . . . . . . . . . . __
Municipal Obligations. . . . . . . . . . . . . . . . . . . . __
Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . __
Temporary Investments. . . . . . . . . . . . . . . . . . . . __
Repurchase Agreements. . . . . . . . . . . . . . . . . . . . __
U.S. Government Obligations. . . . . . . . . . . . . . . . . __
Special Risks Affecting Limited Term California Fund . . . . __
Special Risks Affecting Intermediate New Mexico Fund . . . . __
Special Risks Affecting Intermediate Florida Fund. . . . . . __
Special Risks Affecting Intermediate New York Fund . . . . . __
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 ("CMOs") . . . . . . . . __
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 . . . . . . . . . . . . . . . __
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VALUE FUND AND GLOBAL VALUE FUND . . . . . . . . . . . . . . . __
Illiquid Investments-Value Fund and Global Value Fund. . . . __
Restricted Securities-Value Fund. . . . . . . . . . . . . . __
Swap Agreements, Caps, Floors, Collars-
Value Fund and Global Value Fund. . . . . . . . . . . . . __
Indexed Securities-Value Fund and Global Value Fund . . . . __
Repurchase Agreements-Value Fund and Global Value Fund. . . __
Reverse Repurchase Agreements-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Securities Lending-Value Fund and Global Value Fund . . . . __
Lower-Quality Debt Securities-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Foreign Investments-Value Fund and Global Value Fund. . . . __
Foreign Currency Transactions-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Limitations on Futures and Options Transactions-
Value Fund and Global Value Fund. . . . . . . . . . . . . __
Real Estate-Related Instruments-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Futures Contracts-Value Fund and Global Value Fund. . . . . __
Futures Margin Payments-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Purchasing Put and Call Options-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Writing Put and Call Options-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Combined Positions-Value Fund and Global Value Fund . . . . __
Correlations of Price Changes-Value Fund and
Global Value Fund. . . . . . . . . . . . . . . . . . . . . __
Liquidity of Options and Futures Contracts-
Value Fund and Global Value Fund . . . . . . . . . . . . . __
OTC Options-Value Fund and Global Value Fund. . . . . . . . __
Option and Futures Relating to Foreign Currencies-
Value Fund and Global Value Fund . . . . . . . . . . . . . __
Asset Coverage for Futures and Options Positions-
Value Fund and Global Value Fund . . . . . . . . . . . . . __
Short Sales-Value Fund and Global Value Fund. . . . . . . . __
INVESTMENT LIMITATIONS. . . . . . . . . . . . . . . . . . . . __
Investment Limitations-Limited Term National Fund and
Limited Term California Fund . . . . . . . . . . . . . . . __
Investment Limitations-Intermediate National Fund,
Intermediate New Mexico Fund; Intermediate Florida Fund
and Intermediate New York Fund . . . . . . . . . . . . . . __
Investment Limitations-Government Fund. . . . . . . . . . . __
Investment Limitations-Income Fund. . . . . . . . . . . . . __
Investment Limitations-Value Fund and Global Value Fund . . __
YIELD AND RETURN COMPUTATION. . . . . . . . . . . . . . . . . __
Performance and Portfolio Information . . . . . . . . . . . __
-ii-
REPRESENTATIVE PERFORMANCE INFORMATION. . . . . . . . . . . . __
Representative Performance Information-
Limited Term National Fund (Class A and C). . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Taxable Equivalent Yield. . . . . . . . . . . . . . . . __
Average Annual Total Return . . . . . . . . . . . . . . __
Representative Performance Information-
Limited Term California Fund (Class A and C) . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Taxable Equivalent Yield. . . . . . . . . . . . . . . . __
Average Annual Total Return . . . . . . . . . . . . . . __
Representative Performance Information-Intermediate
National Fund (Class A and C) . . . . . . . . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Taxable Equivalent Yield. . . . . . . . . . . . . . . . __
Average Annual Total Return . . . . . . . . . . . . . . __
Intermediate New Mexico Fund (Class A). . . . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Taxable Equivalent Yield. . . . . . . . . . . . . . . . __
Average Annual Total Return . . . . . . . . . . . . . . __
Representative Performance Information-Intermediate
Florida Fund (Class A). . . . . . . . . . . . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Taxable Equivalent Yield. . . . . . . . . . . . . . . . __
Average Annual Total Return . . . . . . . . . . . . . . __
Representative Performance Information-Intermediate
New York Fund (Class A) . . . . . . . . . . . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Taxable Equivalent Yield. . . . . . . . . . . . . . . . __
Average Annual Total Return . . . . . . . . . . . . . . __
Representative Performance Information-
Government Fund (Class A and C) . . . . . . . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Representative Performance Information-Income
Fund (Class A and Class C Shares) . . . . . . . . . . . . __
Standardized Method of Computing Yields . . . . . . . . __
Representative Performance Information-Value
Fund (Class A and Class C Shares) . . . . . . . . . . . . __
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-
Taxable Income Funds. . . . . . . . . . . . . . . . . . . __
Federal Income Taxes-Value Fund . . . . . . . . . . . . . . __
State and Local Income Tax Considerations-Value Fund. . . . __
-iii-
DISTRIBUTIONS AND SHAREHOLDERS ACCOUNTS . . . . . . . . . . . __
INVESTMENT ADVISER, INVESTMENT ADVISORY AGREEMENT, AND
ADMINISTRATIVE SERVICES AGREEMENT . . . . . . . . . . . . . __
Investment Advisory Agreement . . . . . . . . . . . . . . . __
Administrative Services Agreement . . . . . . . . . . . . . __
SERVICE AND DISTRIBUTION PLANS. . . . . . . . . . . . . . . . __
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . . . . . . __
In General. . . . . . . . . . . . . . . . . . . . . . . . . __
Municipal Funds and Taxable Income Funds. . . . . . . . . . __
Value Fund. . . . . . . . . . . . . . . . . . . . . . . . . __
Portfolio Turnover Rates. . . . . . . . . . . . . . . . . . __
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . __
Limited Term National Fund and
Limited Term California Fund. . . . . . . . . . . . . . . __
Intermediate National Fund; Government Fund;
Income Fund; and Value Fund . . . . . . . . . . . . . . . __
PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . . . . . . __
Limited Term National Fund. . . . . . . . . . . . . . . . . __
Limited Term California Fund. . . . . . . . . . . . . . . . __
Intermediate National Fund. . . . . . . . . . . . . . . . . __
Government Fund . . . . . . . . . . . . . . . . . . . . . . __
Income Fund . . . . . . . . . . . . . . . . . . . . . . . . __
Value Fund. . . . . . . . . . . . . . . . . . . . . . . . . __
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . __
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . . . . . . __
ADDITIONAL INFORMATION RESPECTING
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . __
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . . . . . . __
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . __
-iv-
<PAGE>
ORGANIZATION OF THE FUNDS
Limited Term National Fund and Limited Term California Fund are
diversified series of Thornburg Limited Term Municipal Fund, Inc., a Maryland
corporation organized in 1984 as a diversified, open-end management
investment company (the "Company"). The Company currently offers two series
of stock, Limited Term National Fund and Limited 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, Intermediate New Mexico Fund, Intermediate
Florida Fund, Intermediate New York Fund, Government Fund, Income Fund, Value
Fund, and Global Value Fund are diversified series of Thornburg Investment
Trust, a Massachusetts business trust (the "Trust") organized on June 3, 1987
as a diversified, open-end management investment company under a Declaration
of Trust (the "Declaration"). The Trust currently has eight active Funds,
all of which are described in this prospectus. The Trustees are authorized
to divide the Trust's shares into additional series and classes.
The assets received for the issue or sale of shares of each Fund and all
income, earnings, profits, and proceeds thereof, subject only to the rights
of creditors, are especially allocated to the Fund, and constitute the
underlying assets of that Fund. The underlying assets of each Fund are
segregated on the books of account, and are charged with the liabilities with
respect to that Fund and with a share of the general expense of the Company
(if the Fund is a series of the Company), or of the Trust. Expenses with
respect to the Company and the Trust are allocated in proportion to the asset
value of the respective series and classes of the Company or the Trust except
where allocations of direct expense can otherwise be fairly made. The
officers of the Company, subject to the general supervision of the Company's
directors, determine which expenses are allocable to a given Fund of the
Company, or which are generally allocable to both Funds offered by the
Company. Similarly, the officers of the Trust, subject to the general
supervision of the Trustees, determine which expenses are allocable to a
given Fund, or generally allocable to all of the Funds of the Trust. In the
event of the dissolution or liquidation of the Trust or the Company,
shareholders of each Fund are entitled to receive the underlying assets of
that Fund which are available for distribution.
Each of the Funds may in the future, rather than invest in securities
generally, seek to achieve its investment objectives by pooling its assets
with assets of other funds for investment in another investment company
having the same investment objective and substantially similar investment
policies and restrictions as the Fund. The purpose of such an arrangement is
to achieve greater operational efficiencies and to reduce cost. It is
expected that any such investment company would be managed by Thornburg
Investment Management, Inc. (Thornburg) in a manner substantially similar to
the corresponding Fund. Shareholders of each Fund would receive prior written
notice of any such investment, but may not be entitled to vote on the action.
Such an investment would be made only if at least a majority of the Directors
or Trustees of the Fund determined it to be in the best interest of the
participating Fund and its shareholders.
The Company is a corporation organized under Maryland law, which
provides generally that shareholders will not be held personally liable for
the obligations of the corporation. The Trust is an entity of the type
commonly known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. The Declaration of Trust
provides that the Trust shall not have any claim against shareholders except
for the payment of the purchase price of shares. However, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which a fund itself would be unable to meet its
obligations. Thornburg believes that, in view of the above, the risk of
personal liability to shareholders is remote.
No Fund is liable for the liabilities of any other Fund. However,
because the Company and the Trust share a 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 rights or preemptive rights.
State Street Bank and Trust, Boston, Massachusetts, is custodian of the
assets of the Funds. The Custodian is responsible for the safekeeping of the
Funds' assets and the appointment of subcustodian banks and clearing
agencies. The Custodian takes no part in determining the investment policies
of the Funds or in deciding which securities are purchased or sold by the
Funds.
INVESTMENT POLICIES
Municipal Funds
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Limited Term National Fund, Limited Term California Fund, Intermediate
National Fund, Intermediate New Mexico Fund, Intermediate Florida Fund, and
Intermediate New York Fund are sometimes referred to in this Statement of
Additional Information as the "Municipal Funds." The primary investment
objective of each of the Municipal Funds is to seek as high a level of
current investment income exempt from the individual federal income tax as is
consistent, in the view of the Funds' investment adviser, with the
preservation of capital. In addition, the Limited Term California Fund seeks
exemption of its income dividends from California State individual income
taxes, Intermediate New Mexico Fund seeks exemption of its income dividends
from New Mexico state individual income taxes, and Intermediate New York Fund
seeks exemption of its income dividends from New York State and New York City
individual income taxes. Intermediate Florida Fund seeks exemption from the
"intangibles" tax normally imposed on securities held by individuals resident
in the State of Florida. The objective of preserving capital may preclude
the Municipal Funds from obtaining the highest possible yields.
The Limited Term National Fund and Limited Term California 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 municipal bond portfolios
with longer average maturities while expecting lower yields than those
received on portfolios with longer average maturities. Intermediate National
Fund, Intermediate New Mexico Fund, Intermediate Florida Fund, and
Intermediate New York Fund each 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 Funds 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 Funds.
The following discussion supplements the disclosures in the Thornburg
Municipal Funds Prospectus respecting the Municipal Funds' investment
policies, techniques and investment limitations.
Fund Investments - In General
- -----------------------------
Each Municipal 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 the Funds'
investment adviser (Thornburg) 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," below. 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. Under
normal conditions each of the single State Municipal Funds invests 100%, of
its assets in obligations originating in the state having the same name as
the Fund or issued by United States territories or possessions, and as a
matter of fundamental policy, invests 65% of its total assets in municipal
obligations originating in the state having the same name as the Fund.
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 or state income tax. Such temporary
investments, which may include repurchase agreements with dealers, banks or
recognized financial institutions that in the opinion of Thornburg 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
___. 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.
No 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 any 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. 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 Thornburg 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 Thornburg for Limited Term
National Fund and Limited Term California Fund under the supervision of the
directors of the Company, and for Intermediate National Fund, Intermediate
New Mexico Fund, Intermediate Florida Fund and Intermediate New York 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.
Thornburg 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 and Limited Term California Fund by the
Company's directors, and for Intermediate National Fund, Intermediate New
Mexico Fund, Intermediate Florida Fund and Intermediate New York 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 Thornburg 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 Thornburg determines that the
municipal lease is readily marketable because it is backed by the 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 Thornburg's opinion, certain factors established by the
Company's directors for Limited Term National Fund and Limited Term
California Fund, and by the Trust's trustees for Intermediate National Fund,
Intermediate New Mexico Fund, Intermediate Florida Fund and Intermediate New
York 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.
No 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 Thornburg 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 Thornburg 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 adversely 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. 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
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. Such temporary
investments may be made due to market conditions, pending investment of idle
funds or to afford liquidity. These investments are limited to the following
short-term, fixed-income securities (maturing in one year or less from the
time of purchase): (i) obligations of the United States government or its
agencies, instrumentalities or authorities; (ii) prime commercial paper
within the two highest ratings of Moody's or S&P; (iii) certificates of
deposit of domestic banks with assets of $1 billion or more; and (iv)
repurchase agreements with respect to the foregoing types of securities.
Repurchase agreements will be entered into only with dealers, domestic banks
or recognized financial institutions that in the investment adviser'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.
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. No Municipal 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 Thornburg 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 Municipal 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, Thornburg 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 Municipal 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.
Special Risks Affecting Limited Term California Fund
- ----------------------------------------------------
Limited Term California Fund invests primarily in California state,
municipal, and agency obligations. For this reason, an investment in the
Limited Term California Fund may be riskier than an investment in the Limited
Term National Fund, which buys municipal obligations from throughout the
United States. Prospective investors should consider the risks inherent in
the investment concentration of the Limited Term California Fund before
investing.
California's economy is the largest among the 50 states and one of the
largest in the world. The state's July 1, 1995 population of approximately
32.1 million represents 12.2 percent of the total United States population
and total personal income in the state, at an estimated $810 billion in 1996,
accounts for 12.6 percent of all personal income in the nation. Total
employment is about 14.5 million, the majority of which is in the service,
trade and manufacturing sectors.
California constitutional and other laws raise questions about the
ability of California state and municipal issuers to obtain sufficient
revenue to pay their bond obligations in all situations. In 1978, California
voters approved an amendment to the California Constitution known as
Proposition 13, which has had an affect on California issuers that rely in
whole or in part, directly or indirectly, on ad valorem real property taxes
as a source of revenue. Proposition 13 limits ad valorem taxes on real
property and restricts the ability of taxing entities to increase real
property taxes. In 1979, California voters approved another constitutional
amendment, Article XIIIB, which may have an adverse impact on California
state and municipal issuers. Article XIIIB prohibits government agencies and
the state from spending "appropriations subject to limitation" in excess of
the appropriations limit imposed. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes", which consist of tax revenues,
certain state subventions and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such
proceeds exceed "the cost reasonably borne by such entity in providing the
regulation, product or service". No limit is imposed on appropriations of
funds which are not "proceeds of taxes", such as debt service on indebtedness
existing or authorized before January 1, 1979, or subsequently authorized by
the voters, appropriations required to comply with mandates of the courts or
the federal government, reasonable user charges or fees and certain other
non-tax funds. The amendment restricts the spending authority of state and
local government entities. If revenues exceed such appropriations limits,
such revenues must be returned either as revisions in the tax rate or fee
schedules.
California obtains roughly 45% of general fund revenues from personal
income taxes (individual and corporate) compared to an average of only 30%
for other states. Income taxes serve as a bellwether which is frequently a
leading indicator of economic weakness. Recent deficits were caused by lower
than projected income tax receipts. California's other principal revenue
source is sales taxes. The state's budget problems in recent years have also
been caused by a structural imbalance in that the largest General Fund
Programs -- K-12 education, health, welfare and corrections -- were
increasing faster than the revenue base, driven by the state's rapid
population growth. These pressures are expected to continue as population
trends maintain strong demand for health and welfare services, as the school
age population continues to grow, and as the state's corrections program
responds to a "Three-Strikes" law enacted in 1994, which requires mandatory
life prison terms for certain third-time felony offenders.
As a result of these factors and others, from the late 1980's until
1992-'93, the state had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the state
accumulated and sustained a budget deficit approaching $2.8 billion at its
peak at June 30, 1993. Economic recovery allowed a return to financial
stability in recent years. Revenues exceeded expenditures in the 1996-'97
and 1997-'98 fiscal years, to the extent that the accumulated deficit could
be paid and some reserves established.
Although the state continues to enjoy a healthy economy, with good
employment gains since 1995, some slowing in evident. The state's 1999-'00
executive budge reflected a decline in revenue increases and reductions in
reserves, as a result of projected slowing of employment growth and Asian
economic problems. Budget restrictions and the effects of restructuring
initiatives limit budget flexibility could also create difficulties for
public finance if revenues weaken and expenditures are not controlled.
Special Risks Affecting Intermediate New Mexico Fund
- ----------------------------------------------------
Intermediate New Mexico Fund invests primarily in New Mexico municipal
obligations. For this reason, an investment in Intermediate New Mexico Fund
may be riskier than an investment in Intermediate National Fund, which buys
municipal obligations from throughout the United States. Prospective
investors should consider the risks inherent in the investment concentration
of Intermediate New Mexico Fund before investing.
New Mexico is the fifth largest state in area, containing approximately
121,593 square miles, but has a relatively small population of approximately
1,730,000 persons (1997). Major industries in New Mexico are energy
resources, semi-conductor manufacturing, tourism, services, arts and crafts,
agriculture-agribusiness, government, manufacturing and mining. In fiscal
year 1998, a value of energy resources production (crude petroleum, natural
gas, and coal) was approximately $5.2 billion. Total value of mineral
production was $930 million. The mining industry employed about 15,700 New
Mexicans in 1997. Major federally funded scientific research facilities at
Los Alamos, Albuquerque and White Sands are also a notable part of the
state's economy. Agriculture is a major part of the state's economy, with
crop and livestock sales in excess of $1.7 billion in 1996. As a high,
relatively dry region with extensive grasslands, the State is attractive for
raising cattle, sheep and other livestock. Because of irrigation and a
variety of climatic conditions, the state's farmers are able to produce a
diverse assortment of products. The state's farmers are major producers of
alfalfa hay, wheat, chili peppers, cotton, fruits and pecans. Agricultural
businesses include chili canneries, milk processing and cheese plants,
dairies, wineries, alfalfa, pellets, chemical and fertilizer plans, farm
machinery, feet lots and commercial slaughter plants.
Fiscal year 1997-98 state revenues were approximately $3.23 billion, a
growth of 6.5 percent over the preceding year. Strength in oil and gas
revenue and growth in personal income taxes and for gross receipts tax
collections contributed to most revenue growth. Revenues exceeded
appropriations by $167 million. Ending balances in the state's operating
reserves rose to $246 million.
Fiscal year 1998-99 revenues are estimated at $3.20 billion, a decline
of 0.9 percent over the preceding fiscal year. The projected decrease is a
result of declines in oil and gas revenue and a decrease in corporate income
tax. Further, following a perceived national trend, personal income tax
growth is expected to decelerate. Nonrecurring revenues are expected to be
smaller.
The state's legislature and local government must address a growing
perception that the state's educational system is deficient, which may entail
an increase in educational expenditures. Education represents the largest
state budget item. Potential future economic vulnerabilities for the state
or specific portions of the state include declines in mineral extraction and
fluctuations in gas and oil production and prices, possible budget decreases
at national laboratories located at White Sands, Albuquerque and Los Alamos,
and a possible general slowdown in the nation's economy.
Special Risks Affecting Intermediate Florida Fund
- -------------------------------------------------
Intermediate Florida Fund invests primarily in Florida municipal
obligations. For this reason, an investment in Intermediate Florida Fund may
be riskier than an investment in Intermediate National Fund, which buys
municipal obligations from throughout the United States. Prospective
investors should consider the risks inherent in the investment concentration
of Intermediate Florida Fund before investing.
Florida has one of the fastest growing economies in the nation. State
per capita income has grown more rapidly than the nation's average, so that
Florida's 1997 per capita income was 20th in the nation. Employment growth
continues to outpace the nation. The state's population of 14,166,000 was
about 5.4 percent of the United States' population.
Major industries for the state include agriculture, tourism, insurance,
banking and import-export trade. The state's general fund revenues are
highly dependent upon the sales tax, and the state does not impose an
individual income tax.
Forecasted population increases and expanding demand for public
education, infrastructure improvements and certain other governmental
services will exert pressure on governmental budgets in coming years. Recent
and projected borrowings by the state and local governments are similarly
expanding.
Although recent state economic performance and governmental revenues
have been better than expected, and currently appear adequate for projected
governmental expenditures and borrowings, expected slowing in the growth of
personal income and the national economy will present budget challenges to
the state and some local governments. Florida's experience in the 1990-91
recession indicates that higher unemployment and increased costs for "safety
net" programs for unemployed persons reduce governmental revenues and
increase costs. Although the state has established substantial revenues and
continues to add to those revenues, against such an eventuality, a recession
likely would require budget reductions to avoid constitutionally prohibited
deficit spending, and reduce funds for debt payment.
Special Risks Affecting Intermediate New York Fund
- --------------------------------------------------
Intermediate New York Fund invests primarily in New York municipal
obligations. For this reason, an investment in Intermediate New York Fund
may be riskier than an investment in Intermediate National Fund, which buys
municipal obligations from throughout the United States. Prospective
investors should consider the risks inherent in the investment concentration
of Intermediate New York Fund before investing.
New York has a broad and diverse economy. Although the state's
manufacturing sector has continued to contract over time, the state's service
sector has expanded. Services provide about one-third of overall employment
and 31% of income. Finance, insurance and real estate and particularly
important to the state's economy and employment.
Employment rates have increased in the state, but at a rate less than
the national average. Per capita personal income was 120% of the national
average in 1997. Employment rates are expected to increase, absent recession
or other economic disruption.
In recent years, government has enjoyed greater than expected revenue
growth. Personal income taxes have contributed to most of these revenue
increases. The State has enjoyed operating surpluses in fiscal years 1995-
1996, 1996-1997 and 997-1998. However, these surpluses appear to have
reduced the incentive to control expenditures, and the 1998-1999 budget did
not include significant reductions in expenditures. An economic slowdown and
consequent reductions in personal income tax collections could adversely
affect the ability of the state and its political subdivisions to meet
financial obligations.
In 1995-1996, revenues exceeded estimates, and the growth fund closed
with a balance of $287 million. In 1996-1997, revenues surged, and
previously proposed spending cuts were never implemented tax collections were
large enough, however, that the general fund closed the year with a balance
of $433 million. Again in 1997-1998, continuing revenue growth permitted the
state to extinguish its accumulated deficit and close the year with a general
fund balance of $638 million. General Fund balances do not include a reserve
created from personal income taxes in previous years, representing a reserve
of approximately $1.8 billion in 1998-1999.
Personal income tax collections have continued to increase in 1998-1999,
exceeding estimates. Projections for 1999-2000 anticipate a decline in
revenue increases, and a decline in the rate of employment increase. The
state projects revenue gaps in 2000-2001 and 2001-2002. The state's
indebtedness is above average in amount, but is moderate relative to
currently available revenue resources.
The current financial stability could be upset by a number of factors,
however. Costs which are currently contained could increase if the state's
economy falters. Public assistance costs and health care expense could
increase if unemployment increases. Economic difficulties also could reduce
economic activity and consumer spending, reducing tax revenues in a period
when governmental costs likely would increase. The ability of the state to
respond to these challenges could be impaired significantly because the state
and some local governments have failed to reduce chronically high
expenditures and address governmental economic and spending inefficiencies.
These problems could be further enhanced by the state's historic inability to
adopt timely budgets, which disrupts financial planning by local governments,
agencies, and contractors.
INCOME FUNDS
Government Fund and Income Fund (the "Income Funds") each has the
primary investment goal of providing, through investment in a professionally
managed portfolio of fixed income obligations as high a level of current
income as is consistent, in the investment adviser's view, with safety of
capital. The Government Fund will seek to achieve its primary investment
goal 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 goal by investing 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 Funds has
the secondary goal of reducing fluctuations in its net asset value compared
to longer term portfolios, and will pursue this goal by investing in
obligations with an expected dollar-weighted average maturity of normally not
more than five years.
The following discussion supplements the disclosures in the Funds'
Prospectus respecting Government Fund's and Income Fund's investment
policies, techniques and investment limitations.
Determining Portfolio Average Maturity - Government Fund and Income Fund
- ------------------------------------------------------------------------
For purposes of each 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 Thornburg, will result in
the instrument being valued in the market as though it has an earlier
maturity.
In addition, each 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 Thornburg'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 Fund may purchase, each 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 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 might tend to limit to some degree
the increase in net asset value of the Fund because the value of some
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, on 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 Income Fund, but will not be purchased by 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 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.
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, Thornburg determines that the
securities meet 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
- ---------------------------------
Thornburg 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 Government
Fund nor Income Fund will purchase mortgage-backed securities or any other
assets which, in the opinion of Thornburg, 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. Thornburg 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. If
otherwise consistent with the Income Fund's investment objectives and
policies, Income 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. 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.
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 Government Fund or 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
Thornburg 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, Thornburg 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 Government Fund or 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.
Reverse Repurchase Agreements - Government Fund and Income Fund
- ----------------------------------------------------------------
Either Government Fund or 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 Government Fund or 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 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 Thornburg to be of good
standing, and when, in the judgment of Thornburg, the consideration which can
be earned currently from securities loans of this type justifies the
attendant risk.
Other Investment Strategies - Income Fund
- -----------------------------------------
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, 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 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 Income Fund to utilize these Strategic
Transactions successfully will depend on Thornburg'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 Thornburg'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 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, 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.
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 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.
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. 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 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, Thornburg 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. 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 Thornburg to have an equivalent credit rating. The staff of
the SEC currently takes the position that the amount of 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 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.
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.
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
- -------------------------------------------------
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.
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.
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 in-the-money amount may be excluded in computing the 5%
limit. The segregation requirements with respect to futures and options
thereon are described below.
Options on Securities Indices and Other Financial Indices - Income Fund
- -----------------------------------------------------------------------
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
- -----------------------------------
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.
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.
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.
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, 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 Thornburg
considers the Austrian schilling is linked to the German Deutschemark (the
"D-mark"), the Fund holds securities denominated in Austrian schillings and
Thornburg believes that the value of schillings will decline against the U.S.
dollar, Thornburg 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 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
- -----------------------------------
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 Thornburg, 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 Thornburg'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 Income Fund may enter are
interest rate, currency and index swaps and the purchase or sale of 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. 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.
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, the investment adviser 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, but the value
of the swap or other agreement likely would decline, potentially resulting in
losses. 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 is less highly developed
and, accordingly, they may be less liquid than swaps.
Eurodollar Instruments - Income Fund
- ------------------------------------
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 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 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 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 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, 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, 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. 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
- --------------------------------
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. Income Fund's ability and decisions to purchase and
sell portfolio securities may be affected by laws or regulations relating to
the convertability 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. Foreign
securities and cash held in foreign custody or in foreign depositories may
not enjoy the same or comparable legal protections prevailing in the United
States. 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.
Value Fund And Global Value Fund
- --------------------------------
Thornburg Value Fund ("Value Fund") and Thornburg Global Value Fund
("Global Value Fund") each seek long term capital appreciation by investing
in equity and debt securities of all types. The secondary goal of each Fund
is to seek some current income.
Value Fund expects to invest primarily in domestic equity securities
selected on a value basis. However, the Fund may own a variety of
securities, including foreign equity and debt securities, domestic debt
securities and securities that are not currently paying dividends.
Global Value Fund invests throughout the world in a diversified
portfolio consisting primarily of equity securities. The Fund normally
invests more than one-half of its assets in foreign securities, and may own a
variety of domestic and foreign equity and debt securities, and securities
that are not paying dividends.
The following discussion supplements the disclosures in the Prospectus
respecting Value Fund's investment policies, techniques and investment
limitations.
Illiquid Investments - Value Fund and Global Value Fund
- -------------------------------------------------------
Illiquid investments are investments that cannot be sold or disposed of
in the ordinary course of business at approximately the prices at which they
are valued. Under the supervision of the Trustees, the Funds' investment
adviser (Thornburg) determines the liquidity investments by Value Fund and
Global Value Fund and, through reports from Thornburg, the Trustees monitor
investments in illiquid instruments. In determining the liquidity of the
Funds' investments, Thornburg may consider various factors, including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4)
the nature of the security (including any demand or lender features), and (5)
the nature of the market place for trades (including the ability to assign or
offset each Fund's rights and obligations relating to the investment).
Investments currently considered by Value Fund and Global Value Fund to
be illiquid include repurchase agreements not entitling the holder to payment
of principal and interest within seven days, over-the-counter options, and
non-government stripped fixed-rate mortgage-backed securities. Also Thornburg
may determine some restricted securities, government-stripped fixed-rate
mortgage-backed securities, emerging market securities, and swap agreements
to be illiquid. However, with respect to over-the-counter options either
Fund writes, all or a portion of the value of the underlying instrument may
be illiquid depending on the assets held to cover the option and the nature
and terms of any agreement the Fund any have to close out the option before
expiration.
In the absence of market quotations, illiquid investments are priced at
fair value as determined utilizing procedures and methods reviewed by the
Trustees. If through a change in values, net assets, or other circumstances,
a Fund were in a position where more than 10% of its net assets was invested
in illiquid securities, it would seek to take appropriate steps to protect
liquidity.
Restricted Securities - Value Fund and Global Value Fund
- --------------------------------------------------------
Restricted securities generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, a Fund could be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to
seek registration and the time it is permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to seek registration of the security.
Swap Agreements, Caps, Floors, Collars - Value Fund and Global Value Fund
- --------------------------------------------------------------------------
Swap agreements can be individually negotiated and structured to include
exposure to a variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or decrease the
Fund's exposure to long or short-term interest rates (in the U.S. or abroad),
foreign currency values, mortgage securities, corporate borrowing rates, or
other factors such as security prices or inflation rates. The Fund is not
limited to any particular form of swap agreement if Thornburg determines it
is consistent with the Fund's investment objective and policies.
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 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 such 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 such 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.
Inasmuch as these swaps, floors, caps and collars are entered into for
good faith hedging purposes, Thornburg and the Funds believe these
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to borrowing restrictions.
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 is less highly developed
and, accordingly, may be less liquid than swaps.
Swap agreements will tend to shift the Fund's investment exposure from
one type of investment to another. For example, if the Fund agreed to
exchange payments in dollars for payments in foreign currency, the swap
agreement would tend to decrease the Fund's exposure to U.S. interest rates
and increase its exposure to foreign currency and interest rates. Caps and
floors have an effect similar to buying or writing options. Depending on how
they are used, swap agreements may increase or decrease the overall
volatility of the Fund's investments and its share price and yield. The most
significant factor in the performance of swap agreements is the change in the
specific interest rate, currency, or other factors that determine the amounts
of payments due to and from the Fund. If a swap agreement calls for payments
by the Fund, the Fund must be prepared to make such payments when due. In
addition, if the counterparty's credit worthiness declined, the Fund will
have contractual remedies available to it, but the value of the swap or other
agreement would be likely to decline, potentially resulting in losses. The
Fund expects to be able to eliminate its exposure under swap agreements
either by assignment or other disposition, or by entering into an offsetting
swap agreement with the same party or a similarly creditworthy party.
Value Fund and Global Value Fund will maintain appropriate liquid assets
in a segregated custodial account to cover its current obligations under swap
agreements. If Fund enters into a swap agreement on other than a net basis,
it will segregate assets with a value equal to the full amount of the Fund's
accrued obligations under the agreement.
Indexed Securities - Value Fund and Global Value Fund
- -----------------------------------------------------
Each Fund may purchase securities whose prices are indexed to the prices
of other securities, securities indices, currencies, precious metals or other
commodities, or other financial indicators. Indexed securities typically,
but not always, are debt securities or deposits whose value at maturity or
coupon rate is determined by reference to a specific instrument or statistic.
Gold-indexed securities, for example, typically provide for a maturity value
that depends on the price of gold, resulting in a security whose price tends
to rise and fall together with gold prices. Currency indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed
securities may be positively or negatively indexed; that is, their maturity
value may increase when the specified currency value increases, resulting in
a security that performs similarly to a foreign-denominated instrument, or
their maturity value may decline when foreign currencies increases, resulting
in a security whose price characteristics are similar to a put on the
underlying currency. Currency-indexed securities may also have prices that
depend on the values of a number of different foreign currencies relative to
each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the U.S. and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers
of indexed securities have included banks, corporations, and certain U.S.
government agencies. Indexed securities may be more volatile than their
underlying instruments.
Repurchase Agreements - Value Fund and Global Value Fund
- --------------------------------------------------------
In a repurchase agreement, the Fund purchases a security and
simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked to market daily) of the underlying security. The Fund may engage in a
repurchase agreements with respect to any security in which it is authorized
to invest.
The Fund may enter into these arrangements with member banks of the
Federal Reserve System or any domestic broker-dealer if the creditworthiness
of the bank or broker-dealer has been determined by Thornburg to be
satisfactory. These transactions may not provide the Fund with collateral
marked-to-market during the term of the commitment.
For purposes of the Investment Company Act of 1940, a repurchase
agreement is deemed to be a loan from the Fund to the seller of the security
subject to the repurchase agreement and is therefore subject to the Fund's
investment restriction applicable to loans. It is not clear whether a court
would consider the security purchased by the 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 security before
repurchase of the security 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 underlying
security. If the court characterized the transaction as a loan and the Fund
has not perfected a security interest in the underlying security, the Fund
may be required to return the security to the seller's estate and be treated
as an unsecured creditor of principal and income involved in the transaction.
As with any unsecured debt obligation purchased for the Fund, Thornburg seeks
to minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, there is also
the risk that the seller may fail to repurchase the security, in which case
the 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 security subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Fund will
direct the seller of the security 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.
Reverse Repurchase Agreements - Value Fund and Global Value Fund
- ----------------------------------------------------------------
In a reverse repurchase agreement, a Fund sells a portfolio instrument
to another party, such as a bank or broker-dealer, in return for cash and
agrees to repurchase the instrument at a particular price and time. While a
reverse repurchase agreement is outstanding, the Fund will maintain
appropriate liquid assets in a segregated custodial account to cover its
obligation under the agreement. The Funds will enter into reverse repurchase
agreements only with parties whose creditworthiness has been found
satisfactory by Thornburg. Such transactions may increase fluctuations in
the market value of the Funds' assets and may be viewed as a form of
leverage.
Securities Lending - Value Fund and Global Value Fund
- -----------------------------------------------------
The Funds may lend securities to parties such as broker-dealers or
institutional investors. Securities lending allows the Funds to retain
ownership of the securities loaned and, at the same time, to earn additional
income. Since there may be delays in the recovery of loaned securities, or
even a loss of rights in collateral supplied should the borrower fail
financially, loans will be made only to parties deemed by Thornburg to be of
good standing. Furthermore, they will only be made if, in Thornburg's
judgment, the consideration to be earned from such loans would justify the
risk.
Thornburg understands that it is the current view of the SEC Staff that
a Fund may engage in loan transactions only under the following conditions:
(1) the Fund must receive 100% collateral in the form of cash or cash
equivalents (e.g., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Fund must be able to terminate the
loan at any time; (4) the Fund must receive reasonable interest on the loan
or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the Fund may pay only reasonable
custodian fees in connection with the loan; and (6) the Trustees must be
able to vote proxies on the securities loaned, either by terminating the loan
or by entering into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any security
in which a Fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
Lower-Quality Debt Securities - Value Fund and Global Value Fund
- ----------------------------------------------------------------
Either Fund may purchase lower-quality debt securities (those rated
below Baa by Moody's Investors Service, Inc. or BBB by Standard and Poor's
Corporation, and unrated securities judged by Thornburg to be of equivalent
quality) that have poor protection with respect to the payment of interest
and repayment of principal, or may be in default. These securities are often
considered to be speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices of
lower-quality debt securities may fluctuate more than those of higher-quality
debt securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates.
While the market for high-yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980's brought a dramatic increase in the use of such securities to fund
highly leveraged corporate acquisitions and restructuring. Past experience
may not provide an accurate indication of the future performance of the high-
yield bond market, especially during periods of economic recession. In fact,
from 1989 to 1991, the percentage of lower-quality securities that defaulted
rose significantly above prior levels, although the default rate decreased in
1992 and 1993.
The market for lower-quality debt securities may be thinner and less
active than that for higher-quality debt securities, which can adversely
affect the prices at which the former are sold. If market quotations are not
available, lower-quality debt securities will be valued in accordance with
procedures established by the Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high-yield corporate debt
securities than is the case for securities for which more external sources
for quotations and last-sale information are available. Adverse publicity
and changing investor perceptions may affect the ability of outside pricing
services to value lower-quality debt securities and the Fund's ability to
sell these securities. Since the risk of default is higher for lower-quality
debt securities, Thornburg's research and credit analysis are an especially
important part of managing securities of this type held by the Funds. In
considering investments for the Funds, Thornburg will attempt to identify
those issuers of high-yielding securities whose financial condition is
adequate to meet future obligations, has improved, or is expected to improve
in the future. Thornburg's analysis focuses on relative values based on such
factors as interest or dividend coverage, asset coverage, earnings prospects,
and the experience and managerial strength of the issuer.
Either Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be
in the best interest of the Fund's shareholders.
Foreign Investments - Value Fund and Global Value Fund
- ------------------------------------------------------
Foreign investments can involve significant risks in addition to the
risks inherent in U.S. investments. The value of securities denominated in
or indexed to foreign currencies, and of dividends and interest from such
securities, can change significantly when foreign currencies strengthen or
weaken relative to the U.S. dollar. Foreign securities markets generally
have less trading volume and less liquidity than U.S. markets, and prices on
some foreign markets can be highly volatile. Many foreign countries lack
uniform accounting and disclosure standards comparable to those applicable to
U.S. companies, and it may be more difficult to obtain reliable information
regarding an issuer's financial condition and operations. It may be more
difficult to obtain and enforce a judgment against a foreign issuer. In
addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for
U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to
less government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a broker-
dealer, and may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse
to the interests of U.S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
may be a greater possibility of default by foreign governments or foreign
government-sponsored enterprises, and securities issued or guaranteed by
foreign 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. Investments in foreign countries
also involve a risk of local political, economic, or social instability,
military action or unrest, or adverse diplomatic developments. There is no
assurance that Thornburg will be able to anticipate these potential events or
counter their effects.
The considerations noted above generally are intensified for investments
in developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
The Funds may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such
restrictions.
American Depository Receipts and European Depository Receipts (ADR's and
EDR's) are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed
for use in U.S. and European securities markets, respectively, ADR's and
EDR's are alternatives to the purchase of the underlying securities in their
national markets and currencies.
Foreign Currency Transactions - Value Fund and Global Value Fund
- -----------------------------------------------------------------
The Funds may conduct foreign currency transactions on a spot (i.e.,
cash) basis or by entering into forward contracts to purchase or sell foreign
currencies at a future date and price. Both Funds will convert currency on a
spot basis from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers generally do not
charge a fee for conversion, they do realize a profit based on the difference
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to a Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell
that currency to the dealer.
Forward contracts are generally traded in an interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. The parties to a forward contract may agree to offset or
terminate the contract before its maturity, or may hold the contract to
maturity and complete the contemplated currency exchange. The Funds may use
currency forward contracts for any purpose consistent with their investment
objectives. The following discussion summarizes the principal currency
management strategies involving forward contracts that could be used by the
Funds. The Funds may also use swap agreements, indexed securities, and
options and futures contracts relating to foreign currencies for the same
purposes. When a Fund agrees to buy or sell a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for
a fixed amount of U.S. dollars, of the amount of foreign currency involved in
the underlying security transaction, the Fund will be able to protect itself
against an adverse change in foreign currency values between the date the
security is purchased or sold and the date on which payment is made or
received. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." Each Fund also may enter into forward contracts to
purchase or sell a foreign currency in anticipation of future purchases or
sales of securities denominated in foreign currency, even if the specific
investments have not yet been selected by Thornburg.
The Funds may also use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For
example, if a Fund owned securities denominated in pounds sterling, it could
enter into a forward contract to sell pounds sterling in return for U.S.
dollars to hedge against possible declines in the pound's value. Such a
hedge, sometimes referred to as a "position hedge, " would tend to offset
both positive and negative currency fluctuations, but would not offset
changes in security values caused by other factors. The Fund could also
hedge the position by selling another currency expected to perform similarly
to the pound sterling for example, by entering into a forward contract to
sell Deutschemarks or European Currency Units in return for U.S. dollars.
This type of hedge, sometimes referred to as a "proxy hedge," could offer
advantages in terms of cost, yield, or efficiency, but generally would not
hedge currency exposure as effectively as a simple hedge into U.S. dollars.
Proxy hedges may result in losses if the currency used to hedge does not
perform similarly to the currency in which the hedged securities are
denominated.
The Funds may enter into forward contracts to shift investment exposure
from one currency into another. This may include shifting exposure from U.S.
dollars to a foreign currency, or from one foreign currency to another
foreign currency. For example, if a Fund held investments denominated in
deutschemarks, the Fund could enter into forward contracts to sell
deutschemarks and purchase Swiss francs. This type of strategy, sometimes
known as a "cross hedge," will tend to reduce or eliminate exposure to the
currency that is sold, and increase exposure to the currency that is
purchased, much as if the Fund had sold a security denominated in one
currency and purchased an equivalent security denominated in another. Cross-
hedges protect against losses resulting from a decline in the hedged
currency, but will cause the Fund to assume the risk of fluctuations in the
value of the currency it purchases. Under certain conditions, SEC guidelines
require mutual funds to set aside appropriate liquid assets in a segregated
custodial account to cover currency forward contracts. As required by SEC
guidelines, each Fund will segregate assets to cover currency forward
contracts, if any, whose purpose is essentially speculative. The Funds will
not segregate assets to cover forward contracts entered into for hedging
purposes, including settlement hedges, position hedges, and proxy hedges.
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. Those can result in losses to a Fund if it is unable
to deliver or receive currency 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. Currency
futures are also subject to risks pertaining to futures contracts generally.
See "Futures Contracts," below. Options trading on currency futures is
subject to market liquidity, and establishing and closing positions may be
difficult. Currency exchange rates may fluctuate based on factors extrinsic
to the issuing country's own economy.
Successful use of currency management strategies will depend on
Thornburg's skill in analyzing and predicting currency values. Currency
management strategies may substantially change a Fund's investment exposure
to changes in currency exchange rates, and could result in losses to the Fund
if currencies do not perform as Thornburg anticipates. For example, if a
currency's value rose at a time when Thornburg had hedged the Fund by selling
that currency in exchange for dollars, the Fund would be unable to
participate in the currency's appreciation. If Thornburg hedges currency
exposure through proxy hedges, the Fund could realize currency losses from
the hedge and the security position at the same time if the two currencies do
not move in tandem. Similarly, if Thornburg increases the Fund's exposure to
a foreign currency, and that currency's value declines, the Fund will realize
a loss. There is no assurance that Thornburg's use of currency management
strategies will be advantageous to the Funds or that it will hedge at an
appropriate time.
Limitations on Futures and Options Transactions -
Value Fund and Global Value Fund
- -----------------------------------------------
The Fund will not: (a) sell futures contracts, purchase put options, or
write call options if, as a result, more than 25% of the Fund's total assets
would be hedged with futures and options under normal conditions; (b)
purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts
and written put options would exceed 25% of its total assets; or (c) purchase
call options if, as a result, the current value of option premiums for call
options purchased by the Fund would exceed 5% of the Fund's total assets.
These limitations do not apply to options attached to or acquired or traded
together with their underlying securities, and do not apply to securities
that incorporate features similar to options.
The above limitations on the Fund's investments in futures contracts and
options, and the Fund's policies regarding futures contracts and options
discussed elsewhere in this Statement of Additional Information, are not
fundamental policies and may be changed as regulatory agencies permit.
Real Estate-Related Instruments - Value Fund and Global Value Fund
- ------------------------------------------------------------------
Real estate-related instruments include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such as
changes in real estate values and property taxes, interest rates, cash flow
of underlying real estate assets, over building, and the management skill and
creditworthiness of the issuer. Real estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
Futures Contracts - Value Fund and Global Value Fund
- ----------------------------------------------------
When a Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument at a specified future date. When the Fund
sells a futures contract, it agrees to sell the underlying instrument at a
specified future date. The price at which the purchase and sale will take
place is fixed when the Fund enters into the contract. Some currently
available futures contracts are based on specific securities, such as U.S.
Treasury bonds or notes, and some are based on indices of securities prices,
such as the Standard & Poor's 500 Composite Stock Price Index (S&P 500).
Futures can be held until their delivery dates, or can be closed out before
then if a liquid secondary market is available. The value of a futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase a Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When a Fund sells a futures contract, by contrast, the value of
its futures position will tend to move in a direction contrary to the market.
Selling futures contracts, therefore will tend to offset both positive and
negative market price changes, much as if the underlying instrument had been
sold.
Futures Margin Payments - Value Fund and Global Value Fund
- ----------------------------------------------------------
The purchaser or seller of a futures contract is not required to deliver
or pay for the underlying instrument unless the contract is held until the
delivery date. However both the purchaser and seller are required to deposit
"initial margin" with a futures broker, known as a futures commission
merchant (FCM), when the contract is entered into. Initial margin deposits
are typically equal to a percentage of the contract's value. If either
party's position declines, that party will be required to make additional
"variation margin" payments to settle the change in value on a daily basis.
The party that has a gain may be entitled to receive all or a portion of this
amount. Initial and variation margin payments do not constitute purchasing
securities on margin for purposes of the Fund's investment limitations. In
the event of the bankruptcy of an FCM that holds margin on behalf of a Fund,
the Fund may be entitled to return of margin owed to it only in proportion to
the amount received by the FCM's other customers, potentially resulting in
losses to the Fund.
Purchasing Put and Call Options - Value Fund and Global Value Fund
- ------------------------------------------------------------------
By purchasing a put option, a Fund obtains the right (but not the
obligation) to sell the option's underlying instrument at a fixed strike
price. In return for this right, the Fund pays the current market price for
the option (known as the option premium). Options have various types of
underlying instruments, including specific securities, indices of securities
prices, and futures contracts. The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option.
If the option is allowed to expire, the Fund will lose the entire premium it
paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its current
price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost
of the option.
Writing Put and Call Options - Value Fund and Global Value Fund
- ---------------------------------------------------------------
When a Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the
premium, the Fund assumes the obligation to pay the strike price for the
option's underlying instrument if the other party to the option chooses to
exercise it. When writing an option on a futures contract a Fund will be
required to make margin payments to an FCM as described above for futures
contracts. The Fund may seek to terminate its position in a put option it
writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option
the Fund has written, however, the Fund must continue to be prepared to pay
the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received.
If security prices remain the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer
a loss. This loss should be less than the loss from purchasing the
underlying instrument directly, however, because the premium received for
writing the option should mitigate the effects of the decline. Writing a call
option obligates a Fund to sell or deliver the option's underlying
instrument, in return for the strike price, upon exercise of the option. The
characteristics of writing call options are similar to those of writing put
options, except that writing calls generally is a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, a
call writer mitigates the effects of a price decline.
At the same time, because a call writer must be prepared to deliver the
underlying instrument in return for the strike price, even if its current
value is greater, a call writer gives up some ability to participate in
security price increases.
Combined Positions - Value Fund and Global Value Fund
- -----------------------------------------------------
The Funds may purchase and write options in combination with each other,
or in combination with futures or forward contracts, to adjust the risk and
return characteristics of the overall position. For example, a Fund may
purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out. 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 upon Thornburg's judgment that the combined
strategies will reduce risk or otherwise achieve a portfolio management goal,
it is possible that the combination will instead increase risk or hinder
achievement of the goal.
Correlation of Price Changes - Value Fund and Global Value Fund
- ---------------------------------------------------------------
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized contracts available
will not match a Fund's current or anticipated investments exactly. A Fund
may invest in options and futures contracts based on securities with
different issuers, maturities, or other characteristics from the securities
in which it typically invests, which involves a risk that the options or
futures position will not track the performance of the Fund's other
investments. Options and futures prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures prices are affected by such
factors as current and anticipated short-term interest rates, changes in
volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same
way. Imperfect correlation may also result from differing levels of demand
in the options and futures markets and the securities markets, from
structural differences in how options and futures and securities are traded,
or from imposition of daily price fluctuation limits or trading halts. A
Fund may purchase or sell options and futures contracts with a greater or
lesser value than the securities it wishes to hedge or intends to purchase in
order to attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all
cases. If price changes in the Fund's options or futures positions are
poorly correlated with its other investments, the positions may fail to
produce anticipated gains or result in losses that are not offset by gains in
other investments.
Liquidity of Options and Futures Contracts -
Value Fund and Global Value Fund
- -------------------------------------------
There is no assurance a liquid secondary market will exist for any
particular options or futures contract at any particular time. Options may
have relatively low trading volume and liquidity if their strike prices are
not close to the underlying instrument's current price. In addition,
exchanges may establish daily price fluctuation limits for options and
futures contracts, and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when
the price fluctuation limit is reached or a trading halt is imposed, it may
be impossible for a Fund to enter into new positions or close out existing
positions. If the secondary market for a contract is not liquid because of
price fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require the Fund to continue to
hold a position until delivery or expiration regardless of changes in its
value. As a result, the Fund's access to other assets held to cover its
options or futures positions could also be impaired.
OTC Options - Value Fund and Global Value Fund
- ----------------------------------------------
Unlike exchange-traded options, which are standardized with respect to
the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the
option contract. While this type of arrangement allows a Fund greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded. The staff of
the SEC currently takes the position that OTC options are illiquid, and
investments by each Fund in those instruments are subject to each Fund's
limitation on investing no more than 10% of its assets in illiquid
instruments.
Option and Futures Relating to Foreign Currencies -
Value Fund and Global Value Fund
- --------------------------------------------------
Currency futures contracts are similar to forward currency exchange
contracts, except that they are traded on exchanges (and have margin
requirements) and are standardized as to contract size and delivery date.
Most currency futures contracts call for payment or delivery in U.S. dollars.
The underlying instrument of a currency option may be a foreign currency,
which generally is purchased or delivered in exchange for U.S. dollars, or
may be a futures contract. The purchaser of a currency call obtains the
right to purchase the underlying currency, and the purchaser of a currency
put obtains the right to sell the underlying currency.
The uses and risks of currency options and futures are similar to
options and futures relating to securities or indices, as discussed above.
The Funds may purchase and sell currency futures and may purchase and write
currency options to increase or decrease its exposure to different foreign
currencies. A Fund also may purchase and write currency options in
conjunction with each other or with currency futures or forward contracts.
Currency futures and options values can be expected to correlate with
exchange rates, but may not reflect other factors that affect the value of
the Fund's investments. A currency hedge, for example, should protect a Yen-
denominated security from a decline in the Yen, but will not protect the Fund
against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of each Fund's foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to
the value of the Fund's investments exactly over time. See "Foreign Currency
Transactions - Value Fund and Global Value Fund," above.
Asset Coverage for Futures and Options Positions -
Value Fund and Global Value Fund
- -------------------------------------------------
The Funds will comply with guidelines established by the SEC with
respect to coverage of options and futures strategies by mutual funds, and if
the guidelines so require will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option strategy is
outstanding, unless they are replaced with other suitable assets. As a
result, there is a possibility that segregation of large percentage of a
Fund's assets could impede Fund management or the Fund's ability to meet
redemption requests or other current obligations.
Short Sales - Value Fund and Global Value Fund
- ----------------------------------------------
Either Fund may enter into short sales with respect to stocks underlying
its convertible security holdings. For example, if Thornburg anticipates a
decline in the price of the stock underlying a convertible security a Fund
holds, it may sell the stock short. If the stock price subsequently
declines, the proceeds of the short sale could be expected to offset all or a
portion of the effect of the stock's decline on the value of the convertible
security. Each Fund currently intends to hedge no more than 15% of its total
assets with short sales on equity securities underlying its convertible
security holdings under normal circumstances. When the Fund enters into a
short sale, it will be required to set aside securities equivalent in kind
and amount to those sold short (or securities convertible or exchangeable
into such securities) and will be required to continue to hold them while the
short sale is outstanding. The Funds will incur transaction costs, including
interest expense, in connection with opening, maintaining , and closing short
sales.
INVESTMENT LIMITATIONS
Investment Limitations -
Limited Term National Fund and Limited Term California Fund
- -----------------------------------------------------------
Thornburg Limited Term Municipal Fund, Inc. has adopted the following
fundamental investment policies applicable to each of Limited Term National
Fund and Limited Term California Fund which may not be changed unless
approved by a majority of the outstanding shares of each Fund. Neither Fund
may:
(1) Invest in securities other than municipal obligations (including
participations therein) and temporary investments within the percentage
limitations specified 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 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 Thornburg, 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.
Neither of these Funds 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 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, a 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 each of these Funds has the right to pledge, mortgage or
hypothecate its assets in order to comply with certain state statutes on
investment restrictions, a 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 or the Limited Term
California 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, Intermediate New Mexico
Fund, Intermediate Florida Fund and Intermediate New York Fund
- ---------------------------------------------------------------------------
Thornburg Investment Trust has adopted the following fundamental
investment policies respecting Intermediate National Fund, Intermediate New
Mexico Fund, Intermediate Florida Fund and Intermediate New York Fund, which
may not be changed as to any of these Funds unless approved by a majority of
the outstanding shares of the Fund.
(1) Invest in securities other than municipal obligations (including
participations therein) and temporary investments within the percentage
limitations specified in the Prospectus;
(2) The Intermediate National Fund may not purchase any security if, as
a result, more than 5% of its total assets would be invested in securities of
any one issuer, excluding obligations of, or guaranteed by, the United States
government, its agencies, instrumentalities and authorities. Any of the
single state Intermediate Funds may invest more than 5% of its portfolio
assets in the securities of a single issuer provided that it may not purchase
any security (other than securities issued or guaranteed as to principal or
interest by the United States or its instrumentalities) if, as a result, more
than 5% of the Trust's total assets would be invested in securities of a
single issuer;
(3) Borrow money, except for temporary or emergency purposes and not
for investment purposes, and then only in an amount not exceeding 5% of the
value of the Fund's total assets at the time of borrowing;
(4) Pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by subparagraph (3) above;
(5) Issue senior securities as defined in the Investment Company Act of
1940, except insofar as 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 Funds from investing in municipal obligations
secured by real estate or interests therein;
(8) Purchase or sell commodities or commodity futures contracts or oil,
gas or other mineral exploration or development programs;
(9) Make loans, other than by entering into repurchase agreements and
through the purchase of municipal obligations or temporary investments in
accordance with its investment objectives, policies and limitations;
(10) Make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary for the clearance
of transactions;
(11) Write or purchase puts, calls, straddles, spreads or other
combinations thereof, except to the extent that securities subject to a
demand obligation or to a remarketing agreement may be purchased as set forth
in the Prospectus 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;
(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
Thornburg, 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 a 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 a 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 each Fund has the right to pledge, mortgage or hypothecate its
assets, each 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 a 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, 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, or in participations in such
obligations or repurchase agreements secured by such obligations, 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 Thornburg, 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, 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 non-fundamental policy 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
(together with other assets then segregated to cover the Fund's potential
obligations under its hedging, duration management, risk management and other
Strategic Transactions other than those with respect to futures and options
thereon) 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.
Investment Limitations - Value Fund and Global Value Fund
- ---------------------------------------------------------
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a Fund's assets that may be
invested in any security or other asset, that percentage limitation will be
determined immediately after and as a result of the Fund's acquisition of
such security or other asset. Accordingly, any subsequent change in values,
net assets, or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations.
As a matter of fundamental policy, a Fund may not:
(1) with respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by the
U.S. government or any of its agencies or instrumentalities) if, as a result,
(a) more than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except for temporary or emergency purposes or except
in connection with reverse repurchase agreements; in an amount not exceeding
33 1/3% of its total assets (including the amount borrowed) less liabilities
(other than borrowings). Any borrowings that come to exceed this amount will
be reduced within three days (not including Sundays and holidays) to the
extent necessary to comply with the 33 1/3% limitation;
(4) underwrite any issue of securities (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities);
(5) purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's total assets
would be invested in the securities of companies whose principal business
activities are in the same industry;
(6) purchase or sell real estate unless acquired as a result or
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate
or securities of companies engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options and futures contracts or from
investing in securities or other instruments backed by physical commodities)
; or
(8) lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
The following investment limitations are not fundamental and may be
changed without shareholder approval as to each Fund:
(i) The Fund does not currently intend to sell securities short, unless
it owns or has the right to obtain securities equivalent in kind and amount
to the securities sold short, and provided that transactions in futures
contracts and options are not deemed to constitute selling securities short.
(ii) The Fund does not currently intend to purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
(iii) The Fund may borrow money only (a) from a bank or (b) by engaging
in reverse repurchase agreements with any party. The Fund will not purchase
any security while borrowings representing more than 5% of its total assets
are outstanding.
(iv) The Fund does not currently intend to purchase any security if, as
a result, more than 10% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or disposed
of in the ordinary course of business at approximately the prices at which
they are valued.
(v) The Fund does not currently intend to purchase interests in real
estate investment trusts that are not readily marketable or interests in real
estate limited partnerships that are not listed on an exchange or traded on
the NASDAQ National Market System if, as a result, the sum of such interests
and other investments considered illiquid under the limitation in the
preceding paragraph would exceed the Fund's limitations on investments in
illiquid securities.
(vi) The Fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's commission is paid, or (b) purchase or retain
securities issued by other open-end investment companies. Limitations (a)
and (b) do not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
(vii) The Fund does not currently intend to purchase the securities of
any issuer (other than securities issue or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5%
of its total assets would be invested in the securities of business
enterprises that, including predecessors, have a record of less than three
years of continuous operation.
(viii) The Fund does not currently intend to purchase warrants, valued
at the lower of cost or market, in excess of 5% of the Fund's net assets.
Included in that amount, but not to exceed 2% of the Fund's net assets, may
be warrants that are not listed on the New York Stock Exchange or the
American Stock exchange. Warrants acquired by the Fund in units or attached
to securities are not subject to these restrictions.
(ix) The Fund does not currently intend to invest in oil, gas or other
mineral exploration or development programs or leases.
(x) The Fund does not currently intend to purchase the securities of
any issuer if those officers and Trustees of the trust and those officers and
directors of Thornburg who individually own more than 1/2 of 1% of the
securities of such issuer together own more than 5% of such issuer's
securities.
For each Fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions - Value
Fund and Global Value Fund."
YIELD AND RETURN COMPUTATION
Performance and Portfolio Information
- -------------------------------------
Each Fund will from time to time display performance information,
including yield, dividend returns total return, and average annual total
return, in advertising, sales literature, and reports to shareholders. Yield
is computed by dividing the Fund's net interest and dividend income for a
given 30 days or one month period by the maximum share offering price at the
end of the period. The result is "annualized" to arrive at an annual
percentage rate. In addition, the Fund may use the same method for 90 day or
quarterly periods. Total return is the change in share value over time,
assuming reinvestment of any dividends and capital gains. "Cumulative total
return" describes total return over a stated period, while "average annual
total return" is a hypothetical rate of return which, if achieved annually,
would have produced the same cumulative total return if performance had been
constant for the period shown. Average annual return tends to reduce
variations in return over the period, and investors should recognize that the
average figures are not the same as actual annual returns. The Fund may
display return information for differing periods without annualizing the
results and without taking sales charges into effect.
All performance figures are calculated separately for Class A, Class C
and Class D shares. The figures are historical, and do not predict future
returns. Actual performance will depend upon the specific investments held
by a Fund, and upon the Fund's expenses for the period.
Yield quotations 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.
For the Funds' investments denominated in foreign currencies, income and
expenses are calculated first in their respective currencies, and are then
converted to U.S. dollars, either when they are actually converted or at the
end of the 30-day or one month period, whichever is earlier. Capital gains
and losses generally are excluded from the calculation as are gains and
losses from currency exchange rate fluctuations.
Income calculated for the purposes of calculating the Funds' yields
differs from income as determined for other accounting purposes. Because of
the different accounting methods used, and because of the compounding of
income assumed in yield calculations, a Fund's yield may not equal its
distribution rate, the income paid to a shareholder's account, or the income
reported in the Fund's financial statements.
Yield information may be useful in reviewing a Fund's performance and in
providing a basis for comparison with other investment alternatives.
However, each Fund's yield fluctuates, unlike investments that pay a fixed
interest rate over a stated period of time. When comparing investment
alternatives, investors should also note the quality and maturity of the
portfolio securities of respective investment companies they have chosen to
consider.
Total returns quoted in advertising reflect all aspects of a Fund's
return, including the effect of reinvesting dividends and capital gain
distributions, and any change in the Fund's net asset value (NAV) over a
stated period. Average annual total returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in a
Fund over a stated period, and then calculating the annually compounded
percentage rate that would have produced the same result if the rate of
growth or decline in value had been constant over the period. For example, a
cumulative total return of 100% over ten years would produce an average
annual return of 7.18%, which is the steady annual rate of return that would
equal 100% growth on a compounded basis in ten years. While average annual
returns are a convenient means of comparing investment alternatives,
investors should realize that a Fund's performance is not constant over time,
but changes from year to year, and the average annual returns represent
averaged figures as opposed to the actual year-to-year performance of the
Fund. In addition to average annual total returns, a Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value
an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, or a series of
redemptions, over any time period. Total returns may be broken down into
their components of income and capital (including capital gains and changes
to share price) in order to illustrate the relationship of these factors and
their contributions to total return. Total returns may be quoted on a
before-tax or after-tax basis and may be quoted with or without taking a
Fund's maximum sales charge into account. Excluding a Fund's sales charge
from a total return calculation produces a higher total return figure. Total
returns, yields, and other performance information may be quoted numerically
or in a table, graph, or similar illustration.
A Municipal Fund, Government Fund or Income 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.
Charts and graphs using the Fund's net asset values, adjusted net asset
values, and benchmark indices may be used to exhibit performance. An
adjusted NAV includes any distributions paid by the Fund and reflects all
elements of its return. Unless otherwise indicated, the Fund's adjusted
NAV's are not adjusted for sales charges, if any.
The Funds may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV or total
return for a specified period. A short-term moving average NAV is the
average of each day's adjusted closing NAV for a specified period. Moving
average activity indicators combine adjusted closing NAV's from the last
business day of each week with moving averages for a specified period the
produce indicators showing when an NAV has crossed, stayed above, or stayed
below its moving average.
Each Fund's performance may be compared to the performance of other
mutual funds in general, or to the performance of particular types of mutual
funds. These comparisons may be expressed as mutual fund ranking prepared by
Lipper Analytical Services, Inc. (Lipper), an independent service located in
Summit, New Jersey that monitors the performance of mutual funds. Lipper
generally ranks funds on the basis of total return, assuming reinvestment of
distributions, but does not take sales charges or redemption fees into
consideration, and is prepared without regard to tax consequences. In
addition to the mutual fund rankings the Fund's performance may be compared
to stock, bond, and money market mutual fund performance indices prepared by
Lipper or other organizations. When comparing these indices, it is important
to remember the risk and return characteristics of each type of investment.
For example, while stock mutual funds may offer higher potential returns,
they also carry the highest degree of share price volatility. Likewise,
money market funds may offer greater stability of principal, but generally do
not offer the higher potential returns from stock mutual funds. From time to
time, the Fund's performance may also be compared to other mutual funds
tracked by financial or business publications and periodicals. For example,
the Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on
the basis of risk-adjusted performance. Rankings that compare the performance
of Thornburg funds to one another in appropriate categories over specific
periods of time may also be quoted in advertising. Performance rankings and
ratings reported periodically in financial publications such as "MONEY"
magazine, "Forbes" and "BARRON's" also may be used. These performance
analyses ordinarily do not take sales charges into consideration and are
prepared without regard to tax consequences.
Each Fund may be compared in advertising to Certificates of Deposit
(CD's) or other investments issued by banks or other depository institutions.
Mutual funds differ from bank investments in several respects. For example,
while a Fund may offer greater liquidity or higher potential returns than
CD's, a Fund does not guarantee a shareholder's principal or return, and Fund
shares are not FDIC insured.
Thornburg may provide information designed to help individuals
understand their investment goals and explore various financial strategies.
Such information may include information about current economic market, and
political conditions; materials that describe general principles of
investing, such as asset allocation, diversification, risk tolerance, and
goal setting; questionnaires designed to help create a personal financial
profile; worksheets used to project savings needs bases on assumed rates of
inflation and hypothetical rates of return; and action plans offering
investment alternatives. Materials may also include discussions of other
Thornburg mutual funds.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate
of inflation (based on the CPI), and combinations of various capital markets.
The performance of these capital markets is based on the returns of differed
indices.
The Funds may use the performance of these capital markets in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any of
these capital markets. The risks associated with the security types in the
capital market may or may not correspond directly to those of a Fund. A Fund
may also compare performance to that of other compilations or indices that
may be developed and made available in the future, and advertising, sales
literature and shareholder reports also may discuss aspects of periodic
investment plans, dollar cost averaging and other techniques for investing to
pay for education, retirement and other goals. In addition, a Fund may quote
or reprint financial or business publications and periodicals, including
model portfolios or allocations, as they relate to current economic and
political conditions, fund management, portfolio composition, investment
philosophy, investment techniques and the desirability of owning a particular
mutual fund. A Fund may present its fund number, Quotron (trademark) number,
and CUSIP number, and discuss or quote its current portfolio manager.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds may compare these
measures to those of other funds. Measures of volatility seek to compare a
Fund's historical share price fluctuations or total returns to those of a
benchmark. Measures of benchmark correlation indicate how valid a
comparative benchmark may be. All measures of volatility and correlation are
calculated using averages of historical data. In advertising, a Fund may
also discuss or illustrate examples of interest rate sensitivity.
Momentum Indicators show a Fund's price movements over specific periods
of time. Each point on the momentum indicator represents the Fund's
percentage change in price movements over that period. A Fund may advertise
examples of the effects of periodic investment plans, including the principle
of dollar cost averaging. In such a program, an investor invests a fixed
dollar amount in a fund at periodic intervals, thereby purchasing fewer
shares when prices are high and more shares when prices are low. While such
a strategy does not assure a profit or guard against loss in a declining
market, the investor's average cost per share can be lower than if fixed
numbers of shares are purchased at the same intervals. In evaluating such a
plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. The Funds may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.
For example, a $1,000 investment earning a taxable return of 10% annually
would have an after-tax value of $1,949 after ten years, assuming tax was
deducted from the return each year at a 31% rate. An equivalent tax-deferred
investment would have an after-tax value of $2,100 after ten years, assuming
tax was deducted at a 31% rate from the tax-deferred earnings at the end of
the ten-year period.
REPRESENTATIVE PERFORMANCE INFORMATION
Representative Performance Information -
Limited Term National Fund (Class A and C)
- ------------------------------------------
The following data for Limited Term National Fund represent past
performance, and the investment return and principal value of an investment
in the Fund will fluctuate. An investor's shares, when redeemed, may be
worth more or less than their original cost.
Standardized Method of Computing Yield. The yield of the Limited Term
National Fund Class A and Class C shares for the 30-day period ended June 30,
1999, computed in accordance with the standardized calculation described
above, was 3.28% and 5.43% for Class A and Class C shares, respectively.
Taxable Equivalent Yield. The Limited Term National Fund's taxable
equivalent yield, computed in accordance with the standardized method for the
30-day period ending June 30, 1999, using a maximum federal tax rate of
39.6%, was 6.06% and 5.43% for Class A and Class C shares, respectively.
Average Annual Total Return. The average annual total returns for
Limited Term National Fund for Class A and Class C shares are set forth for
the periods ending June 30, 1999. Shares denoted as Class A were first
offered on September 28, 1984, and Class C shares were first offered on
September 1, 1994. This computation assumes that an investor reinvested all
dividends, and further assumes the deduction of the maximum sales commission
of 1.50% imposed on Class A shares. Class C shares are subject to a
contingent deferred sales charge if redeemed within one year of purchase, and
the one-year return figure below reflects deduction of the sales charge.
"Total return," unlike the standardized yield figures shown above, takes into
account changes in net asset value over the periods shown.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A 1.01% 4.37% 5.56% 6.60%
Class C 1.58% N/A N/A 4.16%
Representative Performance Information -
Limited Term California Fund (Class A and C)
- --------------------------------------------
The following data for Limited Term California Fund represent past
performance, and the investment return and principal value of an investment
in the fund will fluctuate. An investor's shares, when redeemed, may be
worth more or less than their original cost.
Standardized Method of Computing Yield. The Limited Term California
Fund's yields for the 30-day period ended on June 30, 1999, computed in
accordance with the standardized calculation described above, were 3.30% and
2.94% for Class A and Class C shares, respectively. This method of computing
yield does not take into account changes in net asset value.
Taxable Equivalent Yield. The Limited Term California Fund's taxable
equivalent yield for the 30-day period ended on June 30, 1999, computed in
accordance with the standardized method described above, using a maximum
federal tax rate of 39.6% and a maximum California tax rate of 9.3%, was
6.46% and 5.75% for Class A and Class C shares, respectively.
Average Annual Total Return. The average annual total returns for
Limited Term California Fund for Class A and Class C shares are set forth for
the periods ending June 30, 1999. Shares denoted as Class A were first
offered on February 19, 1987, and Class C shares were first offered on
September 1, 1994. This computation assumes that an investor reinvested all
dividends, and further assumes the deduction of the maximum sales charge of
1.50% imposed upon purchases of Class A shares. Class C shares are subject
to a contingent deferred sales charge if redeemed within one year of
purchase, and the one-year return figure below reflects deduction of the
sales charge. "Total return," unlike the standardized yield figures shown
above, takes into account changes in net asset value over the periods shown.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A 1.40% 4.50% 5.47% 5.67%
Class C 2.06% N/A N/A 4.39%
Representative Performance Information -
Intermediate National Fund (Class A and C)
- ------------------------------------------
The following data for Intermediate National Fund represent past
performance, and the investment return and principal value of an investment
in the Fund will fluctuate. An investor's shares, when redeemed, may be
worth more or less than their original cost.
Standardized Method of Computing Yield. The Intermediate National Fund
yields for the 30-day period ended on September 30, 1999, computed in
accordance with the standardized calculation described above, were 4.03% and
3.70% for Class A and Class C shares, respectively. This method of computing
yield does not take into account changes in net asset value.
Taxable Equivalent Yield. The Intermediate National Fund's taxable
equivalent yields for 30-day period ended on September 30, 1999, computed in
accordance with the standardized method using a maximum federal tax rate of
39.6%, were 6.16% and 6.71% for Class A and Class C shares, respectively.
Average Annual Total Return. The Intermediate National Fund's Class A
and Class C total return figures are set forth below for the periods shown
ended September 30, 1999. Class A shares were first offered on July 23,
1991, and Class C shares were first offered on September 1, 1994. The data
for Class A shares reflect deduction of the maximum sales charge of 2.00%
upon purchase. The data for Class C shares held for one year reflect
deduction of a contingent deferred sales charge of .50%. These data assume
reinvestment of all dividends at net asset value.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A (3.06) 5.05% N/A 6.09% (7/23/91)
Class C (1.98) 5.02% N/A 4.73% (9/1/94)
Representative Performance Information -
Intermediate New Mexico Fund (Class A and Class D)
- --------------------------------------------------
The following data for Intermediate New Mexico Fund represents past
performance, and the investment return and principal value of an investment
in the Fund will fluctuate. An investor's shares, when redeemed, may be
worth more or less than their original cost.
Standardized Method of Computing Yield. The yields of the Intermediate
New Mexico Fund for the 30-day period ended September 30, 1999, computed in
accordance with the standardized calculation described above, were 3.89% and
3.71% for Class A and Class D shares, respectively. This method of computing
yield does not take into account changes in net asset value.
Taxable Equivalent Yield. The Intermediate New Mexico Fund's taxable
equivalent yields, computed in accordance with the standardized method
described above for the 30-day period ended September 30, 1999, using a
maximum federal tax rate of 39.6% and a maximum New Mexico tax rate of 8.5%,
were 7.04% and 6.71% for Class A and D shares, respectively.
Average Annual Total Return. The Intermediate New Mexico Fund's Class A
and Class D total return figures are set forth below for the periods shown
ending September 30, 1999. Class A shares were first offered on June 21,
1991, and Class D shares were first offered on June 1, 1999. The data for
Class A shares reflect deduction of the maximum sales charge of 2.00% upon
purchase. These data assume reinvestment of all dividends at net asset
value.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A (1.43)% 4.73% N/A 5.69% (6/21/91)
Class D N/A N/A N/A (0.64)% (6/1/99)
Representative Performance Information -
Intermediate Florida Fund (Class A)
- ---------------------------------------
The following data for Intermediate Florida fund represents past
performance, and the investment return and principal value of an investment
in the fund will fluctuate. An investor's shares, when redeemed, may be
worth more or less than their original cost.
Standardized Method of Computing Yield. The yield of the Intermediate
Florida Fund Class A shares for the 30-day period ended September 30, 1999,
computed in accordance with the standardized calculation described above, was
3.78%. This method of computing yield does not take into account changes in
net asset value.
Taxable Equivalent Yield. The Intermediate Florida Fund's taxable
equivalent yield for Class A, computed in accordance with the standardized
method described above for the 30-day period ended September 30, 1999, using
a maximum federal tax rate of 39.6%, was 6.46%.
Average Annual Total Return. The Intermediate Florida Fund's Class A
total return figures are set forth below for the periods shown ending
September 30, 1999. Class A shares were first offered on February 1, 1994.
The data for Class A shares reflect deduction of the maximum sales charge of
2.00% upon purchase. These data also assume reinvestment of all dividends at
net asset value.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A (2.33)% 4.90% N/A 4.14% (2/1/94)
Representative Performance Information -
Intermediate New York Fund (Class A)
- --------------------------------------
The Following Data for Intermediate New York Fund represents past
performance, and the investment return and principal value of an investment
in the fund will fluctuate. An investor's shares, when redeemed, may be
worth more or less than their original cost.
Standardized Method of Computing Yield. The yield of the Intermediate
New York Fund Class A shares for the one month period ended June 30, 1999,
computed in accordance with the standardized calculation described above, was
3.85%. This method of computing yield does not take into account changes in
net asset value.
Taxable Equivalent Yield. The Intermediate New York Fund's taxable
equivalent yield for Class A, computed in accordance with the method
described above, using a maximum federal tax rate of 39.6%, a maximum New
York State tax rate of 6.85% and a maximum New York City tax rate of 4.46%,
was 7.19% for the one-month period ended on June 30, 1999.
Average Annual Total Return. The Intermediate New York Fund's Class A
total return figures are set forth below for the periods shown ending June
30, 1999. Class A shares were first offered on September 4, 1997. The data
for Class A shares reflect deduction of the maximum sales charge of 2.00%
upon purchase. These data also assume reinvestment of all dividends at net
asset value.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A 0.33% N/A N/A 3.38% (9/4/97)
Representative Performance Information - Government Fund (Class A and C)
- ------------------------------------------------------------------------
The following data for the Government Fund represent past performance,
and the investment return and principal value of an investment in a Fund will
fluctuate. An investor's shares, when redeemed, may be worth more or less
than their original cost.
Standardized Method of Computing Yield. Government Fund's yields for
Class A shares and Class C shares, computed for the 30-day period ended
September 30, 1999 in accordance with the standardized calculation described
above, were 5.43% and 5.05% for Class A and Class C shares, respectively.
This method of computing yield does not take into account changes in net
asset value.
Government Fund's average annual total returns for Class A shares and
Class C shares, computed in accordance with the total return calculation
described above, are displayed in the table below for the periods shown
ending September 30, 1999. Government Fund commenced sales of its Class A
shares on November 6, 1987, and commenced sales of Class C shares on
September 1, 1994. "Total return," unlike the standardized yield figures
shown above, takes into account changes in net asset value over the described
periods. The Class A total return figures assume the deduction of the
maximum sales commission of 1.50% on Class A shares. Class C shares sold on
or after October 2, 1995 are subject to a contingent deferred sales charge of
.50% if redeemed within one year of purchase. This sales charge was deducted
in computing the one-year return figure shown below. These data also assume
reinvestment of all dividends at net asset value.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A (1.01)% 5.77% 6.47% 6.65% (11/6/87)
Class C (0.13)% 5.63% N/A 5.43% (9/1/94)
Representative Performance Information -
Income Fund (Class A and Class C Shares)
- ------------------------------------------
The following data for the Income Fund represent past performance, and
the investment return and principal value of an investment in a Fund will
fluctuate. An investor's shares, when redeemed, may be worth more or less
than their original cost.
Yield Computations
Standardized Method of Computing Yield. Income Fund's yields for Class
A and Class C shares, computed for the 30-day period ended September 30, 1999
in accordance with the standardized calculation described above, were 5.61%
and 5.30% for Class A and Class C shares, respectively. This method of
computing yield does not take into account changes in net asset value.
Income Fund's average annual total returns for Class A shares and Class
C shares, computed in accordance with the total return calculation described
above are displayed in the table below for the periods shown ending September
30, 1999. Income Fund commenced sales of its Class A shares on October 1,
1992, and commenced sales of Class C shares on September 1, 1994. "Total
return," unlike the standardized yield figures shown above, takes into
account changes in net asset value over the described periods. The Class A
total return figures assume the deduction of the maximum sales commission of
1.50% on Class A shares. Class C shares are subject to a contingent deferred
sales charge of .50% if redeemed within one year of purchase. This sales
charge was deducted in computing the one-year return figure shown below.
These data also assume reinvestment of all dividends at net asset value.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A (0.50)% 6.12% N/A 5.66% (10/1/92)
Class C 0.68% 6.05% N/A 5.80% (09/1/94)
Representative Performance Information -
Value Fund (Class A and Class C Shares)
- -----------------------------------------
Value Fund's average annual total returns for Class A and Class C
shares, computed in accordance with the total return calculation described
above, are displayed in the table below for the periods shown ending
September 30, 1999. Value Fund commenced sales of its Class A and Class C
shares on October 2, 1995. No information is currently available for Class B
shares. The Class A total return figures assume the deduction of the maximum
sales charge of 4.50% on Class A shares. Class C shares are subject to a
contingent deferred sales charge of 1.00% if redeemed within one year of
purchase. This sales charge was deducted in computing the one-year return
figure shown below. These data also assume reinvestment of all dividends and
capital gains distributions of net asset value.
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
Class A 29.45% N/A N/A 24.73% (10/2/95)
Class C 33.52% N/A N/A 25.20% (10/2/95)
Representative Performance Information - Global Value Fund (Class A and Class
C Shares)
- ------------------------------------------------------------------------
Global Value Fund's average annual total returns for Class A and Class C
shares, computed in accordance with the total return calculation described
above, are displayed in the table below for the periods shown ending
September 30, 1999. Global Value Fund commenced sales of its Class A and
Class C shares on May 28, 1998. No information is currently available for
Class B shares. The Class A total return figures assume the deduction of the
maximum sales charge of 4.50% on Class A shares. Class C shares are subject
to a contingent deferred sales charge of 1.00% if redeemed within one year of
purchase. This sales charge was deducted in computing the one-year return
figure shown below. These data also assume reinvestment of all dividends and
capital gains distributions of net asset value.
Since
1 Year 5 Years 10 Years Inception
------ ------- ------- ---------
Class A 27.79% N/A N/A 3.74% (5/28/98)
Class C 31.59% N/A N/A 6.31% (5/28/98)
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 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.
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.
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.
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 each 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
income 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 added to his or her "modified adjusted gross income" in
determining what portion, if any, of the individual's Social Security
benefits will be subject to federal income taxation. Shareholders are
advised to consult their own tax advisers as to the effect of this treatment.
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.
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. If
the redemption or resale occurs after 1997, and the shareholder held the
shares as capital assets, the gain or loss will be long-term if the shares
were held for more than 12 months, and any such long-term gain will be
subject to a maximum federal income tax rate of 20% to the extent that gain
exceeds any net short-term capital losses realized by the taxpayer.
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 Municipal Funds and their individual shareholders, and
this summary primarily addresses tax consequences to individual 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.
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.
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 exemption from the State of California personal income taxes for
distributions of interest income in the Limited Term California Fund applies
only to shareholders who are residents of the State of California, and only
to the extent such income qualifies as "exempt-interest dividends" under
Section 17145 of the California Revenue and Taxation Code and is not derived
from interest on obligations from any state other than from California or its
political subdivisions.
Distributions by Intermediate New Mexico Fund attributable to interest on
obligations of the State of New Mexico and its political subdivisions and
their agencies (and interest on obligations of certain United States
territories and possessions) will not be subject to individual income taxes
imposed by the State of New Mexico. Capital gains distributions will be
subject to the New Mexico personal income tax.
Florida does not currently impose an individual income tax. Florida
imposes a personal property or "intangibles" tax which is generally
applicable to securities owned by individual residents in Florida, but the
intangibles tax will not apply to Intermediate Florida Fund shares if the
Fund's assets as of the close of the preceding taxable year consist only of
cash, obligations of Florida and its political subdivisions, and obligations
of the United States, Puerto Rico, Guam and the United States Virgin Islands.
Distributions by Intermediate New York Fund attributable to interest on
obligations of the State of New York, its agencies and political subdivisions
(and interest on obligations of certain United States territories and
possessions) is excluded in determining the New York adjusted gross income of
individuals resident in New York. These distributions are similarly
excludable by individuals resident in New York City for purposes of computing
the New York City income tax.
Distributions by Intermediate National Fund will be subject to treatment
under the laws of the different states and local taxing authorities.
Shareholders should consult their own tax advisors in this regard.
Investors who are not individuals are advised that the preceding
discussion relates primarily to tax consequences affecting individuals, and
the tax consequences of an investment by a person which is not an individual
may be very different. 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 - Income Funds
- -----------------------------------
Each of the 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. If
the redemption or resale occurs after 1997, and the shareholder held the
shares as capital assets, the gain or loss will be long-term if the shares
were held for more than 12 months, and any such long-term gain will be
subject to a maximum federal income tax rate of 20% to the extent that gain
exceeds any net short-term capital losses realized by the taxpayer. If any
capital gain distribution by a Fund represents gain on the sale of property
before 1998, the shareholder receiving the distribution may have to pay
federal income tax at a rate of 28% if the property was owned for more than a
year but not more than 18 months when sold.
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 Code and Treasury Regulations presently in effect as they directly govern
the taxation of the Taxable Income Funds and their individual shareholders,
and this summary primarily addresses tax consequences to individual
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 - Income Funds
- --------------------------------------------------------
A portion of each Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. 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.
Federal Income Taxes - Value Fund and Global Value Fund
- -------------------------------------------------------
Gains (losses) attributable to foreign currency fluctuations are
generally taxable as ordinary income and therefore will increase (decrease)
dividend distributions. Net short-term capital gains are distributed as
dividend income. Value Fund and Global Value Fund will send each shareholder
a notice in January describing the tax status of dividends and capital gain
distributions for the prior year.
Long-term capital gains earned by the Funds on the sale of securities
and distributed to shareholders are federally taxable as long-term capital
gains, regardless of the length of time shareholders have held their shares.
If a shareholder receives a long-term capital gain distribution on shares of
the Value Fund and such shares are held 12 months or less and are sold at a
loss, the portion of the loss equal to the amount of the long-term capital
gain distribution will be considered a long-term loss for tax purposes. Net
short-term capital gains distributed by the Fund are taxable to shareholders
as dividends, not as capital gains.
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. If
the redemption or resale occurs after 1997, and the shareholder held the
shares as capital assets, the gain or loss will be long-term if the shares
were held for more than 12 months, and any such long-term gain generally will
be subject to a maximum federal income tax rate of 20% to the extent that
gain exceeds any net short-term capital losses realized by the taxpayer.
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.
Foreign governments may withhold taxes on dividends and interest paid
with respect to foreign securities typically at a rate between 10% and 35%.
Foreign governments may also impose taxes on other payments or gains with
respect to foreign securities. Because Value Fund does not currently
anticipate that securities of foreign issuers will constitute more than 50%
of its total assets at the end of its fiscal year, shareholders of Value Fund
should not expect to claim a foreign tax credit or deduction on their federal
income tax returns with respect to foreign taxes withheld.
The foregoing is a general and abbreviated summary of the provisions of
the Code and Treasury Regulations currently in effect as they directly govern
the income taxation of Fund shareholders. This summary primarily addresses
income tax consequences to shareholders who are individuals. The Code and
Regulations are subject to change at any time, in some cases retroactively.
Shareholders are advised to consult their own tax advisers for more detailed
information concerning the federal tax consequences of an investment in the
Value Fund.
State and Local Income Tax Considerations -
Value Fund and Global Value Fund
- ---------------------------------------------
Shareholders may be subject to state and local taxes on Fund
distributions, and capital gains taxation on disposition of shares. Shares
also may be subject, in some jurisdictions, to state and local property
taxes. A portion of the Value Fund's dividends derived from certain U.S.
Government obligations may be exempt from state and local taxation.
Shareholders should consult their own tax advisers for information concerning
the state and local taxation of an investment in Value Fund and Global Value
Fund.
DISTRIBUTIONS AND SHAREHOLDERS ACCOUNTS
When an investor or the investor's financial advisor 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 or financial advisor 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 or the
financial advisor 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 or quarterly 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 periodic 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.
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.
INVESTMENT ADVISER, INVESTMENT ADVISORY AGREEMENTS,
AND ADMINISTRATIVE SERVICES AGREEMENTS
Investment Advisory Agreement
Pursuant to an Investment Advisory Agreement in respect of each Fund,
Thornburg Investment Management, Inc. ("Thornburg"), 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, each 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 Limited Term California Fund, and subject to the general
supervision and control of the trustees of Thornburg Investment Trust with
respect to Intermediate National Fund, Intermediate New Mexico Fund,
Intermediate Florida Fund, Intermediate New York Fund, Government Fund,
Income Fund, Value Fund, and Global Value Fund. Thornburg is also a
subadviser to Daily Tax-Free Income Fund, Inc., a registered investment
company.
Thornburg is paid a fee by each Fund, in the percentage amounts set
forth in the table below:
- -----------------------------------------------------------
Limited Term National Fund and Limited Term California Fund
- -----------------------------------------------------------
Net Assets of Fund Advisory Fee Rate
- ------------------ -----------------
0 to $500 million .50%
$500 million to $1 billion .40%
$1 billion to $1.5 billion .30%
$1.5 billion to $2 billion .25%
Over $2 billion .225%
- ----------------------------------------------------------------------
Intermediate National Fund, Intermediate New Mexico Fund, Intermediate
- ----------------------------------------------------------------------
Florida Fund, Intermediate New York Fund, and Income Fund
- ----------------------------------------------------------------------
Net Assets of Fund Advisory Fee Rate
- ------------------ -----------------
0 to $500 million .50%
0$500 million to $1 billion .45%
$1 billion to $1.5 billion .40%
$1.5 billion to $2 billion .35%
Over $2 billion .275%
- ---------------
Government Fund
- ---------------
Net Assets of Fund Advisory Fee Rate
- ------------------ -----------------
0 to $1 billion .375%
$1 billion to $2 billion .325%
Over $2 billion .275%
- --------------------------------
Value Fund and Global Value Fund
- --------------------------------
Net Assets of Fund Advisory Fee Rate
- ------------------ -----------------
0 to $500 million .875%
$500 million to $1 billion .825%
$1 billion to $1.5 billion .775%
$1.5 billion to $2 billion .725%
Over $2 billion .625%
- ---------------------------------------------------------------------------
The fee paid by each Fund is allocated among the different classes of
shares offered by the Fund based upon the average daily net assets of each
class of shares. All fees and expenses are accrued daily and deducted before
payment of dividends. In addition to the fees of Thornburg, 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 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 each of
Limited Term National Fund and Limited Term California 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 each of Intermediate National Fund, Intermediate New Mexico
Fund, Intermediate Florida Fund, Intermediate New York Fund, Government Fund,
Income Fund, Value Fund and Global Value Fund.
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 Thornburg 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 Thornburg, or of
reckless disregard of its obligations and duties under the Agreement,
Thornburg will not be liable for any action or failure to act in accordance
with its duties thereunder.
For the three most recent fiscal years with respect to each Fund, the
amounts paid to Thornburg by each Fund under the Investment Advisory
Agreement applicable to each Fund were as follows:
June 30, 1997 June 30, 1998 June 30, 1999
------------- ------------- -------------
Limited Term National Fund $4,159,938 $4,213,345 $4,227.634
Limited Term California Fund $496,821 $649,445 $651,326
Intermediate New York Fund N/A $19,857 $22,267
Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1998
-------------- -------------- --------------
Intermediate National Fund $1,446,809 $1,248,058 $1,855,808
Intermediate New Mexico Fund $688,883 $606,946 $752,824
Intermediate Florida Fund -0- $45,786 $99,858
Government Fund $678,979 $529,056 $521,022
Income Fund $150,436 $170,199 $228,636
Value Fund $105,914 $376,424 $1,214,207
Global Value Fund N/A N/A $22,883
Thornburg has waived its rights to fees in the foregoing periods as follows:
June 30, 1997 June 30, 1998 June 30, 1999
------------- ------------- -------------
Limited Term National Fund $0 0 0
Limited Term California Fund $27,360 0 $31,212
Intermediate New York Fund N/A $89,203 $104,116
Sept. 30, 1997 Sept. 30, 1998 Sept. 30, 1999
-------------- -------------- -------------
Intermediate National Fund $144,709 0 $110,220
Intermediate New Mexico Fund $61,752 0 $39,618
Intermediate Florida Fund $70,565 0 $111,985
Government Fund 0 0 0
Income Fund 0 0 $106,598
Value Fund 0 0 0
Global Value Fund N/A 0 $43,472
The foregoing figures for the time periods before July 1, 1996 reflect,
in whole or in part, fee rates applicable before a restatement of the
Investment Advisory Agreement for each Fund, which reduced the fee rates then
applicable to each Fund. Thornburg 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, 1999,
Limited Term National Fund and Limited Term California Fund each reimbursed
Thornburg $88,975 and $13,207, respectively, for accounting expenses incurred
on behalf of each Fund, during the fiscal year ended June 30, 1999,
Intermediate New York Fund reimbursed Thornburg $2,407 for accounting
services, and during the fiscal year ended September 30, 1998, Intermediate
National Fund, Intermediate New Mexico Fund and Intermediate Florida Fund,
Government Fund, Income Fund and Global Value Fund each reimbursed Thornburg
$39,514, $16,282, $2,853, $15,952, $5,309 and $474, 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
Thornburg.
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 regulatory
compliance and legal affairs, 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 Class A, Class C,
and Class D shares provides that the class will pay a fee calculated at an
annual percentage of .125% 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 Thornburg.
For the three most recent fiscal years with respect to each Fund, the
amounts paid to Thornburg by each Fund under the Administrative Services
Agreement applicable to Class A, Class B, Class C and Class D shares offered
by each Fund were as follows:
<TABLE>
June 30, 1997 June 30, 1998 June 30, 1999
------------- ------------- ------------
<S> <C> <C> <C>
Limited Term National Fund
Class A $1,013,060 $1,067,228 $1,032,057
Class C $21,000 $25,308 $32,214
Limited Term California Fund
Class A $108,917 $144,672 $147,428
Class C $4,366 $9,139 $10,030
Intermediate New York Fund
Class A N/A $27,265* $31,596
Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1998
-------------- -------------- --------------
Intermediate National Fund
Class A $467,570 $329,737 $421,366
Class C $32,866 $11,773 $19,241
Intermediate New Mexico Fund
Class A $197,336 $167,174 $188,206
Class D $255 N/A N/A
Intermediate Florida Fund
Class A $37,871 $29,088 $32,028
Government Fund
Class A $150,667 $170,871 $162,998
Class C $9,148 $4,909 $5,909
Income Fund
Class A $47,232 $33,817 $41,718
Class C $8,923 $5,702 $8,171
Value Fund
Class A $319,626 $48,098 $143,043
Class B N/A N/A N/A
Class C $106,392 $5,667 $30,145
Global Value Fund
Class A $15,950 N/A $3,075**
Class B N/A N/A N/A
Class C $2,103 N/A $194**
* Fiscal period September 5, 1997 to June 30, 1998
** Fiscal period May 28, 1998 to September 30, 1998
</TABLE>
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 AND DISTRIBUTION PLANS
Service Plans - All Classes
Each of the Funds has adopted a plan and agreement of distribution
pursuant to Rule 12b-1 under the Investment Company Act of 1940 ("Service
Plan") which is applicable to Class A and, if offered by that Fund, Class B,
Class C and Class D of the Fund. The Plan permits each Fund to pay to
Thornburg (in addition to the management fee and reimbursements described
above) an annual amount not exceeding .25 of 1% of the Fund's assets to
reimburse Thornburg for specific expenses incurred by it in connection with
certain shareholder services and the distribution of that Fund's shares to
investors. Thornburg may, but is not required to, expend additional amounts
from its own resources in excess of the currently reimbursable amount of
expenses. Reimbursable expenses include the payment of amounts, including
incentive compensation, to securities dealers and other financial
institutions, including banks (to the extent permissible under the
Glass-Steagall Act and other federal banking laws), for administration and
shareholder services. The nature and scope of services provided by dealers
and other entities likely will vary from entity to entity, but may include,
among other things, processing new account applications, preparing and
transmitting to the Transfer Agent computer processable tapes of shareholder
account transactions, and serving as a source of information to customers
concerning the Funds and transactions with the Funds. The Service Plan does
not provide for accrued but unpaid reimbursements to be carried over and
reimbursed to Thornburg in later years.
The Funds paid to Thornburg the amounts shown in the table below under
the Service Plan for the fiscal years shown below. All amounts received by
Thornburg under the Plan were paid principally as compensation to securities
dealers and other persons selling the Funds' shares for administration and
shareholder services referred to in the preceding paragraph.
<TABLE>
Year Ended Year Ended
June 30, 1998 June 30, 1999
-------------- -------------
<S> <C> <C>
Limited Term National Fund
Class A $2,134,444 $2,064,113
Class C $50,626 $64,427
Limited Term California Fund
Class A $289,344 $294,856
Class C $18,292 $20,060
Intermediate New York Fund
Class A N/A $63,192
Year Ended Year Ended
Sept. 30, 1998 Sept. 30, 1999
-------------- --------------
<S> <C> <C>
Intermediate National Fund
Class A $802,947 $888,339
Class C $53,876 $65,713
Intermediate New Mexico Fund
Class A $360,716 $378,246
Class D N/A $489
Intermediate Florida Fund
Class A $61,932 $74,228
Government Fund
Class A $315,717 $290,728
Class C $49,021 $18,298
Income Fund
Class A $78,430 $89,287
Class C $35,704 $17,840
Value Fund
Class A $286,087 $639,251
Class B N/A N/A
Class C $182,569 $212,784
Global Value Fund
Class A $6,151 $31,899
Class B N/A N/A
Class C $397 $4,205
</TABLE>
Each Fund offering Class B shares has adopted a plan and agreement of
distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940,
applicable only to the Class B shares of that Fund ("Class B Distribution
Plan"). The Class B Distribution Plan provides for the Fund's monthly
reimbursement of the Distributor for distribution expenses incurred by the
Distributor of an annual distribution fee of up to .75% of the average daily
net assets attributable to the Fund's Class B shares. The Class B
Distribution Plan also provides that all contingent deferred service charges
collected on redemptions of Class B shares of the Fund will be paid to the
Distributor, in addition to the monthly amounts described in the preceding
sentences.
The purpose of the Class B Distribution Plan is to reimburse the
Distributor for its services in promoting the sales of Class B shares of the
Fund. The Distributor expects to pay commissions to dealers upon sales of
Class B shares, and will utilize amounts received under the Class B
Distribution Plan for this purpose and to repay borrowings (and interest
thereon) incurred to pay commissions to dealers. The Distributor also may
incur additional distribution related expenses in connection with its
promotion of Class B share sales, including payment of incentive
compensation, advertising and other promotional activities and the hiring of
other persons to promote sales of shares.
The Class B Distribution Plan does not provide for accrued but unpaid
reimbursements to be carried over and reimbursed to the Distributor in later
years. Upon a termination of a Fund's Class B Distribution Plan, the
trustees or the directors of the Fund could (but are not required to)
authorize the Fund to continue to make payments to the Distributor to the
extent of some or all of the Distributor's unreimbursed expenses under the
Plan.
No amounts have been paid under any current Class B Distribution Plan in
the last two fiscal years of any Fund.
Class C and Class D Distribution Plans
Each Fund offering Class C shares or Class D shares has adopted a plan
and agreement of distribution pursuant to Rule 12b-1 under the Investment
Company Act of 1940, applicable only to the Class C, or Class D, if
applicable, shares of that Fund ("Distribution Plan"). The Distribution Plan
provides for the Fund's payment to the Fund's principal underwriter,
Thornburg Securities Corporation ("TSC") on a monthly basis of an annual
distribution fee of .75% of the average daily net assets attributable to the
Fund's Class C shares.
The purpose of the Distribution Plan applicable to each Fund is to
compensate TSC for its services in promoting the sale of Class C or Class D
shares of the Fund. TSC expects to pay compensation to dealers and others
selling Class C and Class D shares from amounts it receives under the
Distribution Plan. TSC also may incur additional distribution-related
expenses in connection with its promotion of Class C or Class D shares sales,
including payment of additional incentives to dealers, advertising and other
promotional activities and the hiring of other persons to promote the sale of
shares. Because each Distribution Plan is a compensation type plan, TSC can
earn a profit on any year when Fund payments exceed TSC's actual expenses.
The Funds are not liable for any expenses incurred by TSC in excess of the
compensation it received from the Fund.
Each of the Funds named below paid to TSC or for the account of TSC the
amounts shown in the table below under the Distribution Plan for each of
those Funds for the fiscal years shown below. All amounts received by or for
TSC under the Plan were paid principally as compensation (as reimbursed for
compensatory previously paid) to securities dealers and other persons selling
the Funds' shares. Each of the Distribution Plans referred to below is
applicable to Class C shares, except for plan applicable to Class D shares of
Intermediate New Mexico Fund.
<TABLE>
Year Ended Year Ended
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Limited Term National Fund $75,916 $96,641
Limited Term California Fund $63,985 $30,091
Year Ended Year Ended
Sept. 30, 1998 Sept. 30, 1999
-------------- --------------
Intermediate National Fund $38,480 $197,139
Government Fund $11,816 $ 54,893
Income Fund $16,341 $ 53,520
Value Fund $60,750 $790,384
Global Value Fund $1,152 $ 12,616
Intermediate New Mexico Fund
(Class D) N/A $ 531
</TABLE>
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of each of the Funds by the Funds' investment adviser, Thornburg
Investment Management, Inc. (Thornburg) pursuant to its authority under each
Fund's investment advisory agreement. Thornburg also is responsible for the
placement of transaction orders for other clients for whom it acts as
investment adviser.
Thornburg, in effecting purchases and sales of portfolio securities for
the account of each of the Municipal Funds and the Income Funds, place orders
in such a manner as, in the opinion of Thornburg, offers 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.
Similarly, Thornburg places orders for transactions in portfolio
securities for Value Fund and Global Value Fund in such a manner as, in the
opinion of Thornburg, will offer the best price and market for the execution
of these transactions. In selecting broker dealers, subject to applicable
legal requirements, Thornburg considers various relevant factors, including,
but not limited to: the size and type of the transaction; the nature and
character of the markets for the security to be purchases or sold; the
execution efficiency, settlement capability, and financial condition of the
broker-dealer firm; the broker-dealer's execution services rendered on a
continuing basis; and the reasonableness of any commissions; and arrangements
for payment of Fund expenses. Generally commissions for foreign investments
traded will be higher than for U.S. investments and may not be subject to
negotiation.
Thornburg may execute a Fund's portfolio transactions with broker-
dealers who provide research and execution services to the Fund. Such
services may include advice concerning the value of securities; the
availability of securities or the purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and performance of accounts;
and effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). The selection of such broker-
dealers is made by Thornburg based upon the quality of such research and
execution services provided. The receipt of research from broker-dealers who
execute transactions on behalf of the Funds may be useful to Thornburg in
rendering investment management services to the Funds. The receipt of such
research may not reduce Thornburg's normal independent research activities;
however, it may enable Thornburg to avoid the additional expenses that could
be incurred if Thornburg tried to develop comparable information through its
own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause a
Fund to pay such higher commissions, Thornburg must determine in good faith
that such commissions are reasonable in relation to the value of the
brokerage and research services provided by the executing broker-dealers,
viewed in terms of a particular transaction or Thornburg's overall
responsibilities to the Fund. In reaching this determination, Thornburg will
not attempt to place a specific dollar value on the brokerage and research
services provided, or to determine what portion of the compensation would be
related to those services.
During the three most recent fiscal years brokerage commissions were
paid only by Value Fund and Global Value Fund. The aggregate commissions
paid by each of those Funds during each of the last three fiscal years are as
follows:
Year Ended Year Ended Year Ended
September 30, 1997 September 30, 1998 September 30, 1999
----------------- ----------------- ------------------
[S] [C] [C] [C]
Value Fund $186,000 $723,734 $2,229,420
Global Value Fund N/A $ 35,669 $104,873
Value Fund brokerage commissions increased from 1997 to 1998 primarily
because of the Fund's growth in assets.
Thornburg is authorized to use research services provided by and to
place portfolio transactions with brokerage firms that have provided
assistance in the distribution of shares of the Funds to the extent permitted
by law. Thornburg may use research services provided by and place agency
transactions with Thornburg Securities Corporation (TSC) if the commissions
are fair, reasonable, and comparable to commissions charged by non-
affiliated, qualified brokerage firms for similar services. Thornburg may
allocate brokerage transactions to broker-dealers who have entered into
arrangements with Thornburg under which the broker-dealer allocates a portion
of the commissions paid by the Fund toward payment of the Fund's expenses,
such as transfer agent fees or custodian fees. The transaction quality must,
however, be comparable to those of other qualified broker-dealers.
Thornburg 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,
Thornburg 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 Thornburg's
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions.
The Directors and Trustees of the respective Funds periodically review
Thornburg's performance of its responsibilities in connection with the
placement of portfolio transactions for the Funds.
Portfolio Turnover Rates
The Funds' respective portfolio turnover rates for the two most recent
fiscal years are as follows:
<TABLE>
Year ended Year ended
June 30, 1998 June 30, 1999
------------- -------------
<S> <C> <C>
Limited Term National Fund 24.95% 22.16%
Limited Term California Fund 21.21% 21.71%
Intermediate New York Fund 42.27%* 9.06%
Year ended Year ended
Sept. 30, 1998 Sept. 30, 1999
-------------- --------------
<S> <C> <C>
Intermediate National Fund 16.28% 23.17%
Intermediate New Mexico Fund 13.67% 15.93%
Intermediate Florida Fund 71.15% 35.91%
Government Fund 29.81% 19.52%
Income Fund 40.75% 48.75%
Value Fund 99.55% 62.71%
Global Value Fund 44.66%** 55.95%
* Fiscal period from September 4, 1997 to June 30, 1998.
** Fiscal period from May 28, 1998 to September 30, 1998.
</TABLE>
MANAGEMENT
Limited Term National Fund and Limited Term California Fund
Limited Term National Fund and Limited Term California Fund are separate
"series" or investment portfolios of Thornburg Limited Term Municipal Fund,
Inc., a Maryland corporation (the "Company"). The management of Limited Term
National Fund and Limited Term California Fund, including general supervision
of Thornburg's performance of duties under the Investment Advisory Agreement
and Administrative Services Agreements applicable to the Funds, is the
responsibility of the Board of Directors of the Company. There are five
Directors of the Company, one of whom is an "interested person" (as the term
"interested" is defined in the Investment Company Act of 1940) and four 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., 53 Director Trustee of Thornburg
Chairman Investment Trust since June,
and Treasurer 1987, Chairman of Trustees
since September 1998 and
President from 1987 to 1998;
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; a Director and Treasurer
of Thornburg since its
formation in
1982 and President from 1982
to August 1997.
J. Burchenal Ault, 71 Director Consultant to and fundraiser
for charities, 1990 to
present; Trustee of Thornburg
Investment Trust since June
1987; Director of Farrar,
Strauss & Giroux (publishers)
since 1968.
Eliot R. Cutler, 51 Director Partner, Cutler & Stanfield,
Attorneys, Washington, D.C.
since 1988.
James E. Monaghan, Jr., 50 Director President, Monaghan &
Associates, Inc. and
Strategies West, Inc. Denver,
Colorado, (business
consultants) since 1983.
A.G. Newmyer III, 49 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, 58 Advisory Director Director of the Company from
1984 to 1997; Senior Vice
President McDonald & Co.,
Cincinnati, Ohio (securities
dealers) since May 1984.
Brian J. McMahon, 43 President Vice President of Thornburg
Investment Trust from June
1987 to September 1998, a
Trustee from June, 1996 to
August 1997 and President
since September 1998; Managing
Director of Thornburg since
December 1985, Vice President
from April 1984 to July 1997
and President from August
1997.
Steven J. Bohlin, 39 Vice President Vice President of Thornburg
Investment Trust since June
1987 and Treasurer since 1989;
a Managing Director and a Vice
President of Thornburg since
1991.
Dawn B. Fischer, 51 Secretary Secretary and Assistant
Treasurer of Thornburg
Investment Trust since June
1987; Managing Director of
Thornburg since December 1985
and Vice President and
Secretary of Thornburg
since January 1984.
George Strickland, 35 Assistant Vice Vice President of Thornburg
President Investment Trust; Associate of
Thornburg from 1991 to 1996
and a Managing Director since
1996; Vice President of
Thornburg since
December 1995.
Leigh Moiola, 31 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since November 1995; Associate
of Thornburg since December
1991 and Vice President of
Thornburg since
November 1995.
William Fries, 58 Vice President Managing Director of Thornburg
since 1995 and Vice President
of Thornburg Investment Trust
since 1995; Vice President of
USAA Investment Management
Company from 1982 to 1995.
Ken Ziesenheim, 44 Vice President Managing Director of Thornburg
since 1995; Vice President of
Thornburg Investment Trust
since 1995; President of
Thornburg Securities
Corporation since 1995; Senior
Vice President of Financial
Services, Raymond James &
Associates, Inc. from 1991 to
1995.
Jonathan Ullrich, 29 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since 1992; Associate of
Thornburg since September 1991
and Assistant Vice President
since December 1995.
Jack Lallement, 60 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since September 1997; Fund
Accountant for Thornburg since
March 1997; Chief Financial
Officer/Controller for Zuni
Rental, Inc. (equipment
leasing and sales),
Albuquerque, New Mexico from
February 1995 to March 1997;
Chief Financial
Officer/Controller, Montgomery
& Andrews, P.A. (law firm),
Santa Fe, New Mexico from
March 1987 to August 1994.
Thomas Garcia, 28 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since September 1997; Fund
Accountant for Thornburg since
1993; BBA, University of New
Mexico, 1993.
Van Billops, 33 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since September 1997; Fund
Accountant for Thornburg since
1992.
Dale Van Scoyk, 51 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since 1997; Account Manager
for Thornburg since 1997;
National Account Manager for
the Heartland Funds 1993 -
1997.
Sophia Franco, 28 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since 1998; Associate of
Thornburg since 1994.
Claiborne Booker, 37 Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since 1998; Associate of
Thornburg since 1998; Partner,
Brinson Partners, Inc., 1994 -
1997.
Kerry Lee, 32, Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since 1998; Associate of
Thornburg since 1995.
Richard Brooks, 52, Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
since 1998; Associate of
Thornburg since 1994.
Yvette Lucero, 27, Assistant Vice Assistance Vice President of
President Thornburg Investment Trust
Since 1999; Associate of
Thornburg since 1997; Sales
Associate, Virginia Trading
Post, 1992-1997.
Christopher Ihlefeld, 29, Assistant Vice Assistant Vice President of
President Thornburg Investment Trust
Since 1999; Associate of
Thornburg since 1996;
Student, College of Santa Fe
1996-1998; Student, Western
New Mexico University,
1995-1996; Student, Rollins
College, 1991-1994.
The business address of each person listed is 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501. Mr. Thornburg is a Director of TSC,
and Executive Vice President of Daily Tax-Free Income Fund, Inc. Mr.
Ziesenheim is president of TSC, and Ms. Fischer is secretary of TSC.
The officers and Directors affiliated with Thornburg will serve without
any compensation from the Company. The Company pays each Director who is not
an employee of Thornburg 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.
The Company paid fees to the Directors and the Advisory Director during
the year ended June 30, 1999 as follows:
<TABLE>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Compensation
Name of Compensation Accrued as Benefits from Company and
Person, from Part of Upon Fund Complex
Position Company Fund Expenses Retirement Paid to Directors
- -------- ------------ ------------- ------------- -----------------
<S> <C> <C> <C> <C>
H. Garrett 0 0 0 0
Thornburg,
Jr.
J. Burchenal $7,000 0 0 $14,000
Ault
Eliot R. $6,000 0 0 $ 6,000
Cutler
James E. $6,500 0 0 $ 6,500
Monaghan, Jr.
A. G. $7,000 0 0 $ 7,000
Newmyer, III
Richard M. $5,500 0 0 $ 5,500
Curry
(Advisory Director)
</TABLE>
The Company does not pay retirement or pension benefits.
Intermediate National Fund; Intermediate New Mexico Fund; Intermediate
Florida Fund; Intermediate New York Fund; Government Fund; Income Fund; Value
Fund; and Global Value Fund
Intermediate National Fund, Intermediate New Mexico Fund; Intermediate
Florida Fund; Intermediate New York Fund; Government Fund, Income Fund, Value
Fund and Global Value Fund are separate "series" or investment portfolios of
Thornburg Investment Trust, a Massachusetts business trust (the "Trust").
The management of these Funds, including the general supervision of
Thornburg'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 five Trustees, one of
whom is an "interested person" (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.,* 53 Trustee Chairman of Trustees; Director,
Chairman (since 1987) and
Treasurer (since its inception
in 1984) 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; Director and
Treasurer of Thornburg since
its formation in 1982 and
President
from 1982 to August 1997.
David A. Ater, 52 Trustee Principal in Ater & Ater
Associates, Santa Fe, New
Mexico (developer, planner and
broker of residential and
commercial real estate) since
1990; owner, developer and
broker for various real estate
projects; Director of Thornburg
Mortgage Asset Corporation
(real estate investment trust)
since 1994.
J. Burchenal Ault, 71 Trustee Independent Fund Raising
Counsel; Trustee, Woodrow
Wilson International Center for
Scholars; Director of Thornburg
Limited Term Municipal Fund,
Inc. since its formation in
1984; Director of Farrar,
Strauss & Giroux (publishers)
since 1968.
Forrest S. Smith, 67 Trustee Attorney in private practice
and shareholder Catron, Catron
& Sawtell (law firm), Santa Fe,
New Mexico.
James W. Weyhrauch, 39 Trustee Executive Vice President and
Director, Nambe' Mills, Inc.
(manufacturer), Santa Fe, New
Mexico.
Brian J. McMahon, 43 President President of Thornburg Limited
Assistant Secretary Term Municipal Fund,Inc.
since 1987; Managing Director
of Thornburg since December
1985, President of Thornburg
since August 1997 and a Vice
President from April 1984 to
August 1997.
Steven J. Bohlin, 39 Vice President Vice President of Thornburg
Treasurer Limited Term Municipal Fund,
Inc. since 1988; a Managing
Director and a Vice President
of Thornburg.
Dawn B. Fischer, 51 Secretary Secretary of Thornburg Limited
Assistant Treasurer Term Municipal Fund, Inc. since
its formation in 1984; Vice
President, Daily Tax Free
Income Fund, Inc. (Mutual Fund)
since 1989; Managing Director
of Thornburg since 1985 and a
Vice President since January
1984.
William Fries, 58 Vice President Managing Director of Thornburg
since 1995 and Vice President
of Thornburg Limited Term
Municipal Fund, Inc. since
1995; Vice President
of USAA Investment Management
Company from 1982 to 1995.
Ken Ziesenheim, 44 Vice President Managing Director of Thornburg
since 1995; Vice President of
Thornburg Limited Term
Municipal Fund, Inc. since
1995; President of Thornburg
Securities Corporation since
1995; Senior Vice President of
Financial Services, Raymond
James & Associates, Inc. from
1991 to 1995.
George Strickland, 35 Vice President Assistant Vice President of
Thornburg Limited Term
Municipal Fund, Inc. since July
1992; Associate of Thornburg
since July 1991 and a Managing
Director commencing in 1996.
Wendy Trevisani, 29, Vice President Associate of Thornburg since
1991; Sales Representative
(fixed income sales), Solomon
Smith Barney 1996-1999;
Student, Columbia University,
1994-1996
Brad Kinkelaar, 31, Vice President Associate of Thornburg since
September, 1999; Student,
Northwestern University;
1994-1996.
Joshua Gonze, 37, Vice President Associate of Thornburg since
August, 1999; Associate
Director, Corporate Credit
Ratings, Standard & Poor's
Corporation 1994-1996.
Leigh Moiola, 31 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1997; Vice President of
Thornburg since 1995 and
Managing Director commencing in
1998.
Jonathan Ullrich, 29 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since July
1992.
Jack Lallement, 60 Assistant Vice Assistance Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
September 1997; Fund Accountant
for Thornburg since March 1997;
Chief Financial
Officer/Controller
for Zuni Rental, Inc.
(equipment leasing and sales),
Albuquerque, New Mexico from
February 1995 to March 1997;
Chief Financial
Officer/Controller, Montgomery
& Andrews, P.A. (law firm),
Santa Fe, New Mexico from March
1987 to August 1994.
Thomas Garcia, 28 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1997; Fund Accountant for
Thornburg
since 1994; BBA, University of
New Mexico, 1993.
Van Billops, 33 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1997; Fund Accountant for
Thornburg since 1993.
Dale Van Scoyk, 51 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1997; Account Manager for
Thornburg since 1997; National
Account Manager for the
Heartland Funds 1993 - 1997.
Sophia Franco, 28 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1998; Associate of Thornburg
since 1994.
Claiborne Booker, 37 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1998; Associate of Thornburg
since 1998; Partner, Brinson
Partners, Inc., 1994 - 1997.
Kerry Lee, 32 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1998; Associate of Thornburg
since 1995.
Richard Brooks, 52 Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1998; Associate of Thornburg
since 1994.
Yvette Lucero, 27, Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1999; Associate of Thornburg
since 1997; Sales Associate,
Virginia Trading Post,
1992-1997.
Christopher Ihlefeld, 29, Assistant Vice Assistant Vice President of
President Thornburg Limited Term
Municipal Fund, Inc. since
1999; Associate of Thornburg
since 1996; Student, College of
Santa Fe 1996-1998; Student,
Western New Mexico University,
1995-1996; Student, Rollins
College, 1991-1994.
David M. Matteucci, 36, Assistant Vice Associate of Thornburg since
President August, 1999; Accountant, Alex
Brown, 1997-1999; Accountant,
State Street Bank & Trust
Company, 1993-1997.
Robert G. Finch, 29, Assistant Vice Associate of Thornburg since
President September, 1998; Senior Account
Specialist, State Street Bank &
Trust Company, 1997-1998, and
Account Controller 1996-1997;
Bookkeeper, Chart House
Enterprises, Inc., Cohasset,
Massachusetts, 1992-1996.
The business address of each person listed is 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501. Mr. Thornburg is a Director of TSC,
Executive Vice President of Daily Tax-Free Income Fund, Inc., and a
Chairman and Treasurer of Thornburg Limited Term Municipal Fund, Inc. Mr.
Ziesenheim and Ms. Fischer are president and secretary, respectively, of
TSC.
The officers and Trustees affiliated with Thornburg serve without any
compensation from the Trust. The Trust pays each Trustee who is not an
employee of Thornburg 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.
The Trust paid fees to the Trustees during the year ended September
30, 1999 as follows:
<TABLE>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Compensation
Compensation Accrued as Benefits from Trust and
from Part of Upon Fund Complex
Trustee Trust Fund Expenses Retirement Paid to Trustee
- -------- ------------ ------------- ------------- ---------------
<S> <C> <C> <C> <C>
H. Garret
Thornburg, Jr. 0 0 0 0
David A. $7,000 0 0 $7,000
Ater
J. Burchenal $7,000 0 0 $14,000
Ault
Forrest S. $7,000 0 0 $7,000
Smith
James W. $6,000 0 0 $6,000
Weyhrauch
</TABLE>
The Trust does not pay retirement or pension benefits.
PRINCIPAL HOLDERS OF SECURITIES
Limited Term National Fund
As of December 31, 1999, Limited Term National Fund had an aggregate
of 64,681,011.085 shares outstanding, of which 56,917,768.677 were Class A
shares and 1,943,324.621 were Class C shares. No persons are known to have
held of record or beneficially 5% or more of Limited Term National Fund's
outstanding shares on December 31, 1999. 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.
Limited Term California Fund
As of December 31, 1999, Limited Term California Fund had an aggregate
of 9,258,470.991 shares outstanding, of which 7,885,141.084 were Class A
shares and 588,337.908 were Class C shares. On December 31, 1999, 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. As of the same date, no persons are known to have held
of record or beneficially 5% of Intermediate Municipal Fund's outstanding
shares, except the following person:
No of % of
Shareholder Shares Total Shares
- ----------- ------ ------------
JJ and WLLC 490,299.295 5.30%
P.O. Box 5807
Redwood City, CA
Intermediate National Fund
As of December 31, 1999, Intermediate National Fund had an aggregate
of 31,718,315.653 shares outstanding, of which 27,637,211.508 were Class A
shares and 2,480,517.076 were Class C shares. On December 31, 1999 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.
As of the same date, the following person owned 5% or more of
Intermediate National Fund's outstanding shares:
No of % of
Shareholder Shares Total Shares
- ----------- ------ ------------
BancOne Securities Corp. 4,087,782.575 12.89%
FBO The One Investment Solution
733 Greencrest Drive
Westerville, Ohio 43081
Intermediate New Mexico Fund
As of December 31, 1999, Intermediate New Mexico Fund had
11,756,031.248 shares outstanding, of which 11,676,367.230 were Class A
shares and 79,664.018 were Class D shares. On December 31, 1999, the
officers, Trustees and related persons of Thornburg Investment Trust, as a
group, held 264,039.025 shares, representing 2.25% of the Fund's
outstanding shares. As of the same date, the following person owned 5% or
more of Intermediate New Mexico Fund's outstanding shares:
No of % of
Shareholder Shares Total Shares
- ----------- ------ ------------
MLPF&S for the Benefit 684,077.829 5.82%
of Its Customers
4800 Deer Lake Dr E FL 2
Jacksonville, Florida 32246
Intermediate Florida Fund
As of December 31, 1999, Intermediate Florida Fund had 3,159,419.598
shares outstanding, all of which were Class A shares. On December 31,
1999, the officers, Trustees and related persons of Thornburg Investment
Trust, as a group, held less than one percent of the Fund's outstanding
shares. As of the same date, the following persons owned 5% or more of
Intermediate Florida Fund's outstanding shares:
No of % of
Shareholder Shares Total Shares
- ----------- ------ ------------
MLPF&S for the Sole 198,844.895 6.29%
Benefit of its Customers
4800 Deer Lake Dr E FL 2
Jacksonville, Florida 32246
Donaldson Lufkin 255,608.883 8.09%
Jenrette Securities Corp.
P.O. Box 2052
Jersey City, NJ 07303
N. Clement 388,194.534 12.29%
Jackson, MS
Intermediate New York Fund
As of December 31, 1999, Intermediate New York Fund had 2,045,755.225
shares outstanding, all of which were Class A shares. On December 31,
1999, the officers, Trustees and related persons of Thornburg Investment
Trust, as a group, held less than one percent of the Fund's outstanding
shares. As of the same date, no persons were known to have held of record
or beneficially 5% or more of the Fund's outstanding shares.
Government Fund
As of December 31, 1999, Government Fund had an aggregate of
9,978,565.829 shares outstanding, of which 8,938,756.031 were Class A
shares and 585,569.540 were Class C shares. No persons are known to have
held of record or beneficially 5% or more of Government Fund's outstanding
shares on December 31, 1999. 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 December 31, 1999, Income Fund had an aggregate of 4,657,644.812
shares outstanding, of which 3,129,899.574 were Class A shares and
647,399.057 were Class C shares. As of December 31, 1999, officers and
Trustees of the Trust as a group, together with related persons, owned less
than one percent of the Fund's outstanding shares. As of the same date, no
persons were known to have held of record or beneficially 5% or more of
Limited Term Income Fund's outstanding shares.
Value Fund
As of December 31, 1999, Value Fund had an aggregate of 26,151,754.969
shares outstanding, of which 16,131,282.948 were Class A shares and
6,330,277.078 were Class C shares. December 31, 1999, the officers,
Trustees and related persons owned 933,557.27 shares of Value Fund,
representing approximately 3.57% of the Fund's issued and outstanding
shares. As of the same date, the following persons owned 5% or more of
Value Fund's outstanding shares:
No of % of
Shareholder Shares Total Shares
- ----------- ------ ------------
Charles Schwab & Co., Inc. 2,960,316.314 11.32%
Special Custody Account
101 Montgomery St.
San Francisco, CA 91404
Global Value Fund
As of December 31, 1999, Global Value Fund had 2,638,148.605 shares
outstanding, of which 2,252,460.613 were Class A shares and 385,687.992
were Class C shares. On December 31, 1999, officers, Trustees and related
persons of Thornburg Investment Trust, as a group, owned 693,397.641 shares
of Global Value Fund, representing 26.28% of the Fund's outstanding shares.
As of the same date, the following persons owned 5% or more of Global Value
Fund's outstanding shares:
No of % of
Shareholder Shares Total Shares
- ----------- ------ ------------
Thornburg Investment 162,550.116 6.16%
Management, Inc.
119 E. Marcy St.
Santa Fe, NM 87501
Brian J. McMahon 319,160.353 (1) 12.10%
119 E. Marcy St.
Santa Fe, NM 87501
Dawn B. Fischer 260,450.358 (2) 9.87%
119 E. Marcy St.
Santa Fe, NM 87501
H. Garrett Thornburg, Jr. 447,705.970 (3) 16.97%
119 E. Marcy St.
Santa Fe, NM 87501
Thornburg Investment 162,550.116 6.16%
Management, Inc.
119 E. Marcy St.
Santa Fe, NM 87501
F. Sica 433,560.281 16.43%
Bronxville, NY 10708
(1) Total includes 162,550.116 shares owned by Thornburg Investment
Management, Inc., as to which Mr. McMahon is president, and
156,610.237 shares owned by the Thornburg Investment Management, Inc.
Profit Sharing Plan, as to which Mr. McMahon is a trustee and holds
shared voting and investment powers.
(2) Total includes 156,610.237 shares owned by the Thornburg Investment
Management, Inc. Profit Sharing Plan, as to which ms. Fischer is a
trustee and holds shared voting and investment powers, 101,423.559
shares owned by the Lloyd Thornburg Irrevocable Trust, as to which
Ms. Fischer is a trustee.
(3) Total includes 162,550.116 shares owned by Thornburg Investment
Management, Inc., as to which Mr. Thornburg is controlling
shareholder, 156,610.237 shares owned by the Thornburg Investment
Management, Inc. Profit Sharing Plan, as to which Mr. Thornburg is a
trustee and holds shared voting and investment powers, and 128,545.617
shares owned by the Garrett Thornburg Revocable Trust, as to which Mr.
Thornburg is trustee.
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 and Limited Term
California Fund shares, and pursuant to a separate Distribution Agreement
with Thornburg Investment Trust, TSC also acts as principal underwriter for
Intermediate National Fund, Intermediate New Mexico Fund, Intermediate
Florida Fund, Intermediate New York Fund, Government Fund, Income Fund,
Value Fund and Global Value 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.
The following table shows the commissions and other compensation
received by TSC from each of the Funds for the fiscal years shown, except
for amounts paid under Rule 12b-1 plans, which are described above under
the caption "Service and Distribution Plans."
<TABLE>
Aggregate Net Underwriting
Year Underwriting Discounts and Commissions Compensation on Brokerage Other
Ended Fund Commissions Paid to TSC Redemptions and Repurchases Commissions Compensation
- ----- ---- ------------ -------------------------- --------------------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
9/30/99 Intermediate
National Fund $571,294 $55,228 $11,875 -0- *
Intermediate
New Mexico Fund $317,481 $28,772 -0- -0- *
Intermediate
Florida Fund $85,986 $9,028 -0- -0- *
Government Fund $102,502 $10,874 $2,112 -0- *
Income Fund $67,275 $7,715 $2,387 -0- *
Value Fund $2,618,305 $313,665 $25,785 -0- *
Global Value Fund $125,207 $16,643 $990 N/A N/A
6/30/99 Limited Term
National Fund $543,696 $84,513 $10,880 -0- *
Limited Term
California Fund $93,857 $14,173 782 -0- *
Intermediate
New York Fund $30,828 $3,578 -0- -0- *
6/30/98 Limited Term
National Fund $669,745 $104,037 $2,946 -0- *
Limited Term
California Fund $89,135 $11,884 $1,807 -0- *
Intermediate
New York Fund $11,478 $1,380 -0- -0- *
Aggregate Net Underwriting
Year Underwriting Discounts and Commissions Compensation on Brokerage Other
Ended Fund Commissions Paid to TSC Redemptions and Repurchases Commissions Compensation
- ----- ---- ------------ -------------------------- --------------------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
9/30/98 Intermediate
National Fund $704,602 $82,991 $53,715 -0- *
Intermediate
New Mexico Fund $396,130 $43,019 -0- -0- *
Intermediate
Florida Fund $109,057 $16,479 -0- -0- *
Government Fund $144,896 $19,451 $2,108 -0- *
Income Fund $109,057 $16,479 $2,584 -0- *
Value Fund $1,847,274 $225,963 $341,070 -0- *
Global Value
Fund ** $70,592 $8,959 $8,112 -0- *
* See "Service and Distribution Plans
** Period from May 28, 1998 to September 30, 1998
</TABLE>
ADDITIONAL INFORMATION RESPECTING PURCHASE AND REDEMPTION OF SHARES
Waivers of CDSCs on Redemptions of Class B Shares
The contingent deferred sales charge (CDSC) imposed on redemptions of
Class B shares will be waived in the event of the death of the shareholder
(including a registered joint owner) occurring after the purchase of the
shares redeemed. The CDSC also will be waived for redemptions resulting
from minimum required distributions made in connection with an IRA, Keogh
Plan or a custodial account under Section 403(b) of the Code, or other
qualified retirement plan, following attainment of age 70-1/2.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036 is the independent auditor of the Funds.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Reports to
Shareholders of Limited Term National Fund, Limited Term California Fund
and Intermediate New York Fund, for the fiscal year ended June 30, 1999,
and the financial statements contained in the Annual Reports to
Shareholders of Intermediate National Fund, Intermediate New Mexico Fund,
Intermediate Florida Fund, Government Fund, Income Fund, Value Fund and
Global Value Fund, for the fiscal years ended September 30, 1999 and
September 30, 1998 are incorporated herein by reference.
