[INSIGHT INVESTMENT MANAGEMENT LETTERHEAD]
GREAT HALL NATIONAL TAX-EXEMPT FUND
60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402-4422
October 4, 1996
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Great Hall National Tax-Exempt Fund ("Great Hall Fund"), a series of Great Hall
Investment Funds, Inc. ("Great Hall Investment Funds") to be held on November 6,
1996 at 8:30 a.m., Central Time, at the offices of Great Hall Investment Funds,
10th Floor, Auditorium, 60 South Sixth Street, Minneapolis, Minnesota 55402, for
the purpose of considering and voting upon a proposed Agreement and Plan of
Reorganization (the "Plan") for Great Hall Fund.
If the Plan is approved by the shareholders of Great Hall Fund, all or
substantially all of the assets and certain stated and identified liabilities of
Great Hall Fund will be exchanged for shares of Voyageur National High Yield
Municipal Bond Fund ("Voyageur Fund") having an aggregate net asset value equal
to the value of Great Hall Fund's aggregate net assets transferred to Voyageur
Fund. In the reorganization, you will receive Class A shares of Voyageur Fund
having a net asset value equal to the value of your Great Hall Fund shares.
Voyageur Fund is a newly formed series of Voyageur Mutual Funds, Inc.
("Voyageur Mutual Funds"), an open-end management investment company located in
Minneapolis, Minnesota. Voyageur Fund Managers, Inc. ("VFM") acts as the
investment adviser to Voyageur Fund. As of June30, 1996, VFM served as
the investment adviser to 6 closed-end and 10 open-end funds (comprised of 33
separate investment portfolios), administered numerous private accounts and,
together with its affiliates, managed approximately $11.5 billion in assets.
The investment objectives of Great Hall Fund and Voyageur Fund are similar
in that both seek a high level of current income exempt from federal income tax
by investing primarily in medium- and lower-grade municipal securities.
Shareholders should carefully consider, however, both the similarities and the
differences (including the differences that Voyageur Fund may invest to a
greater extent than Great Hall Fund in securities subject to alternative minimum
tax and also may invest in certain Derivative Municipal Obligations, as defined
herein) between the investment objectives, policies and restrictions of the two
Funds. These similarities and differences, as well as other important
information concerning the proposed combination of the Funds, are described in
detail in the Prospectus/Proxy Statement, which you are encouraged to review
carefully.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOUR APPROVAL OF THE PLAN.
The Board has recognized that the strategy of Great Hall Fund's distributors of
promoting predominantly externally managed retail mutual funds (exclusive of
Great Hall money market funds) could in the long term cause Great Hall Fund's
size to decrease and thereby make the objective of providing competitive
investment returns increasingly difficult to achieve. The Board therefore has
determined that a transfer of Great Hall Fund to another investment firm would
be in the Fund's best interests. The Board has further determined that VFM is an
organization with strong professional credentials and with business strategies
that are consistent in all material respects with the Fund's long term best
interests.
Approval of the Plan will require the affirmative vote of the holders of a
majority of the outstanding shares of Great Hall Fund. We urge you to take the
time to consider this important matter and vote now. Whether or not you expect
to attend the meeting, please sign and promptly return the enclosed proxy in the
enclosed postage-prepaid envelope. Your prompt response will insure that your
shares are counted at the meeting.
Sincerely,
J. Scott Spiker
Chief Executive
Officer of Great Hall Investment
Funds, Inc.
GREAT HALL NATIONAL TAX-EXEMPT FUND
A SEPARATELY MANAGED SERIES OF
GREAT HALL INVESTMENT FUNDS, INC.
60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
=========================================
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 6, 1996
=========================================
October 4, 1996
To the Shareholders of Great Hall National Tax-Exempt Fund:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Great Hall
National Tax-Exempt Fund ("Great Hall Fund"), a separately managed series of
Great Hall Investment Funds, Inc. ("Great Hall Investment Funds"), will be held
at 8:30 a.m., Central time, on November 6, 1996, at the offices of Great Hall
Investment Funds, Inc., 10th Floor Auditorium, 60 South Sixth Street,
Minneapolis, Minnesota 55402. The purpose of the special meeting is as follows:
1. To consider and vote on a proposed Agreement and Plan of
Reorganization (the "Plan") providing for (a) the acquisition of all
or substantially all of the assets and the assumption of certain
stated and identified liabilities of Great Hall Fund by Voyageur
National High Yield Municipal Bond Fund, ("Voyageur Fund"), a newly
formed, separately managed series of Voyageur Mutual Funds, Inc.
("Voyageur Mutual Funds"), in exchange for Class A common shares of
Voyageur Fund having an aggregate net asset value equal to the
aggregate value of the assets acquired (less liabilities assumed) of
Great Hall Fund and (b) the liquidation of Great Hall Fund and the pro
rata distribution of Voyageur Fund shares to Great Hall Fund
shareholders. Under the Plan, Great Hall Fund shareholders will
receive Voyageur Fund Class A shares, having a net asset value equal
as of the effective time of the Plan to the net asset value of their
Great Hall Fund shares. A vote in favor of the Plan will be considered
a vote in favor of an amendment to the articles of incorporation of
Great Hall Investment Funds required to effect the reorganization
contemplated by the Plan.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Even if Great Hall Fund shareholders vote to approve the Plan, consummation
of the Plan is subject to certain other conditions. See "Information About the
Reorganization--Plan of Reorganization" in the attached Prospectus/ Proxy
Statement. GREAT HALL FUND SHAREHOLDERS WILL NOT BEAR COSTS DIRECTLY RELATED TO
THE REORGANIZATION.
THE BOARD OF DIRECTORS OF GREAT HALL INVESTMENT FUNDS UNANIMOUSLY
RECOMMENDS APPROVAL OF THE PLAN.
The close of business on September 20, 1996 has been fixed as the record
date for the determination of shareholders entitled to notice of and to vote at
the meeting and any adjournments or postponements thereof.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE. IN ORDER TO
AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE RESPECTFULLY ASK FOR
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY. If you are present at the
meeting, you may then revoke your proxy and vote in person, as explained in the
Prospectus/Proxy Statement in the section entitled "Voting Information."
By Order of the Board of Directors,
Matthew L. Thompson
SECRETARY
PROSPECTUS/PROXY STATEMENT
DATED OCTOBER 4, 1996
ACQUISITION OF THE ASSETS OF
GREAT HALL NATIONAL TAX-EXEMPT FUND
A SEPARATELY MANAGED SERIES OF
GREAT HALL INVESTMENT FUNDS, INC.
60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
BY AND IN EXCHANGE FOR SHARES OF
VOYAGEUR NATIONAL HIGH YIELD MUNICIPAL BOND FUND
A NEWLY FORMED, SEPARATELY MANAGED SERIES OF
VOYAGEUR MUTUAL FUNDS, INC.
90 SOUTH SEVENTH STREET, SUITE 4400
MINNEAPOLIS, MINNESOTA 55402
(800-553-2143)
This Prospectus/Proxy Statement is being furnished to the shareholders of
Great Hall National Tax-Exempt Fund ("Great Hall Fund"), a separately managed
series of Great Hall Investment Funds, Inc. ("Great Hall Investment Funds"), in
connection with a special meeting (the "Meeting") of the shareholders of Great
Hall Fund to be held at the offices of Great Hall Investment Funds, 60 South
Sixth Street, Minneapolis, Minnesota, on November 6, 1996, for the purposes set
forth in the accompanying Notice of Special Meeting of Shareholders. This
Prospectus/Proxy Statement is first being mailed to shareholders of Great Hall
Fund on or about October 4, 1996. Information concerning the voting rights of
each Great Hall Fund shareholder is set forth under "Voting Information" below.
Representatives of Insight Investment Management ("Insight"), a division of IFG
Asset Management Services, Inc., the investment adviser and manager of Great
Hall Fund, or of its affiliates, may, without cost to Great Hall Fund, solicit
proxies for management of Great Hall Fund by means of mail, telephone, or
personal calls. All costs of the solicitation will be borne by Voyageur Fund
Managers, Inc. ("VFM") as described under "Information About the
Reorganization--Plan of Reorganization" below. In addition, the services of a
third-party proxy solicitation firm may be utilized, with such firm's expenses
borne by VFM. Persons holding shares as nominees will, upon request, be
reimbursed for their reasonable expenses incurred in sending proxy soliciting
materials on behalf of the Board of Directors to their principals.
As set forth in the Notice of Special Meeting of Shareholders, this
Prospectus/Proxy Statement relates to a proposed Agreement and Plan of
Reorganization (the "Plan") providing for (a)the acquisition of all or
substantially all of the assets and the assumption of certain stated and
identified liabilities of Great Hall Fund by Voyageur National High Yield
Municipal Bond Fund ("Voyageur Fund"), a series of Voyageur Mutual Funds, Inc.
("Voyageur Mutual Funds"), in exchange for Class A common shares of Voyageur
Fund having an aggregate net asset value equal to the aggregate value of the
assets acquired (less liabilities assumed) of Great Hall Fund, and (b) the
liquidation of Great Hall Fund and the pro rata distribution of its holdings of
Voyageur Fund shares to Great Hall Fund shareholders. Great Hall Fund and
Voyageur Fund are sometimes referred to herein, individually, as a "Fund," or
together, as the "Funds." A vote in favor of the Plan will be considered a vote
in favor of an amendment to the articles of incorporation of Great Hall
Investment Funds required to effect the reorganization contemplated by the Plan.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the proposed Plan and
Reorganization and about Voyageur Fund and its affiliates that each Great Hall
Fund shareholder should know prior to voting on the proposed Plan and
Reorganization. A Statement of Additional Information dated October 4, 1996
relating to this Prospectus/Proxy Statement has been filed with the Securities
and Exchange Commission and is incorporated by reference into this
Prospectus/Proxy Statement. Copies of the Statement of Additional Information
and of the other documents incorporated by reference into this Prospectus/Proxy
Statement or into the Statement of Additional Information are available without
charge as noted under "Incorporation by Reference" below.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
As a result of the transactions contemplated by the Plan (collectively, the
"Reorganization"), each shareholder of Great Hall Fund will receive Voyageur
Fund Class A shares having a net asset value equal as of the effective time of
the Plan to the net asset value of their Great Hall Fund shares. The
Reorganization is being structured as a tax-free reorganization so that no
income, gain or loss will be recognized by Great Hall Fund or its shareholders
as a result thereof (except that Great Hall Fund may make a distribution
immediately prior to the Reorganization of all of its current year net
tax-exempt income, ordinary taxable income and net realized capital gains, if
any, not previously distributed, and any portion of this distribution which does
not constitute an exempt-interest dividend will be taxable to Great Hall Fund
shareholders subject to taxation). The shareholders of Great Hall Fund are being
asked to vote on the proposed Plan and Reorganization at the Meeting.
In addition to the approval of the Plan and Reorganization by Great Hall
Fund shareholders, the consummation of the Reorganization is subject to certain
other conditions. See "Information About the Reorganization--Plan of
Reorganization."
Voyageur Fund is a newly formed series of the Voyageur Mutual Funds, Inc.,
an open-end management investment company which offers its shares in multiple
series. The investment objective of Voyageur Fund is to seek a high level of
current income exempt from federal income tax primarily through investment in a
portfolio of medium- and lower-grade Municipal Obligations. The Fund will
attempt to invest 100% (and as a matter of fundamental policy during normal
circumstances will invest at least 80%) of the value of net assets in securities
the interest on which is exempt from regular federal tax. Voyageur Fund may
invest without limit in securities that generate interest that is an item of tax
preference for purposes of federal alternative minimum tax ("AMT"). The
investment objectives, policies and restrictions of both Funds are described and
compared below under "Comparison of Investment Objectives, Policies and
Restrictions."
INCORPORATION BY REFERENCE
The document listed in item 1 below, which has been filed with the
Securities and Exchange Commission (the "Commission"), is incorporated in this
Prospectus/Proxy Statement by reference to the extent noted below. A Statement
of Additional Information dated October 4, 1996 relating to this
Prospectus/Proxy Statement (the "Statement of Additional Information") has been
filed with the Commission and is also incorporated by reference into this
Prospectus/ Proxy Statement. A copy of the Statement of Additional Information,
and of each of the documents listed below is available upon request and without
charge by writing to Voyageur Fund at 90 South Seventh Street, Suite 4400,
Minneapolis, Minnesota 55402, or by calling (800) 553-2143. The documents listed
in items 2 and 3 below are incorporated by reference into the Statement of
Additional Information and such items will be provided with any copy of the
Statement of Additional Information which is requested. Any documents requested
will be sent within one business day of receipt of the request by first class
mail or other means designed to ensure equally prompt delivery.
1. The Prospectus dated December1, 1995 as supplemented August 28, 1996
of Great Hall Fund is incorporated in this Prospectus/Proxy Statement
in its entirety by reference.
2. The Statement of Additional Information dated December 1, 1995 of
Great Hall Fund is incorporated by reference in its entirety in the
Statement of Additional Information relating to this Prospectus/Proxy
Statement.
3. The audited Annual Report of Great Hall Fund for the fiscal year ended
July31, 1996 is incorporated by reference in its entirety in the
Statement of Additional Information relating to this Prospectus/Proxy
Statement.
Also accompanying and attached to this Prospectus/Proxy Statement as Appendix A
is a copy of the Plan for the proposed Reorganization.
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ADDITIONAL
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT AND THE
APPENDICES HERETO AND IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, AND BY
REFERENCE TO THE PLAN, A COPY OF WHICH IS ATTACHED TO THIS PROSPECTUS/PROXY
STATEMENT AS APPENDIX A. GREAT HALL FUND SHAREHOLDERS SHOULD REVIEW THE
ACCOMPANYING DOCUMENTS CAREFULLY IN CONNECTION WITH THEIR REVIEW OF THIS
PROSPECTUS/PROXY STATEMENT.
PROPOSED REORGANIZATION
The Plan provides for (a) the acquisition of all or substantially all of
the assets and the assumption of certain stated and identified liabilities of
Great Hall Fund by Voyageur Fund in exchange for Class A common shares of
Voyageur Fund having an aggregate net asset value equal to the aggregate value
of the assets acquired (less liabilities assumed) of Great Hall Fund and (b) the
liquidation of Great Hall Fund and the pro rata distribution of its holdings of
Voyageur Fund shares to Great Hall Fund shareholders as of the effective time of
the Reorganization (the close of normal trading on the New York Stock Exchange,
currently 4:00 p.m. Eastern Time, on the first day upon which the conditions to
closing shall have been satisfied, or such later date as provided for in the
Plan) (such time and date, the "Effective Time"). As a result of the
Reorganization, each shareholder of Great Hall Fund will receive Voyageur Fund
Class A shares with an aggregate net asset value equal to the aggregate net
asset value of the shareholder's Great Hall Fund shares as of the Effective
Time. GREAT HALL FUND SHAREHOLDERS WILL NOT BEAR COSTS DIRECTLY RELATED TO THE
REORGANIZATION. See "Information About the Reorganization."
The Board of Directors of Great Hall Investment Funds, including all of the
directors who are not "interested persons," as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), of Great Hall Investment Funds, has
unanimously determined that the Reorganization would be in the best interests of
Great Hall Fund and its shareholders and therefore has approved and submitted
the Plan for approval by Great Hall Fund shareholders. The Board has recognized
that the strategy of Great Hall Fund's distributors of promoting predominantly
externally managed retail mutual funds (exclusive of Great Hall money market
funds) could in the long term cause Great Hall Fund's size to decrease and
thereby make the objective of providing competitive investment returns
increasingly difficult to achieve. The Board therefore has determined that a
transfer of Great Hall Fund to another investment firm would be in the Fund's
best interests. The Board has further determined that VFM is an organization
with strong professional credentials and with business strategies that are
consistent in all materials respects with the Fund's long term best interests.
For a more detailed discussion of the Board's reasons for approving the
Reorganization, see "Information About the Reorganization--Reasons for the
Reorganization."
The Board of Directors of Voyageur Mutual Funds, Inc. (the "Voyageur Board
of Directors") has also approved the Reorganization on behalf of Voyageur Fund.
Approval of the Plan and Reorganization will require the affirmative vote
of a majority of the outstanding shares of Great Hall Fund.
TAX CONSEQUENCES
Prior to completion of the Reorganization, Great Hall Fund will have
received from Dorsey & Whitney LLP, counsel to Voyageur Fund, an opinion that,
upon the Reorganization, no gain or loss will be recognized by Great Hall Fund
or its shareholders for federal income tax purposes. The holding period and
aggregate tax basis of Voyageur Fund shares that are received by each Great Hall
Fund shareholder will be the same as the holding period and aggregate tax basis
of Great Hall Fund shares previously held by such shareholders. In addition, the
holding period and tax basis of the assets of Great Hall Fund in the hands of
Voyageur Fund as a result of the Reorganization will be the same as in the hands
of Great Hall Fund immediately prior to the Reorganization. See "Information
About the Reorganization--Federal Income Tax Consequences."
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
Great Hall Fund and Voyageur Fund are both non-diversified, open-end
investment company series with investment objectives which are substantially the
same.
o The investment objective of Great Hall Fund is to maximize current
income exempt from federal income tax through investments primarily in
medium- and lower-grade municipal obligations.
o The investment objective of Voyageur Fund is to seek a high level of
current income exempt from federal income taxes through investment in
a portfolio of medium- and lower-grade Municipal Obligations.
The investment policies of Great Hall Fund and Voyageur Fund are similar
but not identical.
o Great Hall Fund as a matter of fundamental policy during normal
circumstances attempts to invest no more than 20% of the value of its
net assets in securities the interest on which is an item of tax
preference for purposes of the federal alternative minimum tax
("AMT"). Voyageur Fund may invest without limit in such securities.
See "Principal Risk Factors--Differences in Investment
Risks--Alternative Minimum Tax."
o The Funds invest in medium- and lower-grade Municipal Obligations.
Medium-grade Municipal Obligations are rated A or Baa, MIG-2 or
Prime-2 by Moody's Investors Service, Inc. ("Moody's"), or A or BBB,
SP-2 or A-2 by Standard & Poor's Ratings Group ("S&P"), A or BBB or
F-2 by Fitch Investors Service, L.P. ("Fitch"), or, if unrated, are
considered by the Fund's adviser to be of comparable quality. Baa and
BBB rated securities are regarded as having some speculative
characteristics. Medium-grade municipal obligations are generally
regarded as having adequate but not outstanding capacity to pay
interest and repay principal. Lower-grade municipal obligations are
rated Ba or B, MIG-3 or Prime-3 by Moody's, BB or B, SP-3 or A-3 by
S&P, BB or B, or F-3 by Fitch or if unrated, are considered by the
Fund's adviser to be of comparable quality.
Great Hall Fund invests in securities with ratings below Ba or BB only
when Insight believes the rating does not accurately reflect the
actual quality of the issuer's credit. As a non-fundamental policy,
Great Hall Fund will not invest more than 5% of its total assets in
municipal obligations rated below Ba or BB, or more than 35% of its
total assets in municipal obligations rated below Baa or BBB, or, if
unrated, having credit characteristics that are considered by Insight,
in accordance with policies established by the Great Hall Board, to be
of comparable quality.
Voyageur Fund will invest at least 65% of its total assets, except
under abnormal market or economic situations, in medium- and
lower-grade Municipal Obligations rated, at the time of investment,
between BBB and B- (inclusive) by S&P, Baa and B3 (inclusive) by
Moody's, and BBB and B- (inclusive) by Fitch Investors Service, LP
("Fitch"), and Municipal Obligations determined by VFM to be of
comparable quality. Lower-grade obligations generally are regarded as
high risk securities and are highly speculative. See "Principal Risk
Factors--Differences in Investment Risks--Higher Proportion of Total
Assets in Lower Quality Municipal Obligations."
o Voyageur Fund may enter into reverse repurchase agreements, may write
(i.e., sell) covered put and call options and purchase put and call
options on the securities in which it may invest and on indices of
securities in which it may invest, may enter into futures contracts,
may purchase and sell options on futures transactions and may purchase
and sell Derivative Municipal Obligations. Great Hall Fund may not
enter into such transactions. See "Principal Risk Factors--Differences
in Investment Risks--Derivative Municipal Obligations" and
"--Options."
o In normal market conditions, Great Hall Fund has and Voyageur Fund
intends to generally invest its assets in Municipal Obligations. As
used in this Prospectus/Proxy Statement, the term "Municipal
Obligations" refers to debt obligations issued by or on behalf of a
state or territory or its agencies, instrumentalities, municipalities
and political subdivisions including, with respect to Voyageur Fund
only, Derivative Municipal Obligations.
o Great Hall Fund has and Voyageur Fund intends to attempt to invest
100% (and as a matter of fundamental policy during normal
circumstances at least 80%) of the value of net assets in securities
the interest on which is exempt from regular federal tax.
o Under normal market conditions, it is expected that the average
maturity of Great Hall Fund will generally range from 17 to 22 years
and possibly in excess of 22 years. Voyageur Fund expects the weighted
average maturity of its investment portfolio will be approximately 15
to 25 years.
o Both Funds may borrow money from banks for temporary or emergency
purposes (in an amount equal to 20% of total assets for Voyageur Fund
and 5% of total assets for Great Hall Fund). In addition, Voyageur
Fund may engage in reverse repurchase agreements with banks and
securities dealers with respect to not more than 10% of its total
assets. Reverse repurchase agreements may be used as a means of
borrowing for investment purposes. Because Voyageur Fund will, at the
time it enters into a reverse repurchase agreement, segregate cash,
U.S. Government securities or other liquid high-grade debt obligations
having a value sufficient to make payments for the securities to be
repurchased, reverse repurchase agreements will not be considered
borrowings for purposes of the aforementioned 20% limitation on
borrowing.
The Funds' investment objectives, policies and restrictions are described
and compared in further detail herein under "Comparison of Investment
Objectives, Policies and Restrictions." The Annual Report of Great Hall
Investment Funds for the fiscal year ended July31, 1996, referred to on the
cover page hereof under "Incorporation by Reference," provides information
concerning the composition of Great Hall Fund's assets at such date.
FEES AND EXPENSES
GREAT HALL FUND EXPENSES. Insight serves as investment adviser of Great
Hall Fund pursuant to an Investment Advisory Agreement. For Insight's services
under such Agreement, Great Hall Fund is obligated to pay Insight a monthly fee
at an annual rate of .50% of the Fund's average daily net assets.
Dain Bosworth Incorporated and Rauscher Pierce Refsnes, Inc. (the
"Co-Distributors") serve as the exclusive distributors of the shares of Great
Hall Fund pursuant to a Co-Distributor Agreement with Great Hall Investment
Funds. Under the Agreement, the Co-Distributors retain the sales charges, if
any, paid by Great Hall Fund shareholders in connection with their purchases of
Fund shares. In addition, Great Hall Fund has adopted pursuant to Rule 12b-1
under the 1940 Act a distribution plan pertaining to its shares (the
"Distribution Plan"). Great Hall Fund's Distribution Plan provides that the
Co-Distributors are entitled to fees at the annual rate of up to .30% of the
average daily net assets attributable to Great Hall Fund's shares. The
Co-Distributors and Great Hall Fund have agreed to voluntarily limit 12b-1 fees
to .20% per year of the Fund's average daily net assets and to use such fees
only in connection with the provisions of services to existing Great Hall Fund
shareholders. This expense limitation may be terminated at any time.
Rodney Square Management Corporation is the transfer agent and dividend
paying agent for Great Hall Fund and provides certain shareholder and
shareholder-related services.
VOYAGEUR FUND EXPENSES. Voyageur Fund Managers, Inc. ("VFM") has been
retained under an Investment Advisory Agreement to act as Voyageur Fund's
investment adviser. Voyageur Fund pays VFM a monthly investment advisory and
management fee equivalent on an annual basis to 0.65% of the Fund's average
daily net assets. VFM has agreed to waive fees such that the investment advisory
fee will not exceed 0.50% through December 31, 1998.
VFM also acts as Voyageur Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement. Under the Agreement, Voyageur Fund pays VFM a monthly fee
based upon the Fund's average daily net assets and the number of shareholder
accounts then existing. This fee is equal to the sum of (a) $1.33 per
shareholder account per month, (b) $1,000 to $1,500 per month based on the
average daily net assets of the Fund and (c)a percentage of average daily net
assets which ranges from 0.02% to 0.11% based on the average daily net assets of
the Fund. This fee is in addition to investment advisory fees payable under the
Voyageur Advisory Agreement.
Voyageur Fund Distributors, Inc. ("VFD"), an affiliate of VFM, acts as the
principal distributor of Voyageur Fund's shares pursuant to a Distribution
Agreement with Voyageur Fund. Under the Distribution Agreement, VFD retains the
sales charges, if any, paid by Voyageur Fund Class A shareholders in connection
with their purchases of Fund shares and is entitled to deduct a contingent
deferred sales charge on the redemption of certain Class A shares initially sold
without a sales charge. In addition, Voyageur Fund has adopted a Plan of
Distribution pursuant to Rule 12b-1 under the 1940 Act. Pursuant to this Plan,
Voyageur Fund pays VFD a Rule 12b-1 fee at an annual rate of .25% of the Fund's
average daily net assets attributable to Class A shares for servicing of
shareholder accounts and distribution related services.
VFM has undertaken to limit total Voyageur Fund expenses, including Rule
12b-1 fees, to .85% of average daily net assets for Class A shares. This expense
limitation may be terminated or revised at any time after December 31, 1998. In
addition, VFM is contractually obligated to pay the operating expenses of
Voyageur Fund (excluding interest, taxes, brokerage fees and commissions, and
Rule 12b-1 fees) which exceed 1% of the Fund's average daily net assets on an
annual basis, provided that payments made by VFM as a result of such contractual
obligation shall not exceed VFM's investment advisory and management fee.
For additional information on the management of Voyageur Fund, including
information on VFM and VFD, portfolio management, the Fund's Plan of
Distribution, Fund expenses and portfolio transactions, see "Voyageur Fund
Management and General Information" in Appendix C hereto.
COMPARISON OF FEES AND EXPENSES
The following tables are intended to assist Great Hall Fund shareholders in
understanding the various costs and expenses (expressed as a percentage of
average net assets) (a) that such shareholders currently bear as Great Hall Fund
shareholders (under the "Great Hall Fund" column) and (b) that such shareholders
can expect to bear on an estimated basis as Voyageur Fund shareholders after the
Reorganization is consummated (under the "Voyageur Fund" column). THE EXAMPLES
SET FORTH BELOW SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES OR PERFORMANCE, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. The following tables are based on Great Hall Fund expenses for the fiscal
year ended July31, 1996 and Voyageur Fund estimated annualized expenses for the
fiscal year ending December31, 1996, assuming consummation of the
Reorganization.
<TABLE>
<CAPTION>
GREAT HALL FUND SHARES AND
VOYAGEUR FUND CLASS A SHARES FEES AND EXPENSES
VOYAGEUR FUND
GREAT HALL CLASS A
FUND PRO FORMA (1)
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price)......................................... 4.50% 3.75%
Maximum Deferred Sales Charge (2).......................................... 1.00% 1.00%
Other Redemption Fees...................................................... None None
ANNUAL FUND OPERATING EXPENSES (AS A % OF AVERAGE NET ASSETS)
Management Fees (After Fee Waiver for Voyageur Fund) (3)................... 0.50% 0.50%
Rule 12b-1 Fees (After Fee Waiver for Great Hall Fund) (3)................. 0.20% 0.25%
Other Expenses (After Expense Reimbursement for Voyageur Fund) (3)......... 0.15% 0.10%
----- -----
Total Fund Operating Expenses (After Fee Waivers and Expense
Reimbursements) (3)..................................................... 0.85% 0.85%
TOTAL FUND OPERATING EXPENSES WITHOUT
VOLUNTARY WAIVERS AND REIMBURSEMENTs (3).............................. 0.96% 1.15%
</TABLE>
EXAMPLE (4)
You would pay the following expenses on a $1,000 investment over various time
periods assuming: (1) 5% annual return; and (2) redemption at the end of each
time period:
<TABLE>
<CAPTION>
<S> <C> <C>
1 year..................................................................... $53 $46
3 years.................................................................... $71 $64
5 years.................................................................... $90
10 years................................................................... $145
</TABLE>
(1) Voyageur Fund numbers are based on VFM's undertaking to limit Voyageur
Fund's Total Operating Expenses for Class A shares to .85% of average daily
net assets through the fiscal year ending December31, 1998.
(2) For both Funds, a contingent deferred sales charge may apply to the
redemption of Class A shares that are purchased without an initial sales
charge. See "Purchase, Exchange and Redemption Procedures" below.
(3) Total Fund Operating Expenses for each Fund reflect expense limitations
discussed herein. Insight voluntarily limits 12b-1 Fees for Great Hall
Fund's shares to .20% of the Fund's average daily net assets attributable
to such shares. Without expense reimbursements, 12b-1 Fees would have been
.30% per year of its average daily assets, and Total Fund Operating
Expenses would have been .96% of average daily net assets. VFM believes
that without fee waivers and expense reimbursements, Management Fees for
Voyageur Fund Class A shares would be .65% of average daily net assets,
Rule 12b-1 Fees for Voyageur Fund ClassA shares would be .25% of average
daily net assets, Other Expenses would be .25% of average daily net assets,
and Total Fund Operating Expenses would be 1.15% of average daily net
assets.
(4) Assumes deduction of the maximum initial sales charge at the time of
purchase (4.50% for Great Hall Fund and 3.75% for Voyageur Fund) and no
deduction of a contingent deferred sales charge at the time of redemption.
The example is based upon Total Fund Operating Expenses after voluntary
expense waivers and reimbursements.
PURCHASE, EXCHANGE AND REDEMPTION PROCEDURES
PURCHASES OF SHARES. Shares of both Great Hall Fund and Voyageur Fund Class
A may be purchased at a public offering price equal to their net asset value per
share plus a sales charge. The maximum sales charge for Great Hall Fund is 4.50%
of the public offering price for investments of less than $100,000. For Voyageur
Fund, the maximum sales charge is 3.75% of the public offering price for
investments of less than $50,000. For each Fund, the sales charge is reduced on
a graduated scale for larger purchases. Purchases of $1,000,000 or more for
Voyageur Fund and Great Hall Fund are not subject to an initial sales charge.
However, shares of either Fund relating to such $1,000,000 purchases redeemed
during the two years after purchase are subject to a 1.00% contingent deferred
sales charge ("CDSC"). The holding period of Great Hall Fund shareholders who
purchased without initial sales charges because of the $1,000,000 waiver will
count toward determination of applicability of Voyageur Fund's CDSC following
the Reorganization. Shares of Great Hall Fund are subject to a Rule 12b-1 fee
payable at an annual rate of .20% of the Fund's average daily net assets.
Voyageur Fund ClassA shares are subject to a Rule 12b-1 fee payable at an annual
rate of .25% of the Fund's average daily net assets attributable to such shares.
Voyageur Fund also offers Class B and Class C shares, which Great Hall Fund
does not offer. For additional information on the purchase of Voyageur Fund and
Great Hall Fund shares, see "How to Purchase Shares" in Appendix D hereto, and
"How to Invest," beginning on page 16 of the Great Hall Fund prospectus
incorporated herein by reference.
PURCHASES AT REDUCED OR NO SALES CHARGE. For the shares of Great Hall Fund
and Voyageur Fund Class A, various persons, entities and groups may qualify for
reduced sales charges, or for purchases at net asset value without a sales
charge. Following the Reorganization, current Great Hall Fund shareholders (as
holders of Voyageur Fund shares) will be entitled to such Special Purchase Plans
and other purchase privileges as are set forth in the accompanying prospectus of
Voyageur Fund. These purchase plans and privileges differ in certain respects
from those currently offered by Great Hall Fund. See "How to Purchase
Shares--Class A Shares--Front End Sales Charge Alternative" in Appendix D hereto
and "How to Invest--Reduced Sales Charges" beginning on page 17 of the Great
Hall Fund prospectus incorporated herein by reference. Additionally, Class A
shares of Voyageur Fund will be offered at net asset value, without the
imposition of a sales charge, to shareholder accounts which were in existence
and entitled to purchase shares of Great Hall Fund without a sales charge as of
the Effective Time.
REDEMPTION. Shareholders of each Fund may redeem their shares, in whole or
in part, on any business day. All redemptions are made at the net asset value
next determined after a redemption request has been received in good order. As
discussed above, a contingent deferred shales charge may apply to redemptions of
certain Class A shares initially purchased without a sales charge. For
additional information on redemption of shares, see "How to Sell Shares," in
Appendix D hereto, and "How to Redeem Shares," beginning on page 18 of the Great
Hall Fund prospectus incorporated herein by reference.
EXCHANGE PRIVILEGES. Shares of Voyageur Fund may be exchanged for shares of
the same class of other funds advised by VFM ("Voyageur Complex Funds"). These
exchange privileges are further explained in Appendix D hereto under the heading
"Exchange Privilege."
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares dividends from net investment income on each day it is
open for business and pays such distributions monthly. Net realized long-term
capital gains, if any, are declared and distributed by each Fund annually.
For each Fund, dividends and capital gains distributions are reinvested in
additional shares of the same class unless a shareholder elects otherwise.
CAPITAL SHARES; SHAREHOLDER VOTING RIGHTS
All Great Hall Fund shares are the same class and freely transferable. Each
share has equal dividend rights and is entitled to one vote at all shareholder
meetings. Voyageur Fund will offer Class A, Class B and Class C shares. Each
class of shares of Voyageur Fund represents an interest in the same portfolio of
investments of Voyageur Fund and has identical voting, dividend, liquidation,
and other rights on the same terms and conditions except that expenses related
to the distribution of a class of shares are borne solely by such class and that
each class of the Fund's shares has exclusive voting rights with respect to
provisions of Fund's Rule 12b-1 plan which pertain to that particular class or
when a class vote is required by the 1940 Act.
Voyageur Fund intends to obtain an opinion from its independent auditors or
apply for a ruling from the Internal Revenue Service ("IRS") to the effect that
distributions paid with respect to the different classes of shares of Voyageur
Fund will not constitute "preferential dividends" within the meaning of Section
562(c) of the Internal Revenue Code of 1986, as amended (the "Code"), and that
all such distributions will therefore qualify for the "dividends paid deduction"
under Sections 561 and 852(b)(2)(D) of the Code. In 1994, the IRS issued the
same rulings to several other funds managed by VFM that included classes with
terms substantially similar to those of the classes of Voyageur Fund. Voyageur
Fund expects to receive the requested opinion or ruling, although there can be
no assurance that this will be the case.
PRINCIPAL RISK FACTORS
DIFFERENCES IN INVESTMENT RISKS
As discussed below, there are certain differences in the investment risks
associated with investments in Voyageur Fund and Great Hall Fund that should be
considered carefully by Great Hall Fund shareholders.
HIGHER PROPORTION OF TOTAL ASSETS IN LOWER QUALITY MUNICIPAL OBLIGATIONS. A
higher proportion of the total assets of Voyageur Fund may be subject to a
greater degree of credit risk than Great Hall Fund. Each Fund invests in medium-
and lower-grade municipal obligations. Voyageur Fund will invest at least 65% of
its total assets, in normal circumstances, in medium- and lower-grade Municipal
Obligations rated, at the time of investment, between BBB and B- (inclusive) by
S&P, Baa and B3 (inclusive) by Moody's, or BBB and B- (inclusive) by Fitch, or
Municipal Obligations determined by VFM to be of comparable quality. As a
non-fundamental policy, Great Hall Fund will not invest more than 5% of its
total assets in municipal obligations rated below Ba or BB, or more than 35% of
its total assets in municipal obligations rated below Baa or BBB, or, if
unrated, having credit characteristics that are considered by Insight, in
accordance with policies established by the Great Hall Board, to be of
comparable quality. Consequently, while Great Hall Fund can invest no more than
35% of its assets in municipal obligations rated between BBB and B- (inclusive)
by S&P, Baa and B3 (inclusive) by Moody's, or BBB and B- (inclusive) by Fitch,
Voyageur Fund may invest without limit in Municipal Obligations with such
ratings.
Investment in such lower-grade tax-exempt obligations involves special
risks as compared with investment in higher-grade tax-exempt obligations.
Lower-grade tax-exempt obligations generally involve greater credit risk than
higher-grade tax-exempt obligations and are more sensitive to adverse economic
changes, significant increases in interest rates and individual issuer
developments. The market for lower-grade tax-exempt obligations is considered to
be less liquid than the market for investment grade tax-exempt obligations,
which may adversely affect the ability of Voyageur Fund to dispose of such
securities in a timely manner at a price which reflects the value of such
securities in VFM's judgment. The market price for less liquid securities tends
to be more volatile than the market price for more liquid securities. The lower
liquidity of and the absence of readily available market quotations for
lower-grade tax-exempt obligations may make VFM's valuation of such securities
more difficult, and VFM's judgment may play a greater role in the valuation of
Voyageur Fund's lower-grade tax-exempt obligations. Periods of economic
uncertainty and changes may have a greater impact on the market price of such
bonds and, therefore, the net asset value of Voyageur Fund.
Neither Fund will may invest in lower-grade municipal securities rated, at
the time of investment, lower than B-by S&P or Fitch, or B3 by Moody's, or in
municipal securities determined by their respective advisers to be of comparable
quality. Each Fund may retain municipal securities which are downgraded after
investment. There is no minimum rating with respect to securities that are in
default or with respect to which payment of interest and/or repayment of
principal is in arrears after investment. Additional information concerning the
risks associated with investments in lower-grade municipal obligations can be
found in Appendix B to this Prospectus/Proxy Statement under "Risks and Special
Investment Considerations--Special Risk Considerations Regarding Medium- and
Lower-Grade Municipal Obligations," and in the Statement of Additional
Information.
DERIVATIVE MUNICIPAL OBLIGATIONS. Voyageur Fund may acquire Derivative
Municipal Obligations, which are custodial receipts or trust certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain Municipal Obligations.
Certain of these Derivative Municipal Obligations involve special risks. The
principal and interest payments on the custodial receipts or trust certificates
underlying Derivative Municipal Obligations may be allocated in a number of
ways. For example, payments may be allocated such that certain custodial
receipts may have variable or floating interest rates and others may be stripped
securities which pay only the principal or interest due on the underlying
Municipal Obligations. Voyageur Fund may also invest in custodial receipts which
are "inverse floating obligations" (also sometimes referred to as "residual
interest bonds"). These securities pay interest rates that vary inversely to
changes in the interest rates of specified short-term Municipal Obligations or
an index of short-term Municipal Obligations. Thus, as market interest rates
increase, the interest rates on inverse floating obligations decrease.
Conversely, as market rates decline, the interest rates on inverse floating
obligations increase. Such securities have the effect of providing a degree of
investment leverage, since the interest rates on such securities will generally
change at a rate which is a multiple of the change in the interest rates of the
specified Municipal Obligations or index. As a result, the market values of
inverse floating obligations will generally be more volatile than the market
values of other Municipal Obligations and investments in these types of
obligations will increase the volatility of the net asset value of shares of
Voyageur Fund. Great Hall Fund may not invest in such securities.
ALTERNATIVE MINIMUM TAX. Voyageur Fund may invest without limit in
securities the interest on which is an item of tax preference for purposes of
calculation of federal or state alternative minimum tax ("AMT"). Great Hall Fund
attempts not to invest in AMT securities and may invest no more than 20% of its
net assets in such securities. See "Distribution to Shareholders and Taxes
- --Taxes-- Federal Income Taxation" in Appendix D hereto.
CONCENTRATION. As a fundamental policy, Voyageur Fund may not invest 25% or
more of its total assets in the securities of any industry, although, for
purposes of this limitation, tax-exempt securities and U.S. Government
obligations are not considered to be part of any industry. Voyageur Fund may
invest 25% or more of its total assets in industrial development revenue bonds.
In addition, it is possible that the Fund from time to time will invest 25% or
more of its total assets in a particular segment of the municipal bond market,
such as housing, health care, utility, transportation, education or industrial
obligations. In such circumstances, economic, business, political or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or a declining
market or need for the project) might also affect other bonds in the same
segment, thereby potentially increasing market or credit risk. A discussion of
these segments of the municipal bond market is set forth in the Statement of
Additional Information under "Investment Policies and
Restrictions--Concentration Policy."
OPTIONS, FUTURES CONTRACTS AND REVERSE REPURCHASE AGREEMENTS. Voyageur Fund
may write (i.e., sell) covered put and call options and purchase put and call
options on the securities in which it may invest and on indices of securities in
which it may invest. Voyageur Fund also may enter into contracts for the
purchase or sale for future delivery of fixed income securities or contracts
based on financial indices including any index of securities in which the Fund
may invest ("futures contracts") and may purchase and write put and call options
on futures contracts. Great Hall Fund may not engage in options or futures
transactions. In addition, Voyageur Fund may enter into reverse repurchase
agreements with banks and securities dealers with respect to not more than 10%
of its total assets. Great Hall Fund may not enter into such agreements. The use
of options, futures contracts and reverse repurchase agreements entails special
risks as set forth in Appendix B hereto under "Investment Objectives and
Policies of Voyageur Fund--Miscellaneous Investment Practices."
SHARED INVESTMENT RISKS
Because the investment objectives, policies and restrictions of Great Hall
Fund and Voyageur Fund are similar (see "Information About Great Hall Fund and
Voyageur Fund--Comparison of Investment Objectives, Policies and Restrictions"
below), an investment in either Fund involves many of the same risks. Certain of
these risks are discussed below.
DEBT SECURITIES. Investment in debt securities, including municipal
securities, involves both interest rate and credit risk. Generally, the value of
debt instruments rises and falls inversely with interest rates. As interest
rates decline, the value of debt securities generally increases. Conversely,
rising interest rates tend to cause the value of debt securities to decrease.
Bonds with longer maturities generally are more volatile than bonds with shorter
maturities. The market value of debt securities also varies according to the
relative financial condition of the issuer. In general, lower-quality bonds
offer higher yields due to the increased risk that the issuer will be unable to
meet its obligations on interest or principal payments at the time called for by
the debt instrument. Each Fund's investments are also subject to "call" risk.
Certain obligations held by a Fund may permit the issuer at its option to call
or redeem its securities. If an issuer were to redeem securities held by a Fund
during a time of declining interest rates, the Fund might not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed. The yields on Municipal Obligations are dependent on a
variety of factors, including the financial condition of the issuer or other
obligor thereon or the revenue source from which debt service is payable,
general economic and monetary conditions, conditions in the relevant market, the
size of a particular issue, maturity of the obligation and the rating of the
issue. Generally, the value of Municipal Obligations will tend to fall as
interest rates rise and will tend to increase as interest rates decrease. In
addition, Municipal Obligations of longer maturity produce higher current yields
than Municipal Obligations with shorter maturities but are subject to greater
price fluctuation due to changes in interest rates, tax laws and other general
market factors. Lower-rated Municipal Obligations generally produce a higher
yield than higher-rated Municipal Obligations due to the perception of a greater
degree of risk as to the payment of principal and interest. Certain Municipal
Obligations held by Voyageur Fund may permit the issuer at its option to "call,"
or redeem, its securities. If an issuer were to redeem securities held by the
Fund during a time of declining interest rates, the Fund might not be able to
reinvest the proceeds in securities providing the same investment return as the
securities redeemed.
MEDIUM- AND LOWER-GRADE MUNICIPAL OBLIGATIONS. Municipal Obligations which
are in the medium- and lower-grade categories generally offer a higher current
yield than is offered by higher-grade Municipal Obligations but they also
generally involve greater price volatility and greater credit and market risk.
Debt securities rated BB or below by S&P or Fitch and B or below by Moody's are
commonly referred to as "junk bonds."
The value of each of the Fund's portfolio securities can be expected to
fluctuate over time. When interest rates decline, the value of a portfolio
invested in fixed-income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-income securities generally can be expected to decline. However, the
secondary market prices of medium- and lower-grade Municipal Obligations are
less sensitive to changes in interest rates and are more sensitive to adverse
economic changes or individual issuer developments than are the secondary market
prices of higher-grade debt securities. Such events also could lead to a higher
incidence of defaults by issuers of medium- and lower-grade Municipal
Obligations as compared with historical default rates. In addition, changes in
interest rates and periods of economic uncertainty can be expected to result in
increased volatility in the market price of the Municipal Obligations in the
Fund's portfolio and thus in the net asset value of the Fund. Also, adverse
publicity and investor perceptions, whether or not based on rational analysis,
may affect the value and liquidity of medium- and lower-grade Municipal
Obligations. The secondary market value of Municipal Obligations structured as
zero coupon securities and payment-in-kind securities may be more volatile in
response to changes in interest rates than debt securities which pay interest
periodically in cash. Investment in such securities also involves certain tax
considerations. For additional information on the risks of investing in medium-
and lower-grade Municipal Obligations, see "Risks and Special Investment
Considerations--Special Risk Considerations Regarding Medium- and Lower-Grade
Municipal Obligations"in Appendix B hereto.
NON-DIVERSIFIED STATUS. As non-diversified funds, each Fund is able to
invest, subject to certain federal tax requirements, a relatively higher
percentage (compared to "diversified" mutual funds) of its assets in the
securities of a limited number of issuers. This may result in a Fund's
securities being more susceptible to any single economic, political or
regulatory occurrence than the securities of a diversified fund. See "Investment
Policies and Restrictions--Diversification" in the Statement of Additional
Information.
OTHER. Both Funds may invest in repurchase agreements, purchase securities
on a "when-issued" basis and borrow money from banks for temporary or emergency
purposes (in an amount equal to 20% of total assets for Voyageur Fund and 10% of
total assets for Great Hall Fund). Each of these transactions involves certain
risks as set forth in the accompanying Voyageur Fund prospectus under
"Investment Objectives and Policies --Miscellaneous Investment Practices" and in
the Great Hall Fund prospectus incorporated herein by reference under
"Investment Techniques and Risk Factors."
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
Great Hall Fund and Voyageur Fund are both non-diversified, open-end funds
with investment objectives which are substantially the same.
o The investment objective of Great Hall Fund is to maximize current
income exempt from federal income tax through investments primarily in
medium- and lower-grade municipal obligations.
o The investment objective of Voyageur Fund is to seek a high level of
current income exempt from federal income taxes through investment in
a portfolio of medium- and lower-grade Municipal Obligations.
INVESTMENT POLICIES
The investment policies and restrictions of Great Hall Fund and Voyageur
Fund are similar but not identical, as discussed in further detail below.
GENERAL. In normal market conditions, each Fund generally invests its
assets in municipal securities issued by or on behalf of a state or territory or
its agencies, instrumentalities, municipalities and political subdivisions. Each
Fund will attempt to invest 100% (and as a matter of fundamental policy during
normal circumstances at least 80%) of the value of its net assets in securities
the interest on which is exempt from regular federal tax. Great Hall Fund as a
matter of fundamental policy during normal circumstances also attempts to invest
no more than 20% of the value of its net assets in securities the interest on
which is an item of tax preference for purposes of the federal alternative
minimum tax ("AMT"). Voyageur Fund may invest without limit in securities that
generate interest that is an item of tax preference for purposes of the AMT.
SECURITIES RATINGS. Each Fund invests in medium- and lower-grade Municipal
Obligations. Great Hall Fund invests in medium-grade Municipal Obligations rated
A or Baa, MIG-2 or Prime-2 by Moody's, or A or BBB, SP-2 or A-2 by S&P, or, if
unrated, considered by the Fund's adviser to be of comparable quality.
Lower-grade Municipal Obligations in which Great Hall Fund may invest include
those rated Ba or B, MIG-3 or Prime-3 by Moody's, or BB or B, SP-3 or A-3 by
S&P, or, if unrated, considered by Insight, in accordance with policies
established by the Board of Directors of Great Hall, to be of comparable
quality.
In normal circumstances, Voyageur Fund will invest at least 65% of its
total assets in medium- and lower-grade Municipal Obligations rated, at the time
of investment, between BBB and B- (inclusive) by S&P, Baa and B3 (inclusive) by
Moody's, or BBB and B- (inclusive) by Fitch, and Municipal Obligations
determined by VFM to be of comparable quality. Great Hall Fund invests in
Municipal Obligations with ratings below Ba or BB only when Insight believes the
rating does not accurately reflect the actual quality of the issuer's credit. As
a non-fundamental policy, Great Hall Fund will not invest more than 5% of its
total assets in Municipal Obligations rated below Ba or BB, or more than 35% of
its total assets in Municipal Obligations rated below Baa or BBB, or, if
unrated, having credit characteristics that are considered by Insight, in
accordance with policies established by the Great Hall Board, to be of
comparable quality. Consequently, while Great Hall Fund can invest no more than
35% of its assets in Municipal Obligations rated between BBB and B- (inclusive)
by S&P, Baa and B3 (inclusive) by Moody's, and BBB and B- (inclusive) by Fitch,
Voyageur Fund may invest without limit in Municipal Obligations with such
ratings.
Neither Fund may invest in lower-grade Municipal Obligations rated, at the
time of investment, lower than B- by S&P or Fitch, or B3 by Moody's, or in
Municipal Obligations determined by their respective advisers to be of
comparable quality.
Each Fund may retain Municipal Obligations which are downgraded after
investment. There is no minimum rating with respect to securities that are in
default or with respect to which payment of interest and/or repayment of
principal is in arrears after investment.
AVERAGE PORTFOLIO MATURITY. In normal market circumstances, Great Hall Fund
anticipates that longer-term maturities will provide the highest current income
and, accordingly, expects that 80% or more of the assets of Great Hall Fund will
be invested in long-term Municipal Obligations. Under normal market conditions,
it is anticipated that the average weighted maturity of Great Hall Fund's
portfolio will be in the range of 17 to 22 years, and possibly in excess of 22
years. The weighted average maturity of the investment portfolio of Voyageur
Fund is expected to be approximately 15 to 25 years.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. The sale of illiquid securities often requires more time
and results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. A Fund may be
restricted in its ability to sell such securities at a time when its investment
adviser deems it advisable to do so. In addition, in order to meet redemption
requests, a Fund may have to sell other assets, rather than such illiquid
securities, at a time which is not advantageous.
DERIVATIVE MUNICIPAL OBLIGATIONS. Voyageur Fund may also acquire Derivative
Municipal Obligations, which are custodial receipts or trust certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain Municipal Obligations.
Great Hall Fund may not purchase such obligations. Certain Derivative Municipal
Obligations involve special risks. See "Principal Risk Factors--Derivative
Municipal Obligations."
REVERSE REPURCHASE AGREEMENTS. Voyageur Fund may engage in "reverse
repurchase agreements" with banks and securities dealers with respect to not
more than 10% of its total assets. Great Hall Fund may not enter into such
agreements. Reverse repurchase agreements are ordinary repurchase agreements in
which Voyageur Fund is the seller of, rather than the investor in, securities
and agrees to repurchase them at an agreed upon time and place. Reverse
repurchase agreements may be used as a means of borrowing for investment
purposes subject to the 10% limitation set forth above. This speculative
technique is referred to as leveraging. For a further discussion of reverse
repurchase agreements, including the risks thereof, see Appendix B hereto under
"Investment Objectives and Policies of Voyageur Fund--Miscellaneous Investment
Practices--Reverse Repurchase Agreements."
FORWARD COMMITMENTS. Each Fund may purchase securities on a "when issued"
or forward commitment basis, with delivery and payment for the securities
normally taking place 15 to 45 days after the date of the transaction. The
payment obligation and the interest rate that will be received on the securities
are each fixed at the time the buyer enters into the commitment. The purchase of
securities on such a basis involves certain risks. See "Investment Objectives
and Policies of Voyageur Fund--Miscellaneous Investment Practices--Forward
Commitments" in Appendix B hereto.
TAXABLE INVESTMENTS. Although Great Hall Fund will attempt to invest 100%
of its net assets in tax-exempt obligations and Voyageur Fund anticipates that,
in normal market conditions, it will invest substantially all of its assets in
tax-exempt obligations, each Fund may invest without limit in taxable
obligations for temporary defensive purposes. The taxable obligations in which
Voyageur Fund may invest are described in Appendix B to the Prospectus/Proxy
Statement under "Investment Objectives and Policies of Voyageur Fund." To the
extent the Funds invest in taxable investments, the Funds may not at such times
be in a position to achieve the investment objective of current income exempt
from federal income tax. Great Hall Fund may invest up to 20% of its assets and
Voyageur Fund may invest without limit in securities the interest on which is an
item of tax preference for purposes of the federal alternative minimum tax.
BORROWING. As a fundamental policy, Great Hall Fund may borrow from banks
up to a limit of 5% of its total assets, but only for temporary or emergency
non-investment purposes. Voyageur Fund, as a fundamental policy, may borrow
money from banks for temporary or emergency purposes in an amount not exceeding
20% of the value of its total assets. As discussed above, Voyageur Fund may also
engage in reverse repurchase agreements in an amount up to 10% of its total
assets. Reverse repurchase agreements may be used as a means of borrowing for
investment purposes.
OPTIONS. Voyageur Fund may write (i.e., sell) covered put and call options
and purchase put and call options on the securities in which it may invest and
on indices of securities in which it may invest. Great Hall Fund may not engage
in options transactions. Participation in the options market involves investment
risks and transaction costs to which Voyageur Fund would not be subject absent
the use of this strategy. See "Investment Objectives and Policies of Voyageur
Fund--Miscellaneous Investment Practices--Options on Securities" in Appendix B
hereto.
FUTURES CONTRACTS AND OPTIONS THEREON. Voyageur Fund may enter into
contracts for the purchase or sale for future delivery of fixed income
securities or contracts based on financial indices including any index of
securities in which the Fund may invest ("futures contracts") and may purchase
and write put and call options to buy or sell futures contracts ("options on
futures contracts"). Great Hall Fund may not enter into futures contracts or
options on futures contracts. The successful use of such instruments draws upon
VFM's experience with respect to such instruments and generally depends upon
VFM's ability to forecast interest rate movements correctly. See "Investment
Objectives and Policies of Voyageur Fund--Miscellaneous Investment
Practices--Futures Contracts and Options on Futures Contracts" in Appendix B
hereto.
The foregoing comparison does not purport to be a complete summary of the
investment policies, restrictions and risk factors of Great Hall Fund or
Voyageur Fund. For complete discussions of the investment policies, restrictions
and risk factors of the respective Funds, see Appendix B hereto; the Statement
of Additional Information; and Great Hall Fund's prospectus and statement of
additional information referred to under "Incorporation by Reference." The
Annual Report of Great Hall Fund for the fiscal year ended July31, 1996,
referred to on the cover page hereof under "Incorporation by Reference,"
provides information concerning the composition of the Fund's assets at such
date.
CAPITALIZATION
The following table shows the capitalization of Great Hall Fund with
respect to its Class A shares as of June 30, 1996 and on a pro forma basis as of
that date, giving effect to the proposed acquisition of the assets of Great Hall
Fund at the net asset value in the Reorganization. Voyageur Fund will not have
commenced operations prior to the Reorganization.
(In thousands, except per share values)
<TABLE>
<CAPTION>
GREAT HALL VOYAGEUR FUND
FUND PRO FORMA
---- ---------
CLASS A SHARES*
<S> <C> <C>
Net assets................................................ $63,403 $63,403
Net asset value per share................................. $10.14 $10.14
Shares outstanding........................................ 6,250 6,250
</TABLE>
* Great Hall Fund offers only one class of shares without designation.
Voyageur Fund offers Class A, Class B and Class C shares. In the
Reorganization, Great Hall Fund shareholders will receive Voyageur Fund
Class A shares.
INFORMATION ABOUT THE REORGANIZATION
REASONS FOR THE REORGANIZATION
Great Hall Fund was organized and commenced operations in June 1992 by
acquiring all of the assets and liabilities of Carnegie Tax-Exempt Fund
("Carnegie Fund"), a mutual fund managed by Carnegie Capital Management
Corporation ("Carnegie"). Prior to such acquisition, 48% of Carnegie's stock was
owned by Insight's affiliates, Dain Bosworth Incorporated ("Dain") and Rauscher
Pierce Refsnes, Inc. ("Rauscher"), and Insight served as the sub-adviser and
portfolio manager of Carnegie Fund. Since the acquisition, Insight has served as
Great Hall Fund's sole investment adviser, and Dain and Rauscher have served as
the Fund's Co-Distributors. Each of Insight, Dain and Rauscher is a wholly owned
subsidiary of Inter-Regional Financial Group, Inc. ("IFG").
Since the Carnegie acquisition, IFG's strategy concerning retail mutual
funds (like that of many similar financial services firms) has evolved in the
direction of promoting predominantly retail funds that are managed by firms not
affiliated with IFG (exclusive of Great Hall money market funds). IFG and the
Board of Directors of Great Hall Investment Funds have recognized that IFG's
strategy could in the long term result in a decreasing asset base for the Great
Hall Funds and a corresponding difficulty in controlling fund expenses and in
providing competitive returns. For this reason, IFG and Great Hall Investment
Funds have explored and evaluated the relative merits of various options,
including the possible transfer of Great Hall Fund to a firm with a strategy
more congruent with the Fund's long-term best interests -- a firm that could,
among other factors, more actively promote and market the Fund. It was
ultimately decided by IFG and Great Hall Investment Funds' Board of Directors
that such a transfer would indeed be in the best interests of Great Hall Fund
and its shareholders.
IFG thereupon engaged an investment banker to assist in identifying and
screening potential acquiring firms. The banker identified a number of
potentially suitable candidates, and through the process of preliminary
negotiations and due diligence, the Voyageur organization emerged as the
apparent most suitable candidate.
The Board of Directors of Great Hall Investment Funds appointed a committee
of independent directors (the "Committee") to review and evaluate IFG's
recommendation of the proposed Voyageur transaction. Based on its review of the
Voyageur organization and the proposed transactions, the Committee recommended
and the Board of Directors of Great Hall Investment Funds agreed, that the
Reorganization would be in the best interest of Great Hall Fund and its
shareholders. In evaluating the Voyageur organization, the Committee or Insight
(among other matters): interviewed principal Voyageur executive, investment,
marketing, legal, compliance, administrative and accounting personnel and the
Voyageur Fund's independent auditors; reviewed, inspected and analyzed
applicable legal documents, compliance, accounting and administrative procedures
and systems, financial information and other relevant documents and files;
analyzed comparative fund performance and expenses; and conducted various
on-site visits and inspections. Based thereon, the Committee recommended that
the Board of Directors of Great Hall Investment Funds approve the Reorganization
and recommend the Reorganization for shareholder approval.
The Board of Directors believes that the Reorganization will be in the best
interests of Great Hall Fund and its shareholders for the following reasons (in
addition to the aforementioned reasons):
EXPERIENCE OF THE VOYAGEUR ORGANIZATION. VFM currently serves as the
investment adviser of 6 closed-end investment companies, 10 open-end investment
companies consisting of 33 separate portfolios and, together with its
affiliates, numerous privately-managed accounts with combined assets as of July
31, 1996 of approximately $11.5 billion (which includes over $2 billion of
municipal bonds). Therefore, the Reorganization appears consistent with VFM's
current areas of expertise as well as its business plans and strategies.
Additionally, VFM's portfolio managers appear to be well-experienced and to have
commendable track records managing portfolios similar to Great Hall Fund.
EXPENSES IN CONNECTION WITH THE REORGANIZATION. NO EXPENSES DIRECTLY
INCURRED IN CONNECTION WITH THE REORGANIZATION WILL BE BORNE BY GREAT HALL FUND,
VOYAGEUR FUND OR THEIR RESPECTIVE SHAREHOLDERS. The Class A Voyageur Fund shares
to be received by Great Hall Fund shareholders will not be subject to any
front-end sales charges. In addition, the Reorganization will be tax-free to
each Fund and its shareholders and will not result in any economic dilution to
either Fund or its shareholders.
ASSET LEVELS; MARKETING ABILITIES OF VOYAGEUR ORGANIZATION. Great Hall Fund
has a relatively small asset base, which in the long term could limit the Fund's
ability to control costs and to generate competitive returns (in the absence of
voluntary fee and expense waivers and reimbursements). The Voyageur organization
has a much more extensive and developed network of independent brokers and
dealers through whom the Voyageur Fund is distributed (with currently over 600
authorized dealers of Voyageur Fund shares). The greater marketing abilities and
coverage of the Voyageur organization may optimize the opportunities for growth
and the attendant opportunities for increased portfolio management flexibility
and investment returns and for control over Fund expense levels.
FEE AND EXPENSE LEVELS. VFM has agreed to voluntarily limit Voyageur Fund's
Class A expense levels to not more than Great Hall Fund's current fee and
expense level for the period through December 31, 1998.
EXCHANGE PRIVILEGES; SHAREHOLDER SERVICES. The Voyageur organization offers
a comprehensive and competitive range of services to Fund shareholders,
including among others the ability to exchange Voyageur Fund shares for shares
of most other mutual funds for which VFM serves as investment adviser at net
asset value without the payment of a sales charge. In addition, most mutual
funds managed by VFM offer additional purchase options to prospective
shareholders through the availability of multiple classes of shares.
FOR THE FOREGOING REASONS, THE BOARD OF DIRECTORS OF GREAT HALL INVESTMENT
FUNDS BELIEVES THAT THE REORGANIZATION WILL BE IN THE BEST INTERESTS OF THE
GREAT HALL FUND AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THE APPROVAL OF
THE REORGANIZATION BY SUCH SHAREHOLDERS. PLAN OF REORGANIZATION
The following summary of the proposed Plan and the Reorganization is
qualified in its entirety by reference to the Plan attached to this
Prospectus/Proxy Statement as Exhibit A. The Plan provides that, as of the
Effective Time, Voyageur Fund will acquire all or substantially all of the
assets and assume all identified and stated liabilities of Great Hall Fund in
exchange for Voyageur Fund shares having an aggregate net asset value equal to
the aggregate value of the assets acquired (less liabilities assumed) from Great
Hall Fund. The value of Great Hall Fund assets and liabilities to be acquired by
Voyageur Fund, and the value of Voyageur Fund shares to be received in exchange
therefor, will be computed as of the Effective Time. Voyageur Fund will not
assume any liabilities or obligations of Great Hall Fund, whether absolute or
contingent, other than those identified and stated in an unaudited statement of
assets and liabilities of Great Hall Fund as of the Effective Time. Because
Great Hall Fund is a separate series of Great Hall Investment Funds, for
corporate law purposes the transaction is structured as a sale of the assets and
assumption of the liabilities allocated to Great Hall Fund in exchange for the
issuance of Voyageur Fund shares to Great Hall Fund, followed immediately by the
distribution of such Voyageur Fund shares to Great Hall Fund shareholders and
the cancellation and retirement of outstanding Great Hall Fund shares.
Pursuant to the Plan, each holder of Great Hall Fund will receive, at the
Effective Time, Class A shares of Voyageur Fund with an aggregate net asset
value equal to the aggregate net asset value of Great Hall Fund shares owned by
such shareholder immediately prior to the Effective Time. Under the Plan, the
net asset value per share of Great Hall Fund's shares will be computed as of the
Effective Time using the valuation procedures set forth in the Fund's articles
of incorporation and bylaws and then-current prospectus and statement of
additional information and as may be required by the 1940 Act. At the Effective
Time, Voyageur Fund will issue to Great Hall Fund, and Great Hall Fund will
distribute to Great Hall Fund's shareholders of record, determined as of the
Effective Time, Voyageur Fund Class A shares issued in exchange for Great Hall
Fund assets as described above. All outstanding shares of Great Hall Fund
thereupon will be canceled and retired and no additional shares representing
interests in Great Hall Fund will be issued thereafter, and Great Hall Fund will
be deemed to be liquidated. The distribution of Voyageur Fund shares to former
Great Hall Fund shareholders will be accomplished by the establishment of
accounts on the share records of Voyageur Fund in the names of Great Hall Fund
shareholders, each representing the numbers of full and fractional Voyageur Fund
Class A shares due such shareholders.
The Plan provides that no sales charges will be incurred by Great Hall Fund
shareholders in connection with the acquisition by them of Voyageur Fund shares
pursuant thereto. However, if Great Hall Fund shares were initially acquired
without a front-end sales charge in connection with a purchase of $1,000,000 or
more, Voyageur Fund Class A shares acquired in the Reorganization may continue
to be subject to a contingent deferred sales charge. The Plan provides that in
determining whether to apply the two-year 1.0% contingent deferred sales charge
to Voyageur Fund Class A shares acquired in the Reorganization, credit will be
given for the period a former Great Hall Fund shareholder who is subject to such
a contingent deferred sales charge held his or her shares.
Great Hall Fund contemplates that it will make a distribution immediately
prior to the Effective Time of all of its current year net tax-exempt income,
ordinary taxable income and net realized capital gains, if any, not previously
distributed. Any portion of this distribution which does not constitute an
exempt-interest dividend will be taxable to Great Hall Fund shareholders subject
to taxation.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including, among others: (a)approval of the Plan by the
shareholders of Great Hall Fund; (b)the delivery of the opinion of counsel
described below under "--Federal Income Tax Consequences"; (c) the accuracy as
of the Effective Time of the representations and warranties made by Great Hall
Fund and Voyageur Fund in the Plan; and (d) the delivery of customary closing
certificates. See the Plan attached hereto as Exhibit A for a complete listing
of the conditions to the consummation of the Reorganization. The Plan may be
terminated and the Reorganization abandoned at any time prior to the Effective
Time, before or after approval by shareholders of Great Hall Fund, by resolution
of the Board of Directors of either Great Hall Investment Funds or Voyageur
Mutual Funds, if circumstances should develop that, in the opinion of such
Board, make proceeding with the consummation of the Plan and Reorganization not
in the best interests of the respective Fund's shareholders.
The Plan provides that VFM will pay the costs incurred by Voyageur Fund and
Great Hall Fund in connection with the Reorganization, including the fees and
expenses associated with the preparation and filing of a registration statement
for purposes of registering the Voyageur Fund shares to be issued in the
Reorganization, and the expenses of printing and mailing this Prospectus/Proxy
Statement and holding the Great Hall Fund shareholder meeting required to
approve the Reorganization. The Plan also provides that at or prior to the
Effective Time, expenses incurred by Great Hall Fund shall have been maintained
by Insight or otherwise so as not to exceed any applicable state-imposed expense
limitations. In addition, the Plan provides that at or prior to the Effective
Time, appropriate action shall have been taken by Insight or otherwise such that
there are no unamortized organizational expenses on the books of Great Hall
Fund.
Under the Plan, Great Hall Fund has agreed not to acquire any securities
which are not permissible investments for Voyageur Fund prior to the Effective
Time, and it is a condition to closing that Great Hall Fund not hold any such
securities immediately prior to the Effective Time. See "Summary--Investment
Objectives, Policies and Restrictions" and "Information about Great Hall Fund
and Voyageur Fund--Comparison of Investment Objectives, Policies and
Restrictions." Great Hall Fund does not hold any such securities at the date of
this Prospectus/Proxy Statement.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding shares of Great Hall Fund. If the Plan is not approved, the Board of
Directors of Great Hall Fund will consider other possible courses of action.
DESCRIPTION OF VOYAGEUR FUND SHARES
For information concerning the shares of Voyageur Fund, including voting
rights, see "Summary--Capital Shares; Shareholder Voting Rights" above. All
Voyageur Fund shares issued in the Reorganization will be fully paid and
non-assessable and will not be entitled to preemptive or cumulative voting
rights.
FEDERAL INCOME TAX CONSEQUENCES
It is intended that the exchange of Voyageur Fund shares for Great Hall
Fund's net assets and the distribution of such shares to Great Hall Fund's
shareholders upon liquidation of Great Hall Fund will be treated as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended (the "Code"),
and that, for federal income tax purposes, no income, gain or loss will be
recognized by Great Hall Fund's shareholders (except that Great Hall Fund
contemplates that it will make a distribution, immediately prior to the
Reorganization, of all of its current year net tax-exempt income, ordinary
taxable income and net realized capital gains, if any, not previously
distributed, and any portion of this distribution which does not represent
tax-exempt income or otherwise qualify as an exempt-interest dividend will be
taxable to Great Hall Fund shareholders subject to taxation). Great Hall Fund
has not asked, nor does it plan to ask, the Internal Revenue Service to rule on
the tax consequences of the Reorganization.
As a condition to the closing of the Reorganization, the two Funds will
receive an opinion from Dorsey & Whitney LLP, counsel to Voyageur Fund, based in
part on certain representations to be furnished by each Fund and by VFM,
substantially to the effect that the federal income tax consequences of the
Reorganization will be as follows:
(a) the Reorganization will constitute a reorganization within the meaning
of Section 368(a)(1)(F) of the Code, and Voyageur Fund and Great Hall
Fund each will qualify as a party to the Reorganization under Section
368(b) of the Code;
(b) Great Hall Fund shareholders will recognize no income, gain or loss
upon receipt, pursuant to the Reorganization, of Voyageur Fund shares.
Great Hall Fund shareholders subject to taxation will recognize income
upon receipt of any ordinary taxable income or net capital gains of
Great Hall Fund which are distributed by Great Hall Fund prior to the
Effective Time;
(c) the tax basis of Voyageur Fund shares received by each Great Hall Fund
shareholder pursuant to the Reorganization will be equal to the tax
basis of Great Hall Fund shares exchanged therefor;
(d) the holding period of Voyageur Fund shares received by each Great Hall
Fund shareholder pursuant to the Reorganization will include the
period during which the Great Hall Fund shareholder held Great Hall
Fund shares exchanged therefor, provided that the Great Hall Fund
shares were held as a capital asset at the Effective Time;
(e) Great Hall Fund will recognize no income, gain or loss by reason of
the Reorganization;
(f) Voyageur Fund will recognize no income, gain or loss by reason of the
Reorganization;
(g) the tax basis of the assets received by Voyageur Fund pursuant to the
Reorganization will be the same as the basis of those assets in the
hands of Great Hall Fund as of the Effective Time;
(h) the holding period of the assets received by Voyageur Fund pursuant to
the Reorganization will include the period during which such assets
were held by Great Hall Fund; and
(i) Voyageur Fund will succeed to and take into account the earnings and
profits, or deficit in earnings and profits, of Great Hall Fund as of
the Effective Time.
The foregoing opinion will be based upon certain representations, of which
a principal one is that there is no plan or intention on the part of the
shareholders owning 5% or more of the outstanding shares of Great Hall Fund and,
to the best of knowledge of the management of Great Hall Fund, there is no plan
or intention on the part of the remaining shareholders of Great Hall Fund, to
sell, exchange, or otherwise dispose of any of the shares of Voyageur Fund
received in the Reorganization.
Shareholders of Great Hall Fund should consult their tax advisors regarding
the effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion only relates to the federal income
tax consequences of the Reorganization, shareholders of Great Hall Fund should
consult their tax advisors as to state and local tax consequences, if any, of
the Reorganization.
INTERESTS OF INSIGHT, VFM AND AFFILIATES IN REORGANIZATION
In a similar transaction to the Reorganization, Voyageur Minnesota Insured
Fund ("Voyageur Minnesota Fund"), a series of Voyageur Insured Funds, Inc., also
has agreed to purchase all or substantially all of the assets and to assume
certain stated and identified liabilities of Great Hall Minnesota Insured
Tax-Exempt Fund, a series of Great Hall Investment Funds, by and in exchange for
Class A common shares of equal value of Voyageur Minnesota Fund in a tax-free
reorganization. In connection with and following the Reorganization and this
additional reorganization (together, the "Reorganizations"), Insight and the
Co-Distributors have agreed to provide various consulting and shareholder
services and have agreed for a period of three years following the closing of
the Reorganizations not to sponsor or acquire a mutual fund that is similar to
either of the Great Hall funds being acquired in the Reorganizations. In return,
VFM has agreed to pay Insight and the Co-Distributors $1,100,000 at the closing
of the transactions plus an amount at the first anniversary of the closing equal
to approximately 2% of the value of the shareholder accounts being transferred
to the acquiring Voyageur funds (less the $1,100,000 paid at closing), adjusted
generally for fluctuations in market prices between the closing and the first
anniversary. In reviewing the aforementioned payments, the Board of Directors of
Great Hall Investment Funds was aware that Insight and its affiliates incurred
costs in organizing and maintaining the Funds (including costs associated with
acquiring the assets of the Great Hall Fund from the Carnegie organization), as
well as the nature of the other services and consideration to be performed by
Insight and the Co-Distributors.
Each acquiring Voyageur Fund and VFM have agreed to comply in all material
respects with all applicable provisions of Section 15(f) of the 1940 Act
following the Reorganizations. Section 15(f) requires that (a) for a period of
three years following the closing date, at least 75% of each acquiring Voyageur
fund's Board of Directors be comprised of persons who are not "interested
persons" (as defined in the 1940 Act) of either VFM or Insight, and (b) no
"unfair burden" be imposed on the Great Hall funds being acquired or on the
acquiring Voyageur funds as a result of the transaction.
RECOMMENDATION AND VOTE REQUIRED
The Board of Directors of Great Hall Investment Funds, including the
"non-interested" directors who are not interested persons of Great Hall
Investment Funds, unanimously recommends that shareholders of Great Hall Fund
approve the Plan. Approval of the Plan will require the affirmative vote of a
majority of the outstanding shares of Great Hall Fund.
VOTING INFORMATION
GENERAL
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Directors of Great Hall Investment Funds
to be used at the Special Meeting of Great Hall Fund shareholders to be held at
8:30 a.m., Central time, on November 6, 1996, at the offices of Great Hall
Investment Funds and at any adjournments thereof. This Prospectus/Proxy
Statement, along with a Notice of Special Meeting and a proxy card, is first
being mailed to shareholders of Great Hall Fund on or about October 4, 1996.
Only shareholders of record as of the close of business on September 20, 1996
(the "Record Date") will be entitled to notice of, and to vote at, the Meeting
or any adjournment thereof. If the enclosed form of proxy is properly executed
and returned on time to be voted at the Meeting, the proxies named therein will
vote the shares represented by the proxy in accordance with the instructions
marked thereon. Unmarked proxies will be voted "for" the proposed Plan and
Reorganization. A proxy may be revoked by giving written notice, in person or by
mail, of revocation before the Meeting to Great Hall Fund at its principal
executive offices, 60 South Sixth Street, Minneapolis, Minnesota 55402, or by
properly executing and submitting a later-dated proxy, or by voting in person at
the Meeting.
If a shareholder executes and returns a proxy but abstains from voting, the
shares held by such shareholder will be deemed present at the Meeting for
purposes of determining a quorum and will be included in determining the total
number of votes cast. If a proxy is received from a broker or nominee indicating
that such person has not received instructions from the beneficial owner or
other person entitled to vote Great Hall Fund shares (i.e., a broker
"non-vote"), the shares represented by such proxy will not be considered present
at the Meeting for purposes of determining a quorum and will not be included in
determining the number of votes cast. Brokers and nominees will not have
discretionary authority to vote shares for which instructions are not received
from the beneficial owner.
Approval of the Plan and Reorganization will require the affirmative vote
described above under "Information About the Reorganization--Recommendation and
Vote Required."
As of September 20, 1996 (a) Great Hall Fund had 6,039,435 shares
outstanding and entitled to vote at the Meeting; (b) Voyageur Fund had no shares
outstanding; and (c) the directors and officers of Great Hall Fund as a group
owned less than 1% of the outstanding shares of Great Hall Fund. The following
paragraph sets forth information concerning those persons known by Great Hall
Fund to own of record or beneficially more than 5% of the outstanding shares of
Great Hall Fund as of such date, including persons and entities who beneficially
own more than 25% of the Fund. Unless otherwise indicated, the persons named
below have both record and beneficial ownership:
Great Hall Fund: Juanita M. Daly, 1200 Rancho Cr., Las Vegas, NV 89107 -
6.38%.
Proxies are solicited by mail. Additional solicitations may be made by
telephone or personal contact by officers or employees of Insight and its
affiliates without cost to Great Hall Fund. In addition, the services of a
third-party proxy solicitation firm may be utilized, with such firm's fees and
expenses borne by VFM as described under "Information About the
Reorganization--Plan of Reorganization" above.
In the event that sufficient votes to approve the Plan and Reorganization
are not received by the date set for the Meeting, the persons named as proxies
may propose one or more adjournments of the Meeting for up to 120 days to permit
further solicitation of proxies. In determining whether to adjourn the Meeting,
the following factors may be considered: the percentage of votes actually cast,
the percentage of negative votes actually cast, the nature of any further
solicitation and the information to be provided to shareholders with respect to
the reasons for the solicitation. Any such adjournment will require the
affirmative vote of a majority of the shares present in person or by proxy and
entitled to vote at the Meeting. The persons named as proxies will vote upon
such adjournment after consideration of the best interests of all shareholders.
INTERESTS OF CERTAIN PERSONS
The following persons affiliated with Voyageur Fund receive payments from
the Fund for services rendered pursuant to contractual arrangements with the
Fund: VFM receives payments from Voyageur Fund for investment advisory services
it renders pursuant to an Investment Advisory Agreement, and for dividend
disbursing, transfer agency, administrative and accounting services it renders
pursuant to an Administrative Services Agreement. VFD receives payments from
Voyageur Fund for servicing of shareholder accounts and distribution-related
services pursuant to a Distribution Agreement and the Fund's Plan of
Distribution. See "Summary--Fees and Expenses-- Voyageur Fund Expenses" above.
FINANCIAL STATEMENTS AND EXPERTS
The audited statements of assets and liabilities, including the schedules
of investments in securities, of Great Hall Fund as of July31, 1996, and the
related statements of operations for the years then ended, the statements of
changes in net assets for each of the periods indicated therein, and the
financial highlights for the periods indicated therein, as included in the
Annual Report of Great Hall Fund for the fiscal year ended July31, 1996 have
been incorporated by reference into this Prospectus/Proxy Statement in reliance
on the reports of KPMG Peat Marwick LLP, independent auditors for Great Hall
Fund, given on the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of the shares of Voyageur
Fund to be issued in the Reorganization will be passed on by Dorsey & Whitney
LLP.
OTHER INFORMATION ABOUT GREAT HALL FUND AND VOYAGEUR FUND
Great Hall Investment Funds is a Minnesota corporation organized in 1991
and is registered with the Securities and Exchange Commission under the 1940 Act
as an "open-end management investment company." Great Hall Investment Funds
currently offers its shares in five series. Information concerning the
management of Great Hall Investment Funds and shares of Great Hall Fund is
incorporated herein by reference from Great Hall Fund's current Prospectus dated
December1, 1995. The Prospectus of Great Hall Fund may be obtained in the manner
described under "Incorporation by Reference" and forms part of the Registration
Statement of Great Hall Fund on Form N-1A which has been filed with the
Commission.
Voyageur Mutual Funds is a Minnesota corporation organized in 1993 and is
registered with the Securities and Exchange Commission under the 1940 Act as an
"open-end management investment company." As of July31, 1996, Voyageur Mutual
Funds offered its shares in eight series. Additional information regarding the
management of Voyageur Mutual Funds and shares of Voyageur Fund is provided in
AppendixC to this Prospectus/Proxy Statement.
Voyageur Fund and Great Hall Fund are subject to the informational
requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in
accordance therewith file reports and other information including proxy
materials, reports and charter documents with the Commission. These proxy
materials, reports and other information filed by Voyageur Fund and Great Hall
Fund can be inspected and copies obtained at the Public Reference Facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the New York Regional Office of the Commission at Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made as of
this day of September, 1996, by and between Voyageur Mutual Funds, Inc.
("VOYAGEUR), a Minnesota corporation, on behalf of its National High Yield
Municipal Bond Fund (the "ACQUIRING FUND"), a newly formed series of Voyageur,
and Great Hall Investment Funds, Inc. ("GREAT HALL"), a Minnesota corporation,
on behalf of its National Tax-Exempt Fund (the "ACQUIRED FUND"), a series of
Great Hall.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation pursuant to Section 368(a)(1)(F) of the United States Internal
Revenue Code of 1986, as amended (the "CODE"). The reorganization (the
"REORGANIZATION") will consist of the transfer of all or substantially all of
the assets of the Acquired Fund to the Acquiring Fund and the assumption by the
Acquiring Fund of all of the identified and stated liabilities of the Acquired
Fund in exchange solely for full and fractional Class A common shares, par value
$.01 per share, of the Acquiring Fund (the "ACQUIRING FUND SHARES"), having an
aggregate net asset value equal to the aggregate value of the assets acquired
(less liabilities assumed) of the Acquired Fund, and the distribution of the
Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation of
the Acquired Fund as provided herein, all upon the terms and conditions
hereinafter set forth. The distribution of Acquiring Fund shares to Acquired
Fund shareholders and the redemption, retirement and cancellation of the
Acquired Fund's shares will be effected pursuant to an amendment to the articles
of incorporation of Great Hall in the form attached hereto as Exhibit 1 (the
"AMENDMENT") to be adopted by Great Hall in accordance with the Minnesota
Business Corporation Act.
WITNESSETH:
WHEREAS, each of Voyageur and Great Hall is a registered, open-end
management investment company, with each of Voyageur and Great Hall offering its
shares in multiple series (each of which series represents a separate and
distinct portfolio of assets and liabilities);
WHEREAS, Great Hall offers shares of the Acquired Fund in a single class
and Voyageur offers shares of the Acquiring Fund in multiple classes which will,
at the time the transactions contemplated hereby are consummated, be Class A,
Class B and Class C shares;
WHEREAS, the Acquired Fund owns securities which generally are assets of
the character in which the Acquiring Fund is permitted to invest; and
WHEREAS, the Board of Directors of each of Great Hall on behalf of the
Acquired Fund and Voyageur on behalf of the Acquiring Fund has determined that
the exchange of all or substantially all of the assets of the Acquired Fund for
Acquiring Fund Shares and the assumption of certain stated and identified
liabilities of the Acquired Fund by the Acquiring Fund is in the best interests
of the shareholders of the Acquired Fund and the Acquiring Fund, respectively.
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements hereinafter set forth, the
parties hereto covenant and agree as follows:
1. TRANSFER OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF THE ACQUIRED FUND TO
THE ACQUIRING FUND SOLELY IN EXCHANGE FOR ACQUIRING FUND SHARES, THE
ASSUMPTION OF ALL ACQUIRED FUND IDENTIFIED AND STATED LIABILITIES AND THE
LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the requisite approval by Acquired Fund shareholders and to
the other terms and conditions set forth herein and on the basis of the
representations and warranties contained herein, the Acquired Fund agrees to
transfer all or substantially all of the Acquired Fund's assets as set forth in
Section 1.2 to the Acquiring Fund, and the Acquiring Fund agrees in exchange
therefor (a) to deliver to the Acquired Fund that number of full and fractional
Acquiring Fund Shares determined in accordance with Article 2, and (b) to assume
all of the identified and stated liabilities of the Acquired Fund, as set forth
in Section 1.3. Such transactions shall take place as of the effective time
provided for in Section 3.1 (the "EFFECTIVE TIME").
1.2(a) The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all or substantially all of the Acquired Fund's property,
including, but not limited to, all cash, securities, commodities, futures, and
interest and dividends receivable which are owned by the Acquired Fund as of the
Effective Time. All of said assets shall be set forth in detail in an unaudited
statement of assets and liabilities of the Acquired Fund as of the Effective
Time (the "EFFECTIVE TIME STATEMENT"). The Effective Time Statement shall, with
respect to the listing of the Acquired Fund's portfolio securities, detail the
adjusted tax basis of such securities by lot, the respective holding periods of
such securities and the current and accumulated earnings and profits of the
Acquired Fund. The Effective Time Statement shall be prepared in accordance with
generally accepted accounting principles (except for footnotes) consistently
applied from the prior audited period and shall be certified by the Acquired
Fund's treasurer.
(b) The Acquired Fund has provided the Acquiring Fund with a list of all of
the Acquired Fund's assets as of the date of execution of this Agreement. The
Acquired Fund reserves the right to sell any of these securities in the ordinary
course of its business and, subject to Section 5.1, to acquire additional
securities in the ordinary course of its business.
1.3 The Acquiring Fund shall assume all of the identified and stated
liabilities, expenses, costs, charges and reserves (including, but not limited
to, expenses incurred in the ordinary course of the Acquired Fund's operations,
such as accounts payable relating to custodian fees, investment management and
administrative fees, legal and audit fees, and expenses of state securities
registration of the Acquired Fund's shares) reflected in the Effective Time
Statement. The Acquiring Fund shall assume only those liabilities of the
Acquired Fund in the amounts reflected on the Effective Time Statement and shall
not assume any other liabilities, whether absolute or contingent, known or
unknown, accrued or unaccrued.
1.4 Immediately after the transfer of assets provided for in Section 1.1
and the assumption of liabilities provided for in Section 1.3, and pursuant to
the plan of reorganization adopted herein, the Acquired Fund will distribute pro
rata (as provided in Article 2) to the Acquired Fund's shareholders of record,
determined as of the Effective Time (the "ACQUIRED FUND SHAREHOLDERS"), the
Acquiring Fund Shares received by the Acquired Fund pursuant to Section 1.1, and
all other assets of the Acquired Fund, if any. Thereafter, no additional shares
representing interests in the Acquired Fund shall be issued. Such distribution
will be accomplished by the transfer of the Acquiring Fund Shares then credited
to the account of the Acquired Fund on the books of the Acquiring Fund to open
accounts on the share records of the Acquiring Fund in the names of the Acquired
Fund shareholders representing the numbers of Acquiring Fund Shares due each
such shareholder. All issued and outstanding shares of the Acquired Fund will
simultaneously be canceled on the books of the Acquired Fund, although share
certificates representing interests in the Acquired Fund will represent those
numbers of Acquiring Fund Shares after the Effective Time as determined in
accordance with Article 2. Unless requested by Acquired Fund shareholders, the
Acquiring Fund will not issue certificates representing the Acquiring Fund
Shares issued in connection with such exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund. Acquiring Fund Shares will be issued in the manner described in
the Acquiring Fund's Prospectus and Statement of Additional Information as in
effect as of the Effective Time, except that no front-end sales charges will be
incurred by Acquired Fund Shareholders in connection with their acquisition of
Acquiring Fund Shares pursuant to this Agreement.
1.6 In the event Class A Acquiring Fund shares are distributed by the
Acquiring Fund in the Reorganization to former holders of shares of the Acquired
Fund with respect to which the front-end sales charge was waived due to a
purchase of $1 million or more, the Acquiring Fund agrees that in determining
whether a deferred sales charge is payable upon the sale of such Class A shares
of the Acquiring Fund it shall give credit for the period during which the
holder thereof held such Acquired Fund shares.
1.7 Any reporting responsibility of the Acquired Fund, including, but not
limited to, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "COMMISSION"),
any state securities commissions, and any federal, state or local tax
authorities or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
2. VALUATION; ISSUANCE OF ACQUIRING FUND SHARES
2.1 The net asset value per share of the Acquired Fund's shares shall be
computed as of the Effective Time and after the declaration of any dividends or
distributions on that date using the valuation procedures set forth in the
Acquired Fund's articles of incorporation and bylaws, its then-current
Prospectus and Statement of Additional Information, and as may be required by
the Investment Company Act of 1940, as amended (the "1940 ACT").
2.2 The total number of Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the assets and liabilities of the
Acquired Fund which are allocable to the Acquired Fund's shares shall have an
aggregate net asset value equal to the aggregate net asset value of the Acquired
Fund's shares immediately prior to the Effective Time, as determined pursuant to
Section 2.1.
2.3 Immediately after the Effective Time, the Acquired Fund shall
distribute to the Acquired Fund Shareholders in liquidation of the Acquired Fund
pro rata (based upon the ratio that the number of Acquired Fund shares owned by
each Acquired Fund Shareholder immediately prior to the Effective Time bears to
the total number of issued and outstanding Acquired Fund shares immediately
prior to the Effective Time) the full and fractional Acquiring Fund Shares
received by the Acquired Fund pursuant to Section 2.2. Accordingly, each
Acquired Fund Shareholder shall receive, immediately after the Effective Time,
Acquiring Fund Shares with an aggregate net asset value equal to the aggregate
net asset value of the Acquired Fund shares owned by such Acquired Fund
Shareholder immediately prior to the Effective Time.
3. EFFECTIVE TIME; CLOSING
3.1 The closing of the transactions contemplated by this Agreement (the
"CLOSING") shall occur as of the close of normal trading on the New York Stock
Exchange (the "EXCHANGE") (currently, 4:00 p.m. Eastern time), and after the
declaration of any dividends or distributions on such date, on the first day
upon which the conditions to closing shall have been satisfied, or at such time
on such later date as provided herein or as the parties otherwise may agree in
writing (such time and date being referred to herein as the "EFFECTIVE TIME").
All acts taking place at the Closing shall be deemed to take place
simultaneously as of the Effective Time unless otherwise agreed to by the
parties. The Closing shall be held at the offices of Dorsey & Whitney LLP, 220
South Sixth Street, Minneapolis, Minnesota 55402, or at such other place as the
parties may agree.
3.2 The Acquired Fund shall deliver at the Closing its written instructions
to the custodian for the Acquired Fund, acknowledged and agreed to in writing by
such custodian, irrevocably instructing such custodian to transfer to the
Acquiring Fund all of the Acquired Fund's portfolio securities, cash, and any
other assets to be acquired by the Acquiring Fund pursuant to this Agreement.
3.3 In the event that the Effective Time occurs on a day on which (a)the
Exchange or another primary trading market for portfolio securities of the
Acquiring Fund or the Acquired Fund shall be closed to trading or trading
thereon shall be restricted, or (b)trading or the reporting of trading on the
Exchange or elsewhere shall be disrupted so that accurate appraisal of the value
of the net assets of the Acquiring Fund or the Acquired Fund is impracticable,
the Effective Time shall be postponed until the close of normal trading on the
Exchange on the first business day when trading shall have been fully resumed
and reporting shall have been restored.
3.4 The Acquired Fund shall deliver at the Closing a certificate of its
transfer agent stating that the records maintained by the transfer agent (which
shall be made available to the Acquiring Fund) contain the names and addresses
of the Acquired Fund shareholders and the number of outstanding Acquired Fund
shares owned by each such shareholder as of the Effective Time. The Acquiring
Fund shall certify at the Closing that the Acquiring Fund Shares required to be
issued by it pursuant to this Agreement have been issued and delivered as
required herein.
3.5 At the Closing, each party to this Agreement shall deliver to the other
such bills of sale, liability assumption agreements, checks, assignments, share
certificates, if any, receipts or other similar documents as such other party or
its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Acquired Fund represents, warrants and covenants to the Acquiring
Fund as follows:
(a) Great Hall is a corporation duly organized, validly existing and in
good standing under the laws of the state of Minnesota with power under its
articles of incorporation to own all of its properties and assets and to
carry on its business as it is now conducted;
(b) Great Hall is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act, and of each series
of shares offered by Great Hall (including the Acquired Fund shares) under
the Securities Act of 1933, as amended (the "1933 ACT"), is in full force
and effect;
(c) Shares of the Acquired Fund are registered in all jurisdictions in
which they are required to be registered under state securities laws and
any other applicable laws; said registrations, including any periodic
reports or supplemental filings, are complete and current in all material
respects; all fees required to be paid in connection with such
registrations have been paid; and the Acquired Fund is not subject to any
stop orders, and is fully qualified to sell its shares in any state in
which its shares have been registered;
(d) The Prospectus and Statement of Additional Information of the Acquired
Fund, as of the date hereof and up to and including the Effective Time,
conform and will conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not and will not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not materially misleading;
(e) The Acquired Fund is not in violation, and the execution, delivery and
performance of this Agreement will not result in a violation, of Great
Hall's articles of incorporation or bylaws or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which the
Acquired Fund is a party or by which it is bound;
(f) No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or, to the
best of the Acquired Fund's knowledge, threatened against the Acquired Fund
or any of its properties or assets. The Acquired Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(g) The Statement of Assets and Liabilities of the Acquired Fund as of the
end of its fiscal year ended July 31, 1996, have been audited by KPMG Peat
Marwick LLP, independent accountants, and are in accordance with generally
accepted accounting principles consistently applied, and such statement (a
copy of which has been furnished to the Acquiring Fund) presents fairly, in
all material respects, the financial position of the Acquired Fund as of
such date, and there are no known material contingent liabilities of the
Acquired Fund as of such date not disclosed therein;
(h) Since the end of the Acquired Fund's most recently concluded fiscal
year, there has not been any material adverse change in the Acquired Fund's
financial condition, assets, liabilities or business other than changes
occurring in the ordinary course of business, except as otherwise disclosed
to the Acquiring Fund. For the purposes of this paragraph (h), a decline in
net asset value per share of the Acquired Fund, the discharge or incurrence
of Acquired Fund liabilities in the ordinary course of business, or the
redemption of Acquired Fund shares by Acquired Fund shareholders, shall not
constitute such a material adverse change;
(i) All material federal and other tax returns and reports of the Acquired
Fund required by law to have been filed prior to the Effective Time shall
have been filed and shall be correct, and all federal and other taxes shown
as due or required to be shown as due on said returns and reports shall
have been paid or provision shall have been made for the payment thereof,
and, to the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment shall have been asserted with
respect to such returns;
(j) For each taxable year of its operation, the Acquired Fund has met the
requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company, and the Acquired Fund intends to meet the
requirements of Subchapter M of the Code for qualification and treatment as
a regulated investment company for its current taxable year;
(k) All issued and outstanding shares of the Acquired Fund are, and at the
Effective Time will be, duly and validly issued and outstanding, fully paid
and non-assessable. All of the issued and outstanding shares of the
Acquired Fund will, at the Effective Time, be held by the persons and in
the amounts set forth in the records of the Acquired Fund, as provided in
Section 3.4. The Acquired Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any Acquired Fund
shares, and there is not outstanding any security convertible into any
Acquired Fund shares;
(l) At the Effective Time, the Acquired Fund will have good and marketable
title to the Acquired Fund's assets to be transferred to the Acquiring Fund
pursuant to Section 1.2 and full right, power, and authority to sell,
assign, transfer and deliver such assets hereunder, and upon delivery of
and payment for such assets, the Acquiring Fund will acquire good and
marketable title thereto, subject to no restrictions on the full transfer
thereof, including such restrictions as might arise under the 1933 Act
other than as disclosed to the Acquiring Fund in the Effective Time
Statement;
(m) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Effective Time by all necessary action on
the part of the Acquired Fund's Board of Directors, and, subject to the
approval of the Acquired Fund shareholders, this Agreement will constitute
a valid and binding obligation of the Acquired Fund, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance and other
laws relating to or affecting creditors' rights and to the application of
equitable principles in any proceeding, whether at law or in equity;
(n) The information to be furnished by and on behalf of the Acquired Fund
for use in registration statements, proxy materials and other documents
which may be necessary in connection with the transactions contemplated
hereby shall be accurate and complete in all material respects;
(o) All information pertaining to the Acquired Fund, Great Hall, and their
agents and affiliates and included in the Registration Statement referred
to in Section 5.5 (or supplied by the Acquired Fund, Great Hall or their
agents or affiliates for inclusion in said Registration Statement), on the
effective date of said Registration Statement and up to and including the
Effective Time, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which such
statements are made, not materially misleading (other than as may timely be
remedied by further appropriate disclosure);
(p) Since the end of the Acquired Fund's most recently concluded fiscal
year, there have been no material changes by the Acquired Fund in
accounting methods, principles or practices, including those required by
generally accepted accounting principles, except as disclosed in writing to
the Acquiring Fund; and
(q) The Effective Time Statement will be prepared in accordance with
generally accepted accounting principles (except for the omission of any
footnotes that would be required thereby) consistently applied and will
present accurately in all material respects the assets and liabilities of
the Acquired Fund as of the Effective Time, and the values of the Acquired
Fund's assets and liabilities to be set forth in the Effective Time
Statement will be computed as of the Effective Time using the valuation
procedures set forth in the Acquired Fund's articles of incorporation and
bylaws, its then-current Prospectus and Statement of Additional
Information, and as may be required by the 1940 Act. At the Effective Time,
the Acquired Fund will have no liabilities, whether absolute or contingent,
accrued or unaccrued, which are not reflected in the Effective Time
Statement.
4.2 The Acquiring Fund represents, warrants and covenants to the Acquired
Fund as follows: (a) Voyageur is a corporation duly organized, validly
existing and in good standing under the laws of the state of Minnesota with
power under its articles of incorporation to own all of its properties and
assets and to carry on its business as it is now conducted;
(b) Voyageur is a registered investment company classified as a management
company of the open-end type, and its registration with the Commission as
an investment company under the 1940 Act, and of each series of shares
offered by Voyageur under the 1933 Act, is in full force and effect;
(c) At or before the Effective Time, the Acquiring Fund Shares will be
registered in all jurisdictions in which they are required to be registered
under state securities laws (including, but not limited to, all
jurisdictions necessary to effect the Reorganization) and any other
applicable laws; said registrations, including any periodic reports or
supplemental filings, will be complete and current; all fees required to be
paid in connection with such registrations will have been paid; and the
Acquiring Fund will be in good standing, will not be subject to any stop
orders, and will be fully qualified to sell its shares in any state in
which its shares will have been registered;
(d) The Prospectus and Statement of Additional Information of the Acquiring
Fund, as of the effective date of the registration statement on Form N-1A
in which such Prospectus and Statement of Additional Information are
included and up to and including the Effective Time, if later, will conform
in all material respects to the applicable requirements of the 1933 Act and
the 1940 Act and the rules and regulations of the Commission thereunder
and, on the effective date of such registration statement and at all times
thereafter to and including the Effective Time, if later, will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not materially misleading;
(e) Voyageur is not in violation, and the execution, delivery and
performance of this Agreement will not result in a violation, of its
articles of incorporation or bylaws or of any material agreement,
indenture, instrument, contract, lease or other undertaking to which
Voyageur is a party or by which it is bound;
(f) No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or, to the
best of Voyageur's knowledge, threatened against Voyageur or the Acquiring
Fund or any of its properties or assets. Neither Voyageur nor the Acquiring
Fund is a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and adversely
affects its business or its ability to consummate the transactions herein
contemplated;
(g) The Acquiring Fund intends to meet the requirements of Subchapter M of
the Code for qualification and treatment as a regulated investment company
in the current and future years;
(h) All issued and outstanding shares of the Acquiring Fund, if any, are,
and at the Effective Time will be, duly and validly issued and outstanding,
fully paid and non-assessable. The Acquiring Fund Shares to be issued and
delivered to the Acquired Fund for the account of the Acquired Fund
Shareholders, pursuant to the terms of this Agreement, at the Effective
Time will have been duly authorized and, when so issued and delivered, will
be duly and validly issued and outstanding, fully paid and non-assessable.
The Acquiring Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any Acquiring Fund shares, and there is
not outstanding any security convertible into any Acquiring Fund shares;
(i) At the Effective Time, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets;
(j) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Effective Time by all necessary action on
the part of Voyageur's Board of Directors, and at the Effective Time this
Agreement will constitute a valid and binding obligation of Voyageur and
the Acquiring Fund, enforceable in accordance with its terms, subject, as
to enforcement, to bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other laws relating to or affecting creditors'
rights and to the application of equitable principles in any proceeding,
whether at law or in equity. Consummation of the transactions contemplated
by this Agreement does not require the approval of the Acquiring Fund's
shareholders;
(k) The information to be furnished by and on behalf of the Acquiring Fund
for use in registration statements, proxy materials and other documents
which may be necessary in connection with the transactions contemplated
hereby shall be accurate and complete in all material respects;
(l) Following the Reorganization, the Acquiring Fund shall determine the
net asset value per share in accordance with the valuation procedures set
forth in Voyageur's articles of incorporation and bylaws, and the Acquiring
Fund's Prospectus and Statement of Additional Information (as the same may
be amended from time to time) and as may be required by the 1940 Act; and
(m) The Registration Statement referred to in Section 5.5, on its effective
date and up to and including the Effective Time, will (i) conform in all
material respects to the applicable requirements of the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 ACT"), and the 1940
Act and the rules and regulations of the Commission thereunder, and (ii)
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not materially misleading (other than as may timely
be remedied by further appropriate disclosure); provided, however, that the
representations and warranties in clause (ii) of this paragraph shall not
apply to statements in (or omissions from) the Registration Statement
concerning the Acquired Fund, Great Hall, their agents and affiliates, and
Insight (or supplied by the Acquired Fund, Great Hall, or their agents or
affiliates for inclusion in said Registration Statement).
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquired Fund will operate its business in the ordinary course
between the date hereof and the Effective Time, it being understood that such
ordinary course of business will include the declaration and payment of
customary dividends and distributions, and any other distributions that may be
advisable (which may include distributions prior to the Effective Time of net
income and/or net realized capital gains not previously distributed). Between
the date hereof and the Effective Time, the Acquired Fund will not acquire any
securities which are not permissible investments for the Acquiring Fund.
5.2 Great Hall will call a meeting of the Acquired Fund's shareholders to
consider and act upon this Agreement and to take all other action reasonably
necessary to obtain approval of the transactions contemplated herein.
5.3 Great Hall will assist Voyageur in obtaining such information as the
Acquiring Fund reasonably requests concerning the beneficial ownership of the
Acquired Fund shares.
5.4 Subject to the provisions of this Agreement, Voyageur and Great Hall
will each take, or cause to be taken, all actions, and do or cause to be done,
all things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
5.5 Great Hall will provide Voyageur with information reasonably necessary
with respect to Great Hall and the Acquired Fund and its agents and affiliates
in connection with Voyageur's preparation of the Registration Statement on Form
N-14 of Voyageur (the "REGISTRATION STATEMENT"), in compliance with the 1933
Act, the 1934 Act and the 1940 Act.
5.6 Voyageur agrees to use all reasonable efforts to obtain the approvals
and authorizations required by the 1933 Act, the 1940 Act and such state blue
sky or securities laws as may be necessary in order to conduct its operations
after the Effective Time.
5.7 Following the reorganization, Voyageur shall comply in all material
respects with all applicable provisions of Section 15(f) of the 1940 Act.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of Great Hall to consummate the transactions provided for
herein shall be subject, at its election, to the performance by Voyageur of all
the obligations to be performed by it hereunder at or before the Effective Time,
and, in addition thereto, the following further conditions (any of which may be
waived by Great Hall, in its sole and absolute discretion):
6.1 All representations and warranties of Voyageur and the Acquiring Fund
contained in this Agreement shall be true and correct as of the date hereof and,
except as they may be affected by the transactions contemplated by this
Agreement, as of the Effective Time with the same force and effect as if made at
such time;
6.2 Voyageur and the Acquiring Fund shall have delivered to the Acquired
Fund a certificate executed in its name by its President or a Vice President, in
a form reasonably satisfactory to Great Hall and dated as of the date of the
Closing, to the effect that the representations and warranties of Voyageur and
the Acquiring Fund made in this Agreement are true and correct at the Effective
Time, except as they may be affected by the transactions contemplated by this
Agreement and as to such other matters as Great Hall shall reasonably request;
6.3 The Acquiring Fund shall have delivered to the Acquired Fund the
certificate as to the issuance of Acquiring Fund shares contemplated by the
second sentence of Section 3.4;
6.4 The Acquiring Fund's investment adviser shall have paid or agreed to
pay the costs incurred by Voyageur and Great Hall in connection with the
Reorganization, including the fees and expenses associated with the preparation
and filing of the Registration Statement referred to in Section 5.5 above, and
the expenses of printing and mailing the prospectus/proxy statement, soliciting
proxies and holding the Acquired Fund shareholder meeting required to approve
the transactions contemplated by this Agreement; and
6.5 The Acquired Fund shall have received an opinion from Dorsey & Whitney
LLP, counsel to the Acquiring Fund, dated as of the Closing Date, to the effect
that:
(a) Voyageur is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Minnesota, with the corporate
power to own all properties and assets to be acquired pursuant to this
Agreement and to conduct its business as described in the Registration
Statement following the Effective Time;
(b) the Agreement has been duly authorized by all requisite corporate
action, executed and delivered by Voyageur on behalf of the Acquiring Fund
and, assuming due authorization, execution and delivery of the Agreement by
the Acquired Fund, constitutes the valid and binding obligation of the
Acquiring Fund enforceable against the Acquiring Fund in accordance with
its terms, subject as to enforcement, to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar law of
general application affecting creditors' rights, including (without
limitation) applicable fraudulent transfer laws and court decisions
relating thereto and subject to the effect of general principles of equity,
including (without limitation) concepts of materiality, reasonableness,
good faith and fair dealing, and other similar doctrines affecting the
enforcement of agreements generally (regardless of whether considered in a
proceeding in equity or at law);
(c) the Acquiring Fund Shares to be issued to the Acquired Fund
Shareholders as provided by this Agreement have been duly authorized and
reserved for issuance and upon issuance, delivery and payment therefor as
described in the Agreement will be validly issued, fully paid and
nonassessable, and no shareholder of the Acquiring Fund will have any
preemptive rights to subscription or purchase in respect thereof;
(d) the execution and delivery of the Agreement and the Reorganization will
not violate or conflict with Voyageur's Articles of Incorporation or Bylaws
or any material agreement (known to such counsel) to which Voyageur on
behalf of the Acquiring Fund or the Acquiring Fund is a party or by which
Voyageur on behalf of the Acquiring Fund or the Acquiring Fund is bound;
(e) no consent, approval, authorization or order of and no notice to or
filing with, any court or governmental agency or body of the United States
is required to be obtained for the Reorganization, except such as have been
obtained or made under the 1933 Act, the 1934 Act and the 1940 Act, and
such as may be required under state securities laws;
(f) such counsel does not know of any pending or overtly threatened
lawsuits or claims against Voyageur or the Acquiring Fund with respect to
the Reorganization or which is required to be described in the Registration
Statement or the Prospectus/Proxy Statement that is not described as
required;
(g) to such counsel's knowledge, the Acquiring Fund is registered as an
investment company under the 1940 Act and such registration is in full
force and effect; and
(h) the Registration Statement conforms in all material respects to the
applicable requirements of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations of the Commission thereunder. Such counsel also
shall state that they have reviewed with certain officers of Voyageur and
representatives of Voyageur and the Acquiring Fund the contents of the
Registration Statement and related matters, and, although they are not
verifying and are not passing upon and do not assume any responsibility for
the accuracy and completeness of the statements contained in the
Prospectus/Proxy Statement or the Registration Statement, on the basis of
the foregoing (relying substantially as to materiality upon the opinions of
officers of Voyageur and representatives of Voyageur and the Acquiring
Fund), no facts have come to their attention that lead them to believe that
the Registration Statement as of its effective date, as of the date of the
Acquired Fund Shareholders' meeting and as of the Effective Time, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
except that such statement shall not apply to statements contained in, or
omissions from, the Prospectus/Proxy Statement and the Registration
Statement concerning the Acquired Fund, Great Hall, their agents and
affiliates, and Insight (or supplied by the Acquired Fund, Great Hall, or
their agents or affiliates for inclusion in said Prospectus/Proxy Statement
or Registration Statement). Such counsel may state that such counsel
expresses no view with respect to the financial statements, the notes
thereto and the related schedules and other financial or statistical data
included in the Registration Statement or the Prospectus/Proxy Statement.
Such opinion may state that such opinion is solely for the benefit of Great
Hall on behalf of the Acquired Fund, the Acquired Fund, and Great Hall's
directors and officers on behalf of the Acquired Fund. Such opinion may (i)
rely upon the opinion of other counsel, provided such counsel is reasonably
acceptable to the Acquired Fund, to the extent set forth in the opinion,
(ii) provide that references to the knowledge or best of knowledge of such
counsel shall mean the information the attorneys who have represented
Voyageur and the Acquiring Fund in connection with the Reorganization and
all attorneys currently employed by counsel to Voyageur who have worked on
matters for Voyageur within the past 12 months actually receive from
officers of Voyageur or authorized representatives of Voyageur or the
Acquiring Fund, without independent inquiry by counsel, and (iii)include
other customary qualifications and exceptions reasonably acceptable to the
Acquired Fund.
In this Section 6.5, references to the Prospectus/Proxy Statement include
and relate only to the text of such Prospectus/Proxy Statement and Appendices B,
C, and D thereto and not to any other exhibits or attachments thereto or to any
documents incorporated by reference therein.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquired Fund of all of the obligations to be performed by it hereunder at or
before the Effective Time and, in addition thereto, the following conditions
(any of which may be waived by the Acquiring Fund, in its sole and absolute
discretion):
7.1 All representations and warranties of Great Hall and the Acquired Fund
contained in this Agreement shall be true and correct as of the date hereof and,
except as they may be affected by the transactions contemplated by this
Agreement, as of the Effective Time with the same force and effect as if made at
such time.
7.2 The Acquired Fund shall have delivered to the Acquiring Fund the
Effective Time Statement.
7.3 Great Hall and the Acquired Fund shall have delivered to the Acquiring
Fund a certificate executed in its name by its President or a Vice President, in
a form reasonably satisfactory to the Acquiring Fund and dated as of the date of
the Closing, to the effect that the representations and warranties of Great Hall
and the Acquired Fund made in this Agreement are true and correct at the
Effective Time, except as they may be affected by the transactions contemplated
by this Agreement.
7.4 The Acquired Fund shall have delivered to the Acquiring Fund the
written instructions to the custodian for the Acquired Fund contemplated by
Section 3.2.
7.5 The Acquired Fund shall have delivered to the Acquiring Fund the
certificate as to its shareholder records contemplated by the first sentence of
Section 3.4.
7.6 At or prior to the Effective Time, the expenses incurred by the
Acquired Fund (or accrued up to the Effective Time) shall have been maintained
by the Acquired Fund's investment adviser or otherwise so as not to exceed any
applicable contractual or state-imposed expense limitations.
7.7 At or prior to the Effective Time, appropriate action shall have been
taken by the Acquired Fund's investment adviser or otherwise such that no
unamortized organizational expenses shall be reflected in the Effective Time
Statement.
7.8 Immediately prior to the Effective Time, the Acquired Fund shall not
hold any securities which are not permissible investments for the Acquiring
Fund.
7.9 The Acquiring Fund shall have received an opinion from Faegre & Benson
LLP, counsel to the Acquired Fund, dated as of the Closing Date, to the effect
that:
(a) Great Hall is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Minnesota, with the corporate
power to own all properties and assets to be acquired pursuant to this
Agreement and to conduct its business as described in the Registration
Statement;
(b) the Agreement has been duly authorized by all requisite corporate
action, executed and delivered by Great Hall on behalf of the Acquired Fund
and, assuming due authorization, execution and delivery of the Agreement by
the Acquiring Fund, constitutes the valid and binding obligation of the
Acquired Fund enforceable against the Acquired Fund in accordance with its
terms, subject as to enforcement, to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar law of
general application affecting creditors' rights, including (without
limitation) applicable fraudulent transfer laws and court decisions
relating thereto and subject to the effect of general principles of equity,
including (without limitation) concepts of materiality, reasonableness,
good faith and fair dealing, and other similar doctrines affecting the
enforcement of agreements generally (regardless of whether considered in a
proceeding in equity or at law);
(c) the execution and delivery of the Agreement and the Reorganization will
not violate or conflict with the Articles of Incorporation or Bylaws of
Great Hall or any material agreement (known to such counsel) to which Great
Hall on behalf of the Acquired Fund or the Acquired Fund is a party or by
which Great Hall on behalf of the Acquired Fund or the Acquired Fund is
bound;
(d) no consent, approval, authorization or order of and no notice to or
filing with, any court or governmental agency or body of the United States
is required to be obtained or made by the Acquired Fund for the
Reorganization pursuant to the Agreement, except such as have been obtained
or made under the 1933 Act, the 1934 Act and the 1940 Act, and such as may
be required under state securities laws;
(e) such counsel does not know of any pending or overtly threatened
lawsuits or claims against Great Hall or the Acquired Fund with respect to
the Reorganization or which is required to be described in the Registration
Statement or the Prospectus/Proxy Statement that is not described as
required; and
(f) to such counsel's knowledge, Great Hall is registered as an investment
company under the 1940 Act and such registration is in full force and
effect. Such counsel also shall state that they have reviewed with certain
officers of Great Hall and representatives of Great Hall and the Acquired
Fund the contents of the Registration Statement and related matters, and,
although they are not verifying and are not passing upon and do not assume
any responsibility for the accuracy and completeness of the statements
contained in the Prospectus/Proxy Statement or the Registration Statement,
on the basis of the foregoing (relying substantially as to materiality upon
the opinions of officers of Great Hall and representatives of Great Hall
and the Acquired Fund), no facts have come to their attention that lead
them to believe that the Registration Statement as of its effective date,
as of the date of the Acquired Fund Shareholders' meeting and as of the
Effective Time, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein concerning the
Acquired Fund, Great Hall, their agents and affiliates (or supplied by any
such person for inclusion to the Prospectus/Proxy Statement and the
Registration Statement) or necessary to make the statements therein
concerning or supplied by any such persons, in light of the circumstances
under which they were made, not misleading. Such counsel may state that
such counsel expresses no view with respect to the financial statements,
the notes thereto and the related schedules and other financial or
statistical data included in the Registration Statement or the
Prospectus/Proxy Statement. Such opinion may state that such opinion is
solely for the benefit of Voyageur on behalf of the Acquiring Fund, the
Acquiring Fund, and Voyageur's directors and officers on behalf of the
Acquiring Fund. Such opinion may (i) rely upon the opinion of other
counsel, provided such counsel is reasonably acceptable to the Acquiring
Fund, to the extent set forth in the opinion, (ii) provide that references
to the knowledge or best of knowledge of such counsel shall mean the
information the attorneys who have represented Great Hall and the Acquired
Fund in connection with the Reorganization and all attorneys currently
employed by counsel to Great Hall who have worked on matters for Great Hall
within the past 12 months actually receive from officers of Great Hall or
authorized representatives of Great Hall or the Acquired Fund, without
independent inquiry by counsel, and (iii) include other customary
qualifications and exceptions reasonably acceptable to the Acquiring Fund.
In this Section 7.9, references to the Prospectus/Proxy Statement include
and relate only to the text of such Prospectus/Proxy Statement and Appendices B,
C, and D thereto and not to any other exhibits or attachments thereto or to any
documents incorporated by reference therein.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
The following shall constitute further conditions precedent to the
consummation of the Reorganization:
8.1 This Agreement, the Amendment and the transactions contemplated herein
and therein shall have been approved by the requisite votes of (a) the Board of
Directors of each of Voyageur and Great Hall, and (b) the holders of the
outstanding shares of the Acquired Fund in accordance with the provisions of
their respective articles of incorporation and bylaws and applicable law, and
each of Voyageur and Great Hall shall have delivered certified copies of the
resolutions evidencing such approvals to the other party. Notwithstanding
anything herein to the contrary, neither Voyageur on behalf of the Acquiring
Fund nor Great Hall on behalf of the Acquired Fund may waive the conditions set
forth in this Section 8.1.
8.2 As of the Effective Time, no action, suit or other proceeding shall be,
to the knowledge of either party to this Agreement, threatened or pending before
any court or governmental agency in which it is sought to restrain or prohibit,
or obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein.
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the 1933
Act, and no stop order suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.
8.5 The parties shall have received the opinion of Dorsey & Whitney LLP
addressed to Great Hall and Voyageur, dated as of the date of the Closing, and
based in part on certain representations to be furnished by Great Hall on behalf
of the Acquired Fund, Voyageur on behalf of the Acquiring Fund, and VFM,
substantially to the effect that:
(a) the Reorganization will constitute a reorganization within the meaning
of Section 368(a)(1)(F) of the Code, and the Acquiring Fund and the
Acquired Fund each will qualify as a party to the Reorganization under
Section 368(b) of the Code;
(b) the Acquired Fund shareholders will recognize no income, gain or loss
upon receipt, pursuant to the Reorganization, of the Acquiring Fund Shares.
Acquired Fund shareholders subject to taxation will recognize income upon
receipt of any net investment income or net capital gains of the Acquired
Fund which are distributed by the Acquired Fund prior to the Effective
Time;
(c) the tax basis of the Acquiring Fund Shares received by each Acquired
Fund shareholder pursuant to the Reorganization will be equal to the tax
basis of the Acquired Fund shares exchanged therefor;
(d) the holding period of the Acquiring Fund Shares received by each
Acquired Fund shareholder pursuant to the Reorganization will include the
period during which the Acquired Fund shareholder held the Acquired Fund
shares exchanged therefor, provided that the Acquired Fund shares were held
as a capital asset at the Effective Time;
(e) the Acquired Fund will recognize no income, gain or loss by reason of
the Reorganization;
(f) the Acquiring Fund will recognize no income, gain or loss by reason of
the Reorganization;
(g) the tax basis of the assets received by the Acquiring Fund pursuant to
the Reorganization will be the same as the basis of those assets in the
hands of the Acquired Fund as of the Effective Time;
(h) the holding period of the assets received by the Acquiring Fund
pursuant to the Reorganization will include the period during which such
assets were held by the Acquired Fund; and
(i) the Acquiring Fund will succeed to and take into account the earnings
and profits, or deficit in earnings and profits, of the Acquired Fund as of
the Effective Time.
8.6 The Amendment shall have been filed in accordance with the applicable
provisions of Minnesota law.
9. INDEMNIFICATION
9.1 Voyageur on behalf of the Acquiring Fund agrees to indemnify and hold
harmless Great Hall and the Acquired Fund and each of Great Hall's directors and
officers from and against any and all losses, claims, damages, liabilities or
expenses (including, without limitation, the payment of reasonable legal fees
and reasonable costs of investigation) to which, jointly or severally, Great
Hall and the Acquired Fund or any of Great Hall's directors or officers may
become subject, insofar as any such loss, claim, damage, liability or expense
(or actions with respect thereto) arises out of or is based on any breach by
Voyageur or the Acquiring Fund of any of their representations, warranties,
covenants or agreements set forth in this Agreement.
9.2 Great Hall on behalf of the Acquired Fund agrees to indemnify and hold
harmless Voyageur and the Acquiring Fund and each of Voyageur's directors and
officers from and against any and all losses, claims, damages, liabilities or
expenses (including, without limitation, the payment of reasonable legal fees
and reasonable costs of investigation) to which, jointly or severally, Voyageur
and the Acquiring Fund or any of Voyageur's directors or officers may become
subject, insofar as any such loss, claim, damage, liability or expense (or
actions with respect thereto) arises out of or is based on any breach by Great
Hall or the Acquired Fund of any of their representations, warranties, covenants
or agreements set forth in this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF REPRESENTATIONS AND WARRANTIES
10.1 Voyageur on behalf of the Acquiring Fund and Great Hall on behalf of
the Acquired Fund agree that neither party has made any representation,
warranty, covenant or agreement not set forth herein and that this Agreement
constitutes the entire agreement between the parties.
10.2 The representations and warranties contained in this Agreement or in
any document delivered pursuant hereto or in connection herewith shall survive
the consummation of the transactions contemplated hereby.
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by either party by resolution of the party's Board of Directors at
any time prior to the Effective Time, if circumstances should develop that, in
the good faith opinion of such board, make proceeding with this Agreement and
such transactions not in the best interest of the applicable party's
shareholders.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of Great Hall
and Voyageur; provided, however, that following the meeting of the Acquired Fund
shareholders called by Great Hall pursuant to Section 5.2 of this Agreement, no
such amendment may have the effect of changing the provisions for determining
the number of Acquiring Fund Shares to be issued to Acquired Fund shareholders
under this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly given
if delivered or mailed by registered mail, postage prepaid, addressed to
Voyageur at 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402,
Attention: President (with a copy to Dorsey & Whitney LLP, 220 South Sixth
Street, Minneapolis, Minnesota55402, Attention: Kathleen L. Prudhomme) or Great
Hall, 60 South Sixth Street, Minneapolis, MN 55402, Attention: President (with a
copy to Faegre & Benson LLP, 2200 Norwest Center, 90 South Seventh Street,
Minneapolis, Minnesota 55402, Attention: Matthew L. Thompson).
14. HEADINGS; COUNTERPARTS; ASSIGNMENT; MISCELLANEOUS
14.1 The Article and Section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and all of which together shall constitute one
and the same agreement.
14.3 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by
either party without the prior written consent of the other party. Nothing
herein expressed or implied is intended or shall be construed to confer upon or
give any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.
14 .4 The validity, interpretation and effect of this Agreement shall be
governed exclusively by the laws of the State of Minnesota, without giving
effect to the principles of conflict of laws thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President.
VOYAGEUR MUTUAL FUNDS, INC.
on behalf of
VOYAGEUR NATIONAL HIGH YIELD
MUNICIPAL BOND FUND
By_______________________________
Name_____________________________
Title____________________________
GREAT HALL INVESTMENT FUNDS, INC.
on behalf of
GREAT HALL NATIONAL TAX-EXEMPT
FUND
By_______________________________
Name_____________________________
Title____________________________
EXHIBIT 1 TO AGREEMENT AND PLAN OF REORGANIZATION
ARTICLES OF AMENDMENT
TO
RESTATED ARTICLES OF INCORPORATION
OF
GREAT HALL INVESTMENT FUNDS, INC.
The undersigned officer of Great Hall Investment Funds, Inc. (the
"Corporation"), a corporation subject to the provisions of Chapter 302A of the
Minnesota Statutes, hereby certifies that the Corporation's Board of Directors
and shareholders, at meetings held August 21, 1996, and November __, 1996,
respectively, adopted the resolutions hereinafter set forth; and such officer
further certifies that the amendments to the Corporation's Restated Articles of
Incorporation set forth in such resolutions were adopted pursuant to said
Chapter 302A.
WHEREAS, the Corporation is registered as an open end management investment
company (i.e., a mutual fund) under the Investment Company Act of 1940 and
offers its shares to the public in several series, each of which represents
a separate and distinct portfolio of assets; and
WHEREAS, it is desirable and in the best interests of the holders of the
Series E common shares of the Corporation that the assets belonging to such
series be sold to Voyageur Mutual Funds, Inc. ("Voyageur"), a Minnesota
corporation and an open end management investment company registered under
the Investment Company Act of 1940, in exchange for the Series J shares of
Voyageur (also known as the "Voyageur National High Yield Municipal Bond
Fund"); and
WHEREAS, the Corporation wishes to provide for the pro rata distribution of
such shares of Voyageur received by it to holders of the Corporation's
Series E shares and the simultaneous cancellation, redemption and
retirement of the outstanding Series E shares of the Corporation; and
WHEREAS, the Corporation and Voyageur have entered into an Agreement and
Plan of Reorganization providing for the foregoing transactions; and
WHEREAS, the Agreement and Plan of Reorganization requires that, in order
to bind all holders of the Corporation Series E shares to the foregoing
transactions, and in particular to bind such holders to the cancellation
and retirement of the outstanding Series E shares of the Corporation, it is
necessary to adopt an amendment to the Corporation's Restated Articles of
Incorporation.
NOW, THEREFORE, BE IT RESOLVED, that the Corporation's Restated Articles of
Incorporation be, and the same hereby are, amended to add the following
Article 5B following Article 5 thereof:
5B. (a) For purposes of this Article 5B, the following terms shall
have the following meanings:
"CORPORATION" means this corporation.
"VOYAGEUR" means Voyageur Mutual Funds, Inc., a Minnesota corporation.
"ACQUIRED FUND" means the portfolio of assets and liabilities
represented by the Corporation's Series E shares.
"ACQUIRED FUND SHARES" means the Corporation's Series E shares.
"ACQUIRING FUND" means Voyageur's National High Yield Municipal Bond
Fund, which is represented by Voyageur's Series J shares.
"CLASS A ACQUIRING FUND SHARES" means the Acquiring Fund's Class A
shares.
"EFFECTIVE TIME" means 4:00 p.m. Eastern time on the date upon which
these Articles of Amendment are filed with the Minnesota Secretary of
State.
(b) At the Effective Time, the assets belonging to the Acquired Fund,
the Special Liabilities associated with such assets, and the General Assets
and General Liabilities allocated to the Acquired Fund, shall be sold to
and assumed by the Acquiring Fund in return for Class A Acquiring Fund
Shares, all pursuant to the Agreement and Plan of Reorganization between
the Corporation and Voyageur relating thereto. For purposes of the
foregoing, the terms "assets belonging to," "Special Liabilities," "General
Assets" and "General Liabilities" have the meanings assigned to them in
Article 7 of the Corporation's Restated Articles of Incorporation.
(c) The number of Class A Acquiring Fund Shares to be received by the
Acquired Fund and distributed by it to the respective Acquired Fund
shareholders shall be determined as follows:
(i) The net asset value per share of the Acquired Fund Shares
shall be computed as of the Effective Time using the valuation
procedures set forth in the Acquired Fund's Restated Articles of
Incorporation, its bylaws, its then-current Prospectus and Statement
of Additional Information, and as may be required by the Investment
Company Act of 1940, as amended.
(ii) The total number of Class A Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the
assets and liabilities of the Acquired Fund shall have an aggregate
net asset value equal to the aggregate net asset value of all of the
Acquired Fund Shares immediately prior to the Effective Time, as
determined pursuant to (i) above.
(iii) Immediately after the Effective Time, the Acquired Fund
shall distribute to the Acquired Fund shareholders in liquidation of
the Acquired Fund pro rata (based upon the ratio that the number of
Acquired Fund Shares owned by each Acquired Fund shareholder
immediately prior to the Effective Time bears to the total number of
issued and outstanding Acquired Fund Shares immediately prior to the
Effective Time) the full and fractional Class A Acquiring Fund Shares
received by the Acquired Fund pursuant to (i) and (ii) above.
Accordingly, each holder of Acquired Fund Shares shall receive,
immediately after the Effective Time, Class A Acquiring Fund Shares
with an aggregate net asset value equal to the aggregate net asset
value of the Acquired Fund Shares owned by such Acquired Fund
shareholder immediately prior to the Effective Time.
(d) The distribution of Class A Acquiring Fund Shares to Acquired Fund
shareholders provided for in paragraph (c) above shall be accomplished by
the issuance of such Class A Acquiring Fund Shares to open accounts on the
share records of the Acquiring Fund in the names of the Acquired Fund
shareholders representing the numbers of Class A Acquiring Fund Shares due
each such shareholder pursuant to the foregoing provisions. All issued and
outstanding Acquired Fund Shares shall simultaneously be canceled on the
books of the Acquired Fund, redeemed and retired. From and after the
Effective Time, share certificates formerly representing Acquired Fund
Shares shall represent the numbers of Class A Acquiring Fund Shares
determined in accordance with the foregoing provisions.
(e) From and after the Effective Time, the Acquired Fund Shares
canceled and retired pursuant to paragraph (d) above shall have the status
of authorized and unissued common shares of the Corporation without
designation as to series.
IN WITNESS WHEREOF, the undersigned officer of the Corporation has executed
these Articles of Amendment on behalf of the Corporation on November __, 1996.
GREAT HALL INVESTMENT FUNDS, INC.
By_______________________________
Name_____________________________
Title____________________________
APPENDIX B
VOYAGEUR FUND
INVESTMENTS, INVESTMENT TECHNIQUES AND RISKS
INVESTMENT OBJECTIVE AND POLICIES OF VOYAGEUR FUND
The investment objective of Voyageur Fund is to seek a high level of
current income exempt from federal income tax primarily through investment in a
portfolio of medium- and lower-grade Municipal Obligations. The Fund does not
purchase insurance on its portfolio securities. The Fund will attempt to invest
100% (and as a matter of fundamental policy during normal circumstances will
invest at least 80%) of the value of its net assets in Municipal Obligations the
interest on which is exempt from regular federal income tax. The Fund may invest
without limit in securities that generate interest that is an item of tax
preference for purposes of federal alternative minimum tax ("AMT"). In normal
circumstances the weighted average maturity of the investment portfolio of the
Fund is expected to be approximately 15 to 25 years. However, if VFM determines
that market conditions warrant a shorter average maturity, the Fund's
investments will be adjusted accordingly. During times of adverse market
conditions when a defensive investment posture is warranted, the Fund may
temporarily select investments without regard to the foregoing policies.
There are risks in any investment program, and there is no assurance that
Voyageur Fund's investment objective will be achieved. The value of the Fund's
shares will fluctuate with changes in the market value of its investments. The
Fund's investment objective and certain other investment policies explicitly
designated herein as such are fundamental, which means that they cannot be
changed without the vote of the Fund's shareholders as provided in the 1940 Act.
The Fund will invest at least 65% of its total assets, in normal market or
economic situations, in medium- and lower-grade Municipal Obligations rated, at
the time of investment, between BBB and B- (inclusive) by Standard & Poor's
Ratings Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service, Inc.
("Moody's"), or BBB and B- (inclusive) by Fitch Investors Service, LP ("Fitch"),
and Municipal Obligations determined by VFM to be of comparable quality.
Medium-grade Municipal Obligations are rated BBB by S&P or Fitch, Baa by
Moody's or determined by VFM to be of comparable quality. Municipal Obligations
rated BBB by S&P or Fitch generally are regarded by S&P or Fitch as having an
adequate capacity to pay interest and repay principal; adverse economic
conditions or changing circumstances are, however, more likely in S&P's or
Fitch's view to lead to a weakened capacity to pay interest and repay principal
as compared with higher rated Municipal Obligations. Municipal Obligations rated
Baa by Moody's generally are considered by Moody's as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. In Moody's view,
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. In Moody's view, such securities lack
outstanding investment characteristics and have speculative characteristics as
well.
The Fund may invest in lower-grade Municipal Obligations rated, at the time
of investment, no lower than B-by S&P or Fitch or B3 by Moody's, and in
municipal securities determined by VFM to be of comparable quality. Municipal
Obligations rated B by S&P or Fitch generally are regarded by S&P or Fitch, on
balance, as predominantly speculative with respect to capacity to pay interest
or repay principal in accordance with the terms of the obligations. While such
securities will likely have some quality and protective characteristics, in
S&P's or Fitch's view these are outweighed by large uncertainties or major risk
exposure to adverse conditions. Securities rated B by Moody's are viewed by
Moody's as generally lacking characteristics of the desirable investment. In
Moody's view, assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
The Fund will not make initial investments in Municipal Obligations rated,
at the time of investment, below B-by S&P or Fitch or below B3 by Moody's, or in
Municipal Obligations determined by VFM to be of comparable quality. The Fund
may retain Municipal Obligations which are downgraded after investment. There is
no minimum rating with respect to securities that the Fund may hold if
downgraded after investment. See Appendix A to the Statement of Additional
Information relating to the Prospectus/Proxy Statement (the "Statement of
Additional Information") for a description of Municipal Obligations ratings.
Investment in medium- and lower-grade securities involves special risks as
compared with investment in higher-grade securities, including potentially
greater sensitivity to a general economic downturn or to a significant increase
in interest rates, greater market price volatility and less liquid secondary
market trading. See "Risks and Special Investment Considerations." There can be
no assurance that the Fund will achieve its investment objective, and the Fund
may not be an appropriate investment for all investors. Furthermore, interest on
certain "private activity" obligations in which the Fund may invest is treated
as a preference item for the purpose of calculating the federal alternative
minimum tax and, accordingly, a portion of the income produced by the Fund may
be taxable under the federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the alternative
minimum tax or who would become subject to the alternative minimum tax as a
result of an investment in the Fund. See "Distributions to Shareholders and
Taxes--Taxes" in Appendix D to the Prospectus/Proxy Statement.
At times VFM may judge that conditions in the markets for medium- and
lower-grade Municipal Obligations make pursuing the Fund's basic investment
strategy of investing primarily in such Municipal Obligations inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher-grade Municipal Obligations and in Municipal
Obligations determined by VFM to be of comparable quality. Although such
higher-grade Municipal Obligations generally entail less credit risk, such
higher-grade Municipal Obligations may have a lower yield than medium- and
lower-grade Municipal Obligations and investment in such higher-grade Municipal
Obligations may result in a lower yield to Fund shareholders. VFM may also judge
that conditions in the markets for long- and intermediate-term Municipal
Obligations in general make pursuing the Fund's basic investment strategy
inconsistent with the best interests of the Fund's shareholders. At such times,
the Fund may pursue strategies primarily designed to reduce fluctuations in the
value of the Fund's assets, including investing the Fund's assets in
high-quality, short-term Municipal Obligations and in high-quality, short-term
taxable securities. See "Distributions to Shareholders and Taxes--Taxes" in
Appendix D to the Prospectus/Proxy Statement.
The Fund may invest without limitation in short-term Municipal Obligations
or in taxable obligations on a temporary, defensive basis due to market
conditions or, with respect to taxable obligations, for liquidity purposes. Such
taxable obligations, whether purchased for liquidity purposes or on a temporary,
defensive basis, may include: obligations of the U.S. Government, its agencies
or instrumentalities; other debt securities rated within the three highest
grades by either Moody's, Fitch or S&P; commercial paper rated in the highest
grade by any such rating services (Prime-1, F-1+ or A-1, respectively);
certificates of deposit and bankers' acceptances of domestic banks which have
capital, surplus and undivided profits of over $100 million; high-grade taxable
municipal bonds; and repurchase agreements with respect to any of the foregoing
investments. The Fund also may hold its assets in cash and in securities of
tax-exempt money market mutual funds.
MUNICIPAL OBLIGATIONS
As used in this Appendix B to the Prospectus/Proxy Statement, the term
"Municipal Obligations" refers to debt obligations issued by or on behalf of a
state or territory or its agencies, instrumentalities, municipalities and
political subdivisions. The term "Municipal Obligations" also includes
Derivative Municipal Obligations as defined below.
Municipal Obligations are primarily debt obligations issued to obtain funds
for various public purposes such as constructing public facilities and making
loans to public institutions. The two principal classifications of Municipal
Obligations are general obligation bonds and revenue bonds. General obligation
bonds are generally secured by the full faith and credit of an issuer possessing
general taxing power and are payable from the issuer's general unrestricted
revenues and not from any particular fund or revenue source. Revenue bonds are
payable only from the revenues derived from a particular source or facility,
such as a tax on particular property or revenues derived from, for example, a
municipal water or sewer utility or an airport. Municipal Obligations that
benefit private parties in a manner different than members of the public
generally (so-called private activity bonds or industrial development bonds) are
in most cases revenue bonds, payable solely from specific revenues of the
project to be financed. The credit quality of private activity bonds is usually
directly related to the creditworthiness of the user of the facilities (or the
creditworthiness of a third-party guarantor or other credit enhancement
participant, if any).
Within these principal classifications of Municipal Obligations, there is a
variety of types of municipal securities. Certain Municipal Obligations may
carry variable or floating rates of interest whereby the rate of interest is not
fixed but varies with changes in specified market rates or indexes, such as a
bank prime rate or a tax-exempt money market index. Accordingly, the yield on
such obligations can be expected to fluctuate with changes in prevailing
interest rates. Other Municipal Obligations are zero-coupon securities, which
are debt obligations which do not entitle the holder to any periodic interest
payments prior to maturity and are issued and traded at a discount from their
face amounts. The market prices of zero-coupon securities are generally more
volatile than the market prices of securities that pay interest periodically.
Municipal Obligations also include state or municipal leases and
participation interests therein. Voyageur Fund may invest in these types of
obligations without limit. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities such as fire, sanitation or police vehicles or telecommunications
equipment, buildings or other capital assets. Municipal lease obligations,
except in certain circumstances, are considered illiquid by the staff of the
Securities and Exchange Commission. Municipal lease obligations held by the Fund
will be treated as illiquid unless they are determined to be liquid pursuant to
guidelines established by Voyageur Fund's Board of Directors. Under these
guidelines, VFM will consider factors including, but not limited to (1) whether
the lease can be canceled, (2) what assurance there is that the assets
represented by the lease can be sold, (3) the municipality's general credit
strength (e.g., its debt, administrative, economic and financial
characteristics), (4) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an "event of non-appropriation"), and (5) the legal recourse in the event of
failure to appropriate. Additionally, the lack of an established trading market
for municipal lease obligations may make the determination of fair market value
more difficult. See "Investment Policies and Restrictions--Municipal
Obligations" in the Statement of Additional Information.
Voyageur Fund may also acquire Derivative Municipal Obligations, which are
custodial receipts or trust certificates underwritten by securities dealers or
banks that evidence ownership of future interest payments, principal payments or
both on certain Municipal Obligations. The underwriter of these certificates or
receipts typically purchases and deposits the securities in an irrevocable trust
or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations. Although under the terms of
a custodial receipt or trust certificate, the Fund typically would be authorized
to assert its rights directly against the issuer of the underlying obligation,
the Fund could be required to assert through the custodian bank those rights as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the Fund may be subject
to delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which the
underlying security had been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, it would be subject
to state income tax (but not federal income tax) on the income it earned on the
underlying security, and the yield on the security paid to the Fund and its
shareholders would be reduced by the amount of taxes paid. Furthermore, amounts
paid by the trust or custodial account to the Fund would lose their tax-exempt
character and become taxable, for federal and state purposes, in the hands of
the Fund and its shareholders. However, the Fund will only invest in custodial
receipts which are accompanied by a tax opinion stating that interest payable on
the receipts is tax-exempt. If the Fund invests in custodial receipts, it is
possible that a portion of the discount at which the Fund purchases the receipts
might have to be accrued as taxable income during the period that the Fund holds
the receipts.
The principal and interest payments on the Derivative Municipal Obligations
underlying custodial receipts may be allocated in a number of ways. For example,
payments may be allocated such that certain custodial receipts may have variable
or floating interest rates and others may be stripped securities which pay only
the principal or interest due on the underlying Municipal Obligations. Voyageur
Fund may also invest in custodial receipts which are "inverse floating
obligations" (also sometimes referred to as "residual interest bonds"). These
securities pay interest rates that vary inversely to changes in the interest
rates of specified short-term Municipal Obligations or an index of short-term
Municipal Obligations. Thus, as market interest rates increase, the interest
rates on inverse floating obligations decrease. Conversely, as market rates
decline, the interest rates on inverse floating obligations increase. Such
securities have the effect of providing a degree of investment leverage, since
the interest rates on such securities will generally change at a rate which is a
multiple of the change in the interest rates of the specified Municipal
Obligations or index. As a result, the market values of inverse floating
obligations will generally be more volatile than the market values of other
Municipal Obligations and investments in these types of obligations will
increase the volatility of the net asset value of shares of the Fund.
ILLIQUID SECURITIES
Voyageur Fund may invest up to 15% of its net assets in illiquid
securities. A security is considered illiquid if it cannot be sold in the
ordinary course of business within seven days at approximately the price at
which it is valued. Illiquid securities may offer a higher yield than securities
which are more readily marketable, but they may not always be marketable on
advantageous terms.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. Voyageur Fund may be restricted in its ability to sell such securities
at a time when VFM deems it advisable to do so. In addition, in order to meet
redemption requests, the Fund may have to sell other assets, rather than such
illiquid securities, at a time which is not advantageous.
Certain securities in which Voyageur Fund may invest, including municipal
lease obligations, certain restricted securities and commercial paper issued
pursuant to the private placement exemption of Section 4(2) of the Securities
Act of 1933, historically have been considered illiquid by the staff of the
Securities and Exchange Commission. In accordance with more recent staff
positions, however, the Fund will treat such securities as liquid and not
subject to the above 15% limitation when they have been determined to be liquid
by VFM subject to the oversight of and pursuant to procedures adopted by the
Voyageur Board of Directors. See "Investment Policies and Restrictions--Illiquid
Investments" in the Statement of Additional Information.
MISCELLANEOUS INVESTMENT PRACTICES
FORWARD COMMITMENTS
New issues of Municipal Obligations and other securities are often
purchased on a "when issued" or delayed delivery basis, with delivery and
payment for the securities normally taking place 15 to 45 days after the date of
the transaction. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the buyer enters into the
commitment. Voyageur Fund may enter into such "forward commitments" if it holds,
and maintains until the settlement date in a segregated account, cash or
high-grade liquid debt obligations in an amount sufficient to meet the purchase
price. There is no percentage limitation on the Fund's total assets which may be
invested in forward commitments. Municipal Obligations purchased on a
when-issued basis and the securities held in the Fund's portfolio are subject to
changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Municipal Obligations
purchased on a when-issued basis may expose the Fund to risk because they may
experience such fluctuations prior to their actual delivery. Purchasing
Municipal Obligations on a when-issued basis can involve the additional risk
that the yield available in the market when the delivery takes place actually
may be higher than that obtained in the transaction itself. Any significant
commitment by the Fund to the purchase of securities on a when-issued basis may
increase the volatility of the Fund's net asset value. Although Voyageur Fund
will generally enter into forward commitments with the intention of acquiring
securities for its portfolio, it may dispose of a commitment prior to settlement
if the Fund's investment manager deems it appropriate to do so. The Fund may
realize short-term profits or losses upon the sale of forward commitments.
REPURCHASE AGREEMENTS
Voyageur Fund may enter into repurchase agreements with respect to not more
than 10% of its total assets (taken at current value), except when investing for
defensive purposes during times of adverse market conditions. The Fund may enter
into repurchase agreements with respect to any securities which it may acquire
consistent with its investment policies and restrictions.
A repurchase agreement involves the purchase by the Fund of securities with
the condition that, after a stated period of time, the original seller (a member
bank of the Federal Reserve System or a recognized securities dealer) will buy
back the same securities ("collateral") at a predetermined price or yield.
Repurchase agreements involve certain risks not associated with direct
investments in securities. In the event the original seller defaults on its
obligation to repurchase, as a result of its bankruptcy or otherwise, the Fund
will seek to sell the collateral, which action could involve costs or delays. In
such case, the Fund's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, the Fund could suffer a
loss. See "Investment Policies and Restrictions--Taxable Obligations" in the
Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS
Voyageur Fund may engage in "reverse repurchase agreements" with banks and
securities dealers with respect to not more than 10% of its total assets.
Reverse repurchase agreements are ordinary repurchase agreements in which the
Fund is the seller of, rather than the investor in, securities and agrees to
repurchase them at an agreed upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and transaction costs. Because
certain of the incidents of ownership of the security are retained by the Fund,
reverse repurchase agreements are considered a form of borrowing by the Fund
from the buyer, collateralized by the security. At the time the Fund enters into
a reverse repurchase agreement, cash, U.S. Government securities or other liquid
high grade debt obligations having a value sufficient to make payments for the
securities to be repurchased will be segregated, and will be marked to market
daily and maintained throughout the period of the obligation. Reverse repurchase
agreements may be used as a means of borrowing for investment purposes subject
to the 10% limitation set forth above. This speculative technique is referred to
as leveraging. Leveraging may exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs which may or may not be
recovered by income from or appreciation of the securities purchased. Because
the Fund does not currently intend to utilize reverse repurchase agreements in
excess of 10% of total assets, the Fund believes the risks to principal of
leveraging through reverse repurchase agreements are reduced. VFM believes that
the limited use of leverage may facilitate the Fund's ability to provide current
income.
OPTIONS AND FUTURES
Voyageur Fund may utilize put and call transactions and may utilize futures
transactions to hedge against market risk and facilitate portfolio management.
See "Investment Policies and Restrictions--Options and Futures Transactions" in
the Statement of Additional Information. Options and futures may be used to
attempt to protect against possible declines in the market value of the Fund's
portfolio resulting from downward trends in the debt securities markets
(generally due to a rise in interest rates), 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 securities markets as
a temporary substitute for purchasing particular securities. The use of options
and futures is a function of market conditions. Other transactions may be used
by the Fund in the future for hedging purposes as they are developed to the
extent deemed appropriate by the Voyageur Board of Directors.
OPTIONS ON SECURITIES
Voyageur Fund may write (i.e., sell) covered put and call options and
purchase put and call options on the securities in which it may invest and on
indices of securities in which it may invest, to the extent such put and call
options are available.
A put option gives the buyer of such option, upon payment of a premium, the
right to deliver a specified amount of a security to the writer of the option on
or before a fixed date at a predetermined price. A call option gives the
purchaser of the option, upon payment of a premium, the right to call upon the
writer to deliver a specified amount of a security on or before a fixed date, at
a predetermined price.
In purchasing a call option, the Fund would be in a position to realize a
gain if, during the option period, the price of the security increased by an
amount in excess of the premium paid. It would realize a loss if the price of
the security declined or remained the same or did not increase during the period
by more than the amount of the premium. In purchasing a put option, the Fund
would be in a position to realize a gain if, during the option period, the price
of the security declined by an amount in excess of the premium paid. It would
realize a loss if the price of the security increased or remained the same or
did not decrease during that period by more than the amount of the premium. If a
put or call option purchased by the Fund were permitted to expire without being
sold or exercised, its premium would be lost by the Fund.
If a put option written by the Fund were exercised, the Fund would be
obligated to purchase the underlying security at the exercise price. If a call
option written by the Fund were exercised, the Fund would be obligated to sell
the underlying security at the exercise price. The risk involved in writing a
put option is that there could be a decrease in the market value of the
underlying security caused by rising interest rates or other factors. If this
occurred, the option could be exercised and the underlying security would then
be sold to the Fund at a higher price than its current market value. The risk
involved in writing a call option is that there could be an increase in the
market value of the underlying security caused by declining interest rates or
other factors. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction as described in Appendix B to the Statement of Additional
Information. The Fund retains the premium received from writing a put or call
option whether or not the option is exercised.
Over-the-counter options are purchased or written by the Fund in privately
negotiated transactions. Such options are illiquid, and it may not be possible
for the Fund to dispose of an option it has purchased or terminate its
obligations under an option it has written at a time when VFM believes it would
be advantageous to do so. Over-the-counter options are subject to the Fund's 15%
illiquid investment limitation. See Appendix B to the Statement of Additional
Information for a further discussion of the general characteristics and risks of
options.
Participation in the options market involves investment risks and
transaction costs to which Voyageur Fund would not be subject absent the use of
this strategy. If VFM's predictions of movements in the direction of the
securities and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategy was not
used. Risks inherent in the use of options include (1) dependence on VFM's
ability to predict correctly movements in the direction of interest rates and
securities prices; (2) imperfect correlation between the price of options and
movements in the prices of the securities being hedged; (3) the fact that the
skills needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; and (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences. See
"Investment Policies and Restrictions--Risks of Transactions in Futures
Contracts and Options" in the Statement of Additional Information for further
discussion and see Appendix B thereto for a discussion of closing transactions
and other risks.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Voyageur Fund may enter into contracts for the purchase or sale for future
delivery of fixed income securities or contracts based on financial indices
including any index of securities in which the Fund may invest ("futures
contracts") and may purchase and write put and call options to buy or sell
futures contracts ("options on futures contracts"). A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
The purchaser of a futures contract on an index agrees to take or make delivery
of an amount of cash equal to the difference between a specified dollar multiple
of the value of the index on the expiration date of the contract ("current
contract value") and the price at which the contract was originally struck.
Options on futures contracts to be written or purchased by the Fund will be
traded on exchanges or over the counter. The successful use of such instruments
draws upon VFM's experience with respect to such instruments and usually depends
upon VFM's ability to forecast interest rate movements correctly. Should
interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of futures contracts or options on futures contracts or may
realize losses and would thus be in a worse position than if such strategies had
not been used. In addition, the correlation between movements in the price of
futures contracts or options on futures contracts and movements in the prices of
the securities hedged or used for cover will not be perfect.
Voyageur Fund's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements. To the extent
required to comply with applicable Securities and Exchange Commission releases
and staff positions, when purchasing a futures contract or writing a put option,
the Fund will maintain in a segregated account cash, U.S. Government securities
or other liquid high grade debt securities equal to the value of such contracts,
less any margin on deposit. In addition, the rules and regulations of the
Commodity Futures Trading Commission currently require that, in order to avoid
"commodity pool operator" status, the Fund must use futures and options
positions (a) for "bona fide hedging purposes" (as defined in the regulations)
or (b) for other purposes so long as aggregate initial margins and premiums
required in connection with non-hedging positions do not exceed 5% of the
liquidation value of the Fund's portfolio. There are no other numerical limits
on the Fund's use of futures contracts and options on futures contracts. For a
discussion of the tax treatment of futures contracts and options on futures
contracts, see "Taxes" in the Statement of Additional Information. For a further
discussion of the general characteristics and risks of futures, see Appendix B
to the Statement of Additional Information.
CONCENTRATION POLICY
As a fundamental policy, Voyageur Fund may not invest 25% or more of its
total assets in the securities of any industry, although, for purposes of this
limitation, tax-exempt securities and U.S. Government obligations are not
considered to be part of any industry. The Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Fund from time to time will invest 25% or more of its total
assets in a particular segment of the municipal bond market, such as housing,
health care, utility, transportation, education or industrial obligations. In
such circumstances, economic, business, political or other changes affecting one
bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or a declining market or need
for the project) might also affect other bonds in the same segment, thereby
potentially increasing market or credit risk. For a discussion of these segments
of the municipal bond market, see "Investment Policies and
Restrictions--Concentration Policy" in the Statement of Additional Information.
The Voyageur Board of Directors may change any of the foregoing policies
that are not specifically designated fundamental.
RISKS AND SPECIAL INVESTMENT CONSIDERATIONS
GENERAL
The yields on Municipal Obligations are dependent on a variety of factors,
including the financial condition of the issuer or other obligor thereon or the
revenue source from which debt service is payable, general economic and monetary
conditions, conditions in the relevant market, the size of a particular issue,
maturity of the obligation and the rating of the issue. Generally, the value of
Municipal Obligations will tend to fall as interest rates rise and will tend to
increase as interest rates decrease. In addition, Municipal Obligations of
longer maturity produce higher current yields than Municipal Obligations with
shorter maturities but are subject to greater price fluctuation due to changes
in interest rates, tax laws and other general market factors. Lower-rated
Municipal Obligations generally produce a higher yield than higher-rated
Municipal Obligations due to the perception of a greater degree of risk as to
the payment of principal and interest. Certain Municipal Obligations held by
Voyageur Fund may permit the issuer at its option to "call," or redeem, its
securities. If an issuer were to redeem securities held by the Fund during a
time of declining interest rates, the Fund might not be able to reinvest the
proceeds in securities providing the same investment return as the securities
redeemed.
SPECIAL RISK CONSIDERATIONS REGARDING MEDIUM- AND LOWER-GRADE MUNICIPAL
OBLIGATIONS
Voyageur Fund invests in medium- and lower-grade Municipal Obligations.
Municipal Obligations which are in the medium- and lower- grade categories
generally offer a higher current yield than is offered by higher-grade Municipal
Obligations but they also generally involve greater price volatility and greater
credit and market risk. Credit risk relates to the issuer's ability to make
timely payment of interest and principal when due. Market risk relates to the
changes in market value that occur as a result of variation in the level of
prevailing interest rates and yield relationships in the municipal securities
market. Debt securities rated BB or below by S&P or Fitch and B or below by
Moody's are commonly referred to as "junk bonds." Although Voyageur Fund
primarily will invest in medium- and lower-grade Municipal Obligations, the Fund
may invest in higher-grade Municipal Obligations for temporary defensive
purposes. Such investments may result in lower current income than if the Fund
were fully invested in medium- and lower-grade securities.
The value of Voyageur Fund's portfolio securities can be expected to
fluctuate over time. When interest rates decline, the value of a portfolio
invested in fixed-income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in
fixed-income securities generally can be expected to decline. However, the
secondary market prices of medium- and lower-grade Municipal Obligations are
less sensitive to changes in interest rates and are more sensitive to adverse
economic changes or individual issuer developments than are the secondary market
prices of higher-grade debt securities. Such events also could lead to a higher
incidence of defaults by issuers of medium- and lower-grade Municipal
Obligations as compared with historical default rates. In addition, changes in
interest rates and periods of economic uncertainty can be expected to result in
increased volatility in the market price of the Municipal Obligation in the
Fund's portfolio and thus in the net asset value of the Fund. Also, adverse
publicity and investor perceptions, whether or not based on rational analysis,
may affect the value and liquidity of medium- and lower-grade Municipal
Obligations. The secondary market value of Municipal Obligations structured as
zero-coupon securities and payment-in-kind securities may be more volatile in
response to changes in interest rates than debt securities which pay interest
periodically in cash. Investment in such securities also involves certain tax
considerations.
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of medium-and lower-grade Municipal Obligations to pay
interest and to repay principal, to meet projected financial goals and to obtain
additional financing. In the event that an issuer of securities held by Voyageur
Fund experiences difficulties in the timely payment of principal or interest and
such issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
medium- or lower-grade Municipal Obligations in which the Fund may invest,
trading in such securities may be relatively inactive. VFM has contracted with
Muller Data Corporation as pricing agent and VFM is responsible for determining
the net asset value of the Fund, subject to the supervision of the Voyageur
Board of Directors. During periods of reduced market liquidity and in the
absence of readily available market quotations for medium- and lower-grade
Municipal Obligations held in the Fund's portfolio, the ability of the pricing
agent to value the Fund's securities becomes more difficult and the pricing
agent's use of judgment may play a greater role in the valuation of the Fund's
securities due to the reduced availability of reliable objective data. The
effects of adverse publicity and investor perceptions may be more pronounced for
securities for which no established retail market exists as compared with the
effects on securities for which such a market does exist. Further, the Fund may
have more difficulty selling such securities in a timely manner and at their
stated value than would be the case for securities for which an established
retail market does exist.
Voyageur Fund may invest in zero-coupon and payment-in-kind Municipal
Obligations. Zero-coupon securities are debt obligations that do not entitle the
holder to any periodic payment of interest prior to maturity or a specified date
when the securities begin paying current interest. They are issued and traded at
discount from their face amounts or par value, which discount varies depending
on the time remaining until cash payments begin, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
Internal Revenue Code of 1986, as amended, requires that regulated investment
companies distribute at least 90% of their net investment income each year,
including tax-exempt and non-cash income. Accordingly, although the Fund will
receive no coupon payments on zero-coupon securities prior to their maturity,
the Fund is required, in order to maintain its desired tax treatment, to include
in its distributions to shareholders in each year any income attributable to
zero-coupon securities that is in excess of 10% of the Fund's net investment
income in that year. The Fund may be required to borrow or to liquidate
portfolio securities at a time that it otherwise would not have done so in order
to make such distributions. Payment-in-kind securities are securities that pay
interest through the issuance of additional securities. Such securities
generally are more volatile in response to changes in interest rates and are
more speculative investments than are securities that pay interest periodically
in cash.
VFM seeks to minimize the risks involved in investing in medium- and
lower-grade Municipal Obligations through multiple portfolio holdings, careful
investment analysis, and attention to current developments and trends in the
economy and financial and credit markets. The Fund will rely on VFM's judgment,
analysis and experience in evaluating the creditworthiness of an issue. In its
analysis, VFM will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of the issuer's management and regulatory
matters. VFM may consider the credit ratings of Moody's, Fitch, and S&P in
evaluating Municipal Obligations, although it does not rely primarily on these
ratings. Such ratings evaluate only the safety of principal and interest
payments, not market value risk. Additionally, because the creditworthiness of
an issuer may change more rapidly than is able to be timely reflected in changes
in credit ratings, VFM continuously monitors the issuers of Municipal
Obligations held in the Fund's portfolio.
Municipal Obligations generally are not listed for trading on any national
securities exchange, and many issuers of medium- and lower-grade Municipal
Obligations choose not have a rating assigned to their obligations by any
nationally recognized statistical rating organization. The amount of information
available about the financial condition of an issuer of unlisted or unrated
securities generally is not as extensive as that which is available with respect
to issuers of listed or rated securities. Because of the nature of medium- and
lower-rated Municipal Obligations, achievement by the Fund of its investment
objective may be more dependent on the credit analysis of VFM than is the case
for an investment company which invests primarily in exchange listed
higher-grade securities.
INVESTMENT RESTRICTIONS
Voyageur Fund has adopted certain investment restrictions in addition to
those set forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the restriction providing
that Voyageur Fund may not borrow money, except from banks for temporary or
emergency purposes in an amount not exceeding 20% of the value of its total
assets (the Fund may also borrow money in the form of reverse repurchase
agreements up to 10% of total assets). See "Investment Policies and
Restrictions--Investment Restrictions" in the Statement of Additional
Information.
The Fund also has a number of non-fundamental investment restrictions which
may be changed by the Voyageur Board of Directors without shareholder approval.
These include restrictions providing that the Fund may not (i)invest more than
5% of its total assets in securities of any single investment company,
(ii)invest more than 10% of its total assets in securities of two or more
investment companies, (iii) invest more than 15% of its net assets in illiquid
securities or (iv) pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 10% of net assets. If Voyageur Fund invests in securities of
investment companies, the return on any such investments will be reduced by the
operating expenses, including investment advisory and administrative fees, of
such investment companies.
Except for Voyageur Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
APPENDIX C
VOYAGEUR FUND
MANAGEMENT AND GENERAL INFORMATION
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF VOYAGEUR MUTUAL FUNDS
The Board of Directors of Voyageur Mutual Funds (the "Voyageur Board of
Directors") is responsible for managing the business and affairs of Voyageur
Fund. The names, addresses, principal occupations and other affiliations of
Directors and executive officers of Voyageur Mutual Funds are set forth in the
Statement of Additional Information relating to the Prospectus/Proxy Statement
(the "Statement of Additional Information").
INVESTMENT ADVISER; PORTFOLIO MANAGEMENT
VFM has been retained under an investment advisory agreement (the "Advisory
Agreement") to act as the Fund's investment adviser, subject to the authority of
the Voyageur Board of Directors. VFM and the Underwriter are each indirect
wholly-owned subsidiaries of Dougherty Financial Group, Inc. ("DFG"), which is
owned approximately 49% by Michael E. Dougherty, 49% by Pohlad Companies and
less than 1% by certain retirement plans for the benefit of DFG employees. Mr.
Dougherty co-founded the predecessor of DFG in 1977 and has served as DFG's
Chairman of the Board and Chief Executive Officer since inception. Pohlad
Companies is a holding company owned in equal parts by each of James O. Pohlad,
Robert C. Pohlad and William M. Pohlad. As of June 30, 1996, VFM and its
affiliates served as the manager to 6 closed-end and 10 open-end investment
companies (comprising 33 separate investment portfolios), administered numerous
private accounts and managed approximately $11.5 billion in assets. VFM's
principal business address is 90 South Seventh Street, Suite 4400, Minneapolis,
Minnesota 55402.
Voyageur Fund will pay VFM a monthly investment advisory and management fee
equivalent on an annual basis to 0.65% of its average daily net assets. VFM has
agreed to limit its investment advisory fee to 0.50% through the period ended
December 31, 1998.
Steve Eldredge will have day-to-day portfolio management responsibility of
Voyageur Fund. Since July 1995, Mr.Eldredge has managed Voyageur Florida Tax
Free Fund, Voyageur Florida Insured Tax Free Fund, Voyageur Florida Limited Term
Tax Free Fund, Voyageur National Tax Free Fund, Voyageur National Limited Term
Tax Free Fund, Voyageur Iowa Tax Free Fund, and Voyageur Wisconsin Tax Free
Fund. Mr.Eldredge is a Senior Tax Exempt Portfolio Manager for VFM where he has
been employed since 1995. Prior to joining VFM, Mr.Eldredge was a portfolio
manager for ABT Mutual Funds in Florida from 1989 to 1995. Mr. Eldredge has over
18 years experience in portfolio management.
PLAN OF DISTRIBUTION
Voyageur Fund has adopted a Plan of Distribution under the 1940 Act (the
"Plan") and has entered into a Distribution Agreement with Voyageur Fund
Distributors, Inc. (the "Underwriter"). Pursuant to the Fund's Plan, the Fund
will pay the Underwriter a Rule 12b-1 fee, at an annual rate of .25% of the
Fund's average daily net assets attributable to Class A shares and 1% of the
Fund's average daily net assets attributable to each of Class B and Class C
shares for servicing of shareholder accounts and distribution related services.
Payments made under the Plan are not tied exclusively to expenses actually
incurred by the Underwriter and may exceed or be less than expenses actually
incurred by the Underwriter.
All of the Rule 12b-1 fee attributable to Class A shares, and a portion of
the fee equal to .25% of the average daily net assets of the Fund attributable
to each of Class B shares and Class C shares constitutes a shareholder servicing
fee designed to compensate the Underwriter for the provision of certain services
to the shareholders. The services provided may include personal services
provided to shareholders, such as answering shareholder inquiries regarding the
Fund and providing reports and other information, and services related to the
maintenance of shareholder accounts. The Underwriter may use such Rule 12b-1 fee
or portion thereof to make payments to qualifying broker-dealers and financial
institutions that provide such services.
That portion of the Rule 12b-1 fee equal to .75% of the average daily net
assets of the Fund attributable to Class B shares and Class C shares,
respectively, constitutes a distribution fee designed to compensate the
Underwriter for advertising, marketing and distributing the Class B shares and
Class C shares of the Fund. In connection therewith, the Underwriter may provide
initial and ongoing sales compensation to its investment executives and other
broker-dealers for sales of Class B shares and Class C shares and may pay for
other advertising and promotional expenses in connection with the distribution
of Class B shares and Class C shares. The distribution fee attributable to Class
B shares and Class C shares is designed to permit an investor to purchase such
shares through investment executives of the Underwriter and other broker-dealers
without the assessment of an initial sales charge and at the same time to permit
the Underwriter to compensate its investment executives and other broker-dealers
in connection with the sale of such shares.
CUSTODIAN; DIVIDEND DISBURSING, TRANSFER, ADMINISTRATIVE AND ACCOUNT SERVICES
AGENT
Norwest Bank Minnesota, N.A. serves as the custodian of Voyageur Fund's
portfolio securities and cash.
VFM acts as the Fund's dividend disbursing, transfer, administrative and
accounting services agent to perform dividend-paying functions, to calculate the
Fund's daily share price, to maintain shareholder records and to perform certain
regulatory and compliance related services for the Fund. The fees paid for these
services are based on the Fund's assets and include reimbursement of
out-of-pocket expenses. VFM will receive a monthly fee from the Fund equal to
the sum of (1) $1.33 per shareholder account per month, (2)a monthly fee ranging
from $1,000 to $1,500 based on the average daily net assets of the Fund and (3)a
percentage of average daily net assets which ranges from 0.02% to 0.11% based on
the average daily net assets of the Fund. See "The Investment Adviser and
Underwriter--Expenses of the Fund" in the Statement of Additional information.
Certain institutions may act as sub-administrators for the Fund pursuant to
contracts with VFM, whereby the institutions will provide shareholder services
to their customers. VFM will pay the sub-administrators' fees out of its own
assets. The fee paid by VFM to any sub-administrator will be a matter of
negotiation between the institution and VFM based on the extent and quality of
the services provided.
EXPENSES OF VOYAGEUR FUND
VFM is contractually obligated to pay the operating expenses (excluding
interest expense, taxes, brokerage fees, commissions and Rule 12b-1 fees) of
Voyageur Fund which exceed 1% of the Fund's average daily net assets on an
annual basis up to certain limits as set forth in detail in the Statement of
Additional Information. In addition, VFM and the Underwriter reserve the right
to voluntarily waive their fees in whole or in part and to voluntarily absorb
certain other of the Fund's expenses. VFM and the Underwriter have agreed to
waive fees or absorb expenses for the fiscal year ending December31, 1998 in
such a manner as will result in the Fund being charged fees and expenses that
approximate those set forth in the section "Fees and Expenses" in the
Prospectus/Proxy Statement. After December31, 1998, such voluntary fee and
expense waivers may be discontinued or modified by VFM and the Underwriter in
their sole discretion.
Voyageur Fund's expenses include, among others, fees of directors, expenses
of directors' and shareholders' meetings, insurance premiums, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Underwriter), expenses of printing and mailing stock
certificates and shareholder statements, association membership dues, charges of
the Fund's custodian, bookkeeping, auditing and legal expenses, the fees and
expenses of registering the Fund and its shares with the Securities and Exchange
Commission and registering or qualifying its shares under state securities laws
and expenses of preparing and mailing prospectuses and reports to existing
shareholders.
PORTFOLIO TRANSACTIONS
Voyageur Fund will not effect any brokerage transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with VFM
unless such transactions, including the frequency thereof, the receipt of
commissions payable in connection therewith and the selection of the affiliated
broker-dealer effecting such transactions, are not unfair or unreasonable to the
shareholders of the Fund. It is not anticipated that the Fund will effect any
brokerage transactions with any affiliated broker-dealer, including the
Underwriter, unless such use would be to the Fund's advantage. VFM may consider
sales of shares of the Fund as a factor in the selection of broker-dealers to
execute the Fund's securities transactions.
GENERAL INFORMATION ABOUT VOYAGEUR FUND
Voyageur Fund sends to its shareholders six-month unaudited and annual
audited financial statements.
The shares of the Fund constitute a separate series of the Voyageur Mutual
Funds, a Minnesota corporation which issues shares of common stock with a $.01
par value per share. All shares of Voyageur Mutual Funds are nonassessable and
fully transferable when issued and paid for in accordance with the terms thereof
and possess no cumulative voting, preemptive or conversion rights. The Voyageur
Board of Directors is empowered to issue other series of common stock without
shareholder approval.
Voyageur Fund currently offers its shares in multiple classes, each with
different sales arrangements and bearing different expenses. Class A, Class B
and Class C shares each represent interests in the assets of the Fund and have
identical voting, dividend, liquidation and other rights on the same terms and
conditions except that expenses related to the distribution of each class are
borne solely by such class and each class of shares has exclusive voting rights
with respect to provisions of the Fund's Rule 12b-1 distribution plan which
pertain to a particular class and other matters for which separate class voting
is appropriate under applicable law.
Fund shares are freely transferable, subject to applicable securities laws,
are entitled to dividends as declared by the Voyageur Board of Directors and, in
liquidation, are entitled to receive the net assets, if any, of the Fund. The
Fund does not generally hold annual meetings of shareholders and will do so only
when required by law. Shareholders may remove Voyageur Board of Directors
members from office by votes cast in person or by proxy at a meeting of
shareholders or by written consent and, in accordance with Section 16 of the
1940 Act, the Voyageur Board of Directors shall promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any Board
member when requested to do so by the record holders of not less than 10% of the
outstanding shares.
Each share of a series has one vote irrespective of the relative net asset
value of the shares. On some issues, such as the election of Board members, the
shares of all series and classes vote together as one. On an issue affecting
only a particular series or class, the shares of the affected series or class
vote as a separate series or class. An example of such an issue would be a
fundamental investment restriction pertaining to only one series.
The assets received by Voyageur Mutual Funds for the issue or sale of
shares of each series or class thereof, and all income, earnings, profits and
proceeds thereof, subject only to the rights of creditors, are allocated to such
series, and in the case of a class, allocated to such class, and constitute the
underlying assets of such series or class. The underlying assets of each series,
or class thereof, are required to be segregated on the books of account, and are
to be charged with the expenses in respect to such series or class thereof, and
with a share of the general expenses of Voyageur Mutual Funds. Any general
expenses of Voyageur Mutual Funds not readily identifiable as belonging to a
particular series or class are allocated among the series or classes thereof,
based upon the relative net assets of the series or class at the time such
expenses were accrued.
Voyageur Mutual Funds' Articles of Incorporation limit the liability of the
Board members to the fullest extent permitted by law. For a further discussion
of the above matters, see "Additional Information" in the Statement of
Additional Information.
APPENDIX D
VOYAGEUR FUND
SHAREHOLDER GUIDE TO INVESTING
HOW TO PURCHASE SHARES
ALTERNATIVE PURCHASE ARRANGEMENTS
Voyageur Fund offers investors the choice among three classes of shares
which offer different sales charges and bear different expenses. These
alternatives permit at investor to choose the method of purchasing shares that
is most beneficial given the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. A summary of these
alternative purchase arrangements is located in the Prospectus/Proxy Statement
under "Summary--Fees and Expenses."
A broker-dealer may receive different levels of compensation depending on
which class of shares is sold. In addition, the Underwriter from time to time
pays certain additional cash incentives of up to $100 and/or non-cash incentives
such as vacations or other prizes to its investment executives and other
broker-dealers and financial institutions in consideration of their sales of
Fund shares. In some instances, other incentives may be made available only to
broker-dealers and financial institutions who meet certain objective standards
developed by the Underwriter.
GENERAL PURCHASE INFORMATION
The minimum initial investment in Voyageur Fund is $1,000, and the minimum
additional investment is $100. The Fund's shares may be purchased at the public
offering price from the Underwriter, from other broker-dealers who are members
of the National Association of Securities Dealers, Inc. and who have selling
agreements with the Underwriter and from certain financial institutions that
have selling agreements with the Underwriter.
When orders are placed for shares of the Fund, the public offering price
used for the purchase will be the net asset value per share next determined
after receipt of the order, plus the applicable sales charge, if any. If an
order is placed with the Underwriter or other broker-dealer, the broker-dealer
is responsible for promptly transmitting the order to the Fund. The Fund
reserves the right, in its absolute discretion, to reject any order for the
purchase of its shares.
Shares of the Fund may be purchased by opening an account either by mail or
by phone. Dividend income begins to accrue as of the opening of the New York
Stock Exchange (the "Exchange") on the day that payment is received. If payment
is made by check, payment is considered received on the day the check is
received if the check is drawn upon a member bank of the Federal Reserve System
within the Ninth Federal Reserve District (Michigan's Upper Peninsula,
Minnesota, Montana, North Dakota, South Dakota and northwestern Wisconsin). In
the case of other checks, payment is considered received when the check is
converted into "Federal Funds," i.e., monies of member banks within the Federal
Reserve System that are on deposit at a Federal Reserve Bank, normally within
two days after receipt.
An investor who may be interested in having shares redeemed shortly after
purchase should consider making unconditional payment by certified check or
other means approved in advance by the Underwriter. Payment of redemption
proceeds will be delayed as long as necessary to verify by expeditious means
that the purchase payment has been or will be collected. Such period of time
typically will not exceed 15 days.
AUTOMATIC INVESTMENT PLAN
Investors may make systematic investments in fixed amounts automatically on
a monthly basis through Voyageur Fund's Automatic Investment Plan. Additional
information is available from the Underwriter by calling 800-545-3863.
PURCHASES BY MAIL
To open an account by mail, call 800-545-3863 to obtain the required form
and instructions. A general authorization form must be completed, with an
investment dealer or other financial institution designated on the form, and the
form mailed, along with a check payable to the Fund, to:
NW 9369
P.O. Box 1450
Minneapolis, MN 55485-9369
PURCHASES BY TELEPHONE
To open an account by telephone, call 612-376-7014 or 800-545-3863 to
obtain an account number and instructions. Information concerning the account
will be taken over the phone. The investor must then request a commercial bank
with which he or she has an account and which is a member of the Federal Reserve
System to transmit Federal Funds by wire to the Fund as follows:
Norwest Bank Minnesota, N.A., ABA #091000019
For Credit of: Voyageur National High Yield Municipal Bond Fund
Checking Account No.: 872-458
Account Number: (assigned by telephone)
Information on how to transmit Federal Funds by wire is available at any
national bank or any state bank that is a member of the Federal Reserve System.
The bank may charge the shareholder for the wire transfer. If the phone order
and Federal Funds are received before the close of trading on the Exchange, the
order will be deemed to become effective at that time. Otherwise, the order will
be deemed to become effective as of the close of trading on the Exchange on the
next day the Exchange is open for trading. The investor will be required to
complete a general authorization and mail it to the Fund after making the
initial telephone purchase.
CLASS A SHARES--FRONT END SALES CHARGE ALTERNATIVE
The public offering price of Class A shares of Voyageur Fund is the net
asset value of the Fund's shares plus the applicable front end sales charge
("FESC"), which will vary with the size of the purchase. The Fund receives the
net asset value. The FESC varies depending on the size of the purchase and is
allocated between the Underwriter and other broker-dealers.
The current sales charges are:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER DISCOUNT
AS % OF AS % OF AS % OF
AMOUNT OF PURCHASE NET ASSET VALUE OFFERING PRICE OFFERING PRICE (1)
- ------------------ --------------- -------------- ------------------
<S> <C> <C> <C>
Less than $50,000 3.90% 3.75% 3.25%
$50,000 but less than $100,000 3.63% 3.50% 3.00%
$100,000 but less than $250,000 2.83% 2.75% 2.50%
$250,000 but less than $500,000 2.04% 2.00% 1.75%
$500,000 but less than $1,000,000 1.78% 1.75% 1.75%
$1,000,000 or more NAV(3) NAV(3) 1.00%(2)
</TABLE>
- ---------------
(1) Brokers and dealers who receive 90% or more of the sales charge may be
considered to be underwriters under the Securities Act of 1933, as amended.
(2) The Underwriter intends to pay its investment executives and other
broker-dealers and banks that sell Fund shares, out of its own assets, a
fee of up to 1% of the offering price of sales of $1,000,000 or more, other
than on sales not subject to a contingent deferred sales charge.
(3)Purchases of $1,000,000 or more may be subject to a contingent deferred
sales charge at the time of redemption. See "How to Sell Shares--Contingent
Deferred Sales Charge."
In connection with the distribution of the Fund's Class A shares, the
Underwriter is deemed to receive all applicable sales charges. The Underwriter,
in turn, pays its investment executives and other broker-dealers selling such
shares a "dealer discount," as set forth above. In the event that shares are
purchased by a financial institution acting as agent for its customers, the
Underwriter or the broker-dealer with whom such order was placed may pay all or
part of its dealer discount to such financial institution in accordance with
agreements between such parties.
SPECIAL PURCHASE PLANS--REDUCED SALES CHARGES
Certain investors (or groups of investors) may qualify for reductions in
the sales charges shown above. Investors should contact their broker-dealer or
the Fund for details about the Fund's Combined Purchase Privilege, Cumulative
Quantity Discount and Letter of Intention plans. Descriptions are also included
with the general authorization form and in the Statement of Additional
Information. These special purchase plans may be amended or eliminated at any
time by the Underwriter without notice to existing Fund shareholders.
RULE 12B-1 FEES
Class A shares are subject to a Rule 12b-1 fee payable at an annual rate of
.25% of the average daily net assets of the Fund attributable to Class A shares.
All or a portion of such fees are paid quarterly to financial institutions and
service providers with respect to the average daily net assets attributable to
shares sold or serviced by such institutions and service providers. For
additional information about this fee, see "Management--Plan of Distribution" in
Appendix C to the Prospectus/Proxy Statement.
CONTINGENT DEFERRED SALES CHARGE
Although there is no initial sales charge on purchases of Class A shares of
$1,000,000 or more, the Underwriter pays investment dealers, out of its own
assets, a fee of up to 1% of the offering price of such shares. If these shares
are redeemed within two years after purchase, the redemption proceeds will be
reduced by a contingent deferred sales charge ("CDSC") of 1%. For additional
information, see "How to Sell Shares--Contingent Deferred Sales Charge."
WAIVER OF SALES CHARGES
A limited group of institutional and other investors may qualify to
purchase Class A shares at net asset value, with no front end or deferred sales
charges. The investors qualifying to purchase such shares are: (1) officers and
directors of Voyageur Fund; (2)officers, directors and full-time employees of
Dougherty Financial Group, Inc. and Pohlad Companies, and officers, directors
and full-time employees of parents and subsidiaries of the foregoing companies;
(3)officers, directors and full-time employees of investment advisers of other
mutual funds subject to a sales charge and included in any other family of
mutual funds that includes any Voyageur Complex fund as a member ("Other Load
Funds"), and officers, directors and full-time employees of parents,
subsidiaries and corporate affiliates of such investment advisers; (4)spouses
and lineal ancestors and descendants of the officers, directors/trustees and
employees referenced in clauses (1), (2) and (3), and lineal ancestors and
descendants of their spouses; (5)investment executives and other employees of
banks and dealers that have selling agreements with the Underwriter and parents,
spouses and children under the age of 21 of such investment executives and other
employees; (6)trust companies and bank trust departments for funds held in a
fiduciary, agency, advisory, custodial or similar capacity; (7)any state or any
political subdivision thereof or any instrumentality, department, authority or
agency of any state or political subdivision thereof; (8)partners and full-time
employees of the Fund's counsel; (9)managed account clients of VFM, clients of
investment advisers affiliated with VFM and other registered investment advisers
and their clients (the Fund may be available through a broker-dealer which
charges a transaction fee for purchases and sales); and (10)"wrap accounts" for
the benefit of clients of financial planners adhering to certain standards
established by VFM.
Class A shares will also be issued at net asset value, without a front end
or deferred sales charge, if the purchase of such shares is funded by the
proceeds from the redemption of shares of any unrelated open-end investment
company that charges a front end sales charge and, in certain circumstances, a
contingent deferred sales charge. In order to exercise this privilege, the
purchase order must be received by the Fund within 60 days after the redemption
of shares of the unrelated investment company.
CLASS B SHARES--CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE
The public offering price of Class B shares of Voyageur Fund is the net
asset value of the Fund's shares. Class B shares are sold without an initial
sales charge so that Voyageur Fund receives the full amount of the investor's
purchase. However, a CDSC of up to 5% will be imposed if shares are redeemed
within six years of purchase. For additional information, see "How to Sell
Shares--Contingent Deferred Sales Charge." In addition, Class B shares are
subject to higher Rule 12b-1 fees as described below. The CDSC will depend on
the number of years since the purchase was made according to the following
table:
CDSC AS A % OF
CDSC PERIOD AMOUNT REDEEMED*
----------- ----------------
1st year after purchase 5%
2nd year after purchase 4
3rd year after purchase 4
4th year after purchase 3
5th year after purchase 2
6th year after purchase 1
Thereafter 0
- ----------
* The CDSC will be calculated on an amount equal to the lesser of the net
asset value of the shares at the time of purchase or the net asset value at
the time of redemption.
Proceeds from the CDSC are paid to the Underwriter and are used to defray
expenses of the Underwriter related to providing distribution-related services
to the Fund in connection with the sale of Class B shares, such as the payment
of compensation to selected broker-dealers and for selling Class B shares. The
combination of the CDSC and the Rule 12b-1 fee enables the Fund to sell the
Class B shares without deduction of a sales charge at the time of purchase.
Although Class B shares are sold without an initial sales charge, the
Underwriter pays to brokers who sell Class B shares a sales commission equal to
4% of the amount invested and an ongoing annual servicing fee of .15% (paid
quarterly) calculated on the net assets attributable to sales made by such
broker-dealers.
RULE 12B-1 FEES
Class B shares are subject to a Rule 12b-1 fee payable at an annual rate of
1% of the average daily net assets of the Fund attributable to Class B shares.
The higher 12b-1 fee will cause Class B shares to have a higher expense ratio
and to pay lower dividends than Class A shares. For additional information about
this fee, see "Fees and Expenses" in the Prospectus/Proxy Statement and
"Management--Plan of Distribution" in Appendix C to the Prospectus/Proxy
Statement.
CONVERSION FEATURE
On the first business day of the month eight years after the purchase date,
Class B shares will automatically convert to Class A shares and will no longer
be subject to a higher Rule 12b-1 fee. Such conversion will be on the basis of
the relative net asset values of the two classes. Class A shares issued upon
such conversion will not be subject to any FESC or CDSC. Class B shares acquired
by exchange from Class B shares of another Voyageur Complex fund will convert
into Class A shares based on the time of the initial purchase. Similarly, Class
B shares acquired by exercise of the Reinstatement Privilege will convert into
Class A shares based on the time of the original purchase of Class B shares. See
"Reinstatement Privilege" below. Class B shares acquired through reinvestment of
distributions will convert into Class A shares based on the date of issuance of
such shares.
CLASS C SHARES--LEVEL LOAD ALTERNATIVES
The public offering price of Class C shares of Voyageur Fund is the net
asset value of the Fund's shares. Class C shares are sold without an initial
sales charge so that the Fund receives the full amount of the investor's
purchase. However, a CDSC of 1% will be imposed if shares are redeemed within
one year of purchase. For additional information, see "How to Sell
Shares--Deferred Sales Charge." In addition, Class C shares are subject to
higher annual Rule 12b-1 fees as described below.
RULE 12B-1 FEES
Class C shares are subject to a Rule 12b-1 fee payable at an annual rate of
1% of the average daily net assets of a Fund attributable to Class C shares. The
higher Rule 12b-1 fee will cause Class C shares to have a higher expense ratio
and to pay lower dividends than Class A shares. For additional information about
this fee, see "Fees and Expenses" in the Prospectus/Proxy Statement and
"Management--Plan of Distribution" in Appendix C to the Prospectus/Proxy
Statement.
Proceeds from the CDSC are paid to the Underwriter and are used to defray
expenses of the Underwriter related to providing distribution-related services
to the Fund in connection with the sale of Class C shares, such as the payment
of compensation to selected broker-dealers and for selling Class C shares. The
combination of the CDSC and the Rule 12b-1 fee enables the Fund to sell the
Class C shares without deduction of a sales charge at the time of purchase.
Although Class C shares are sold without an initial charge, the Underwriter pays
an annual fee of 0.90% (paid quarterly commencing in the thirteenth month after
the sale of such shares) calculated on the net assets attributable to sales made
by such broker-dealers.
HOW TO SELL SHARES
Voyageur Fund will redeem its shares in cash at the net asset value next
determined after receipt of a shareholder's written request for redemption in
good order (see below). If shares for which payment has been collected are
redeemed, payment must be made within seven days. Shareholders will not earn any
income on redeemed shares on the redemption date. The Fund may suspend this
right of redemption and may postpone payment only when the Exchange is closed
for other than customary weekends or holidays, or if permitted by the rules of
the Securities and Exchange Commission during periods when trading on the
Exchange is restricted or during any emergency which makes it impracticable for
the Fund to dispose of its securities or to determine fairly the value of its
net assets or during any other period permitted by order of the Commission for
the protection of investors.
The Fund reserves the right and currently plans to redeem Fund shares and
mail the proceeds to the shareholder if at any time the value of Fund shares in
the account falls below a specified value, currently set at $250. Shareholders
will be notified and will have 60 days to bring the account up to the required
value before any redemption action will be taken by the Fund.
CONTINGENT DEFERRED SALES CHARGE
The CDSC will be calculated on an amount equal to the lesser of the net
asset value of the shares at the time of purchase or their net asset value at
the time of redemption. No charge will be imposed on increases in net asset
value above the initial purchase price. In addition, no charge will be assessed
on shares derived from reinvestment of dividends or capital gains distributions.
In determining whether a CDSC is payable with respect to any redemption,
the calculation will be determined in the manner that results in the lowest rate
being charged. Therefore, it will be assumed that shares that are not subject to
the CDSC are redeemed first, shares subject to the lowest level of CDSC are
redeemed next, and so forth. If a shareholder owns Class A and either Class B or
Class C shares, then absent a shareholder choice to the contrary, Class B or
Class C shares not subject to a CDSC will be redeemed in full prior to any
redemption of Class A shares not subject to a CDSC.
The CDSC does not apply to: (1)redemptions of Class B shares in connection
with the automatic conversion to Class A shares, (2)redemption of shares when a
Fund exercises its right to liquidate accounts which are less than the minimum
account size, and (3)redemptions in the event of the death or disability of the
shareholder within the meaning of Section 72(m)(7) of the Internal Revenue Code.
If a shareholder exchanges Class A, Class B or Class C shares subject to a
CDSC for Class A, Class B or Class C shares, respectively, of a different
Voyageur Complex fund, the transaction will not be subject to a CDSC. However,
when shares acquired through the exchange are redeemed, the shareholder will be
treated as if no exchange took place for the purpose of determining the CDSC.
Fund shares are exchangeable for shares of any money market fund available
through VFM. No CDSC will be imposed at the time of any such exchange; however,
the shares acquired in any such exchange will remain subject to the CDSC and the
period during which such shares represent shares of the money market fund will
not be included in determining how long the shares have been held. Any CDSC due
upon a redemption of Fund shares will be reduced by the amount of any Rule 12b-1
payments made by such money market fund with respect to such shares.
The Underwriter, upon notification, intends to provide, out of its own
assets, a pro rata refund of any CDSC paid in connection with a redemption of
Class A, Class B or Class C shares of any of the Voyageur Complex funds (by
crediting such refunded CDSC to such shareholder's account) if, within 90 days
of such redemption, all or any portion of the redemption proceeds are reinvested
in shares of the same class in any of the Voyageur Complex funds. Any
reinvestment within 90 days of a redemption to which the CDSC was paid will be
made without the imposition of a FESC but will be subject to the same CDSC to
which such amount was subject prior to the redemption. The amount of the CDSC
will be calculated from the original investment date.
EXPEDITED REDEMPTIONS
Voyageur Fund offers several expedited redemption procedures, described
below, which allow a shareholder to redeem Fund shares at net asset value
determined on the same day that the shareholder places the request for
redemption of those shares. Pursuant to these expedited redemption procedures,
the Fund will redeem its shares at their net asset value next determined
following the Fund's receipt of the redemption request. The Fund reserves the
right at any time to suspend or terminate the expedited redemption procedures or
to impose a fee for this service. There is currently no additional charge to the
shareholder for use of the Fund's expedited redemption procedures.
EXPEDITED TELEPHONE REDEMPTION
Shareholders of Voyageur Fund redeeming at least $1,000 and no more than
$50,000 of shares (for which certificates have not been issued) may redeem by
telephoning the Fund directly at 612-376-7014 or 800-545-3863. The applicable
section of the general authorization form must have been completed by the
shareholder and filed with the Fund before the telephone request is received.
The proceeds of the redemption will be paid by check mailed to the shareholder's
address of record or, if requested at the time of redemption, by wire to the
bank designated on the general authorization form. The Fund will employ
reasonable procedures to confirm that telephone instructions are genuine,
including requiring that payment be made only to the shareholder's address of
record or to the bank account designated on the authorization form and requiring
certain means of telephonic identification. The Fund's Adviser and Distributor
will not be liable for following instructions which are reasonably believed to
be genuine.
EXPEDITED REDEMPTIONS THROUGH CERTAIN BROKER-DEALERS
Certain broker-dealers who have sales agreements with the Underwriter may
allow their customers to effect a redemption of shares of the Fund purchased
through such broker-dealer by notifying the broker-dealer of the amount of
shares to be redeemed. The broker-dealer is then responsible for promptly
placing the redemption request with the Fund on the customer's behalf. Payment
will be made to the shareholder by check or wire sent to the broker-dealer.
Broker-dealers offering this service may impose a fee or additional requirements
for such redemptions.
GOOD ORDER
"Good order" means that stock certificates, if issued, must accompany the
written request for redemption and must be duly endorsed for transfer, or must
be accompanied by a duly executed stock power. If no stock certificates have
been issued, a written request to redeem must be made. Stock certificates will
not be issued for Class B or Class C shares. In any case, the shareholder must
execute the redemption request exactly as the shares are registered. If the
redemption proceeds are to be paid to the registered holder(s), a signature
guarantee is not normally required. A signature guarantee is required in certain
other circumstances, for example, to redeem more than $50,000 or to have a check
mailed other than to the shareholder's address of record. See "Other
Information" in the Statement of Additional Information. VFM may waive certain
of these redemption requirements at its own risk, but also reserves the right to
require signature guarantees on all redemptions, in contexts perceived by the
Adviser to subject the Fund to an unusual degree of risk.
MONTHLY CASH WITHDRAWAL PLAN
An investor who owns or buys shares of Voyageur Fund valued at $10,000 or
more at the current offering price may open a Withdrawal Plan and have a
designated sum of money paid monthly to the investor or another person. Deferred
sales charges may apply to monthly redemptions of Class B or Class C shares. See
"Monthly Cash Withdrawal Plan" in the Statement of Additional Information
relating to the Prospectus/Proxy Statement (the "Statement of Additional
Information").
REINSTATEMENT PRIVILEGE
An investor in Voyageur Fund whose shares have been redeemed and who has
not previously exercised the Reinstatement Privilege as to the Fund may reinvest
the proceeds of such redemption in shares of the same class of any Voyageur
Complex fund eligible for sale in the shareholder's state of residence.
Reinvestment will be at the net asset value of Fund shares next determined after
the Underwriter receives a check along with a letter requesting reinstatement.
The Underwriter must receive the letter requesting reinstatement within 365 days
following the redemption. Investors who desire to exercise the Privilege should
contact their broker-dealer or the Fund.
Exercise of the Reinstatement Privilege does not alter the income tax
treatment of any capital gains realized on a sale of shares of the Fund, but to
the extent that any shares are sold at a loss and the proceeds are reinvested
within 30 days in shares of the Fund, some or all of the loss may not be allowed
as a deduction, depending upon the number of shares reacquired.
EXCHANGE PRIVILEGE
Except as described below, shareholders may exchange some or all of their
Voyageur Fund shares for shares of another Voyageur Complex fund, provided that
the shares to be acquired in the exchange are eligible for sale in the
shareholder's state of residence. Class A shareholders may exchange their shares
for Class A shares of other Voyageur Complex funds. Class B shareholders may
exchange their shares for the Class B shares of other Voyageur Complex funds and
Class C shareholders may exchange their shares for the Class C shares of other
Voyageur Complex funds. Shares of each class may also be exchanged for shares of
any money market fund available through VFM.
The minimum amount which may be exchanged is $1,000. The exchange will be
made on the basis of the relative net asset values next determined after receipt
of the exchange request plus the amount, if any, by which the applicable sales
charge exceeds the sum of all sales charges previously paid in connection with
the prior investment. For a discussion of issues relating to the contingent
deferred sales charge upon such exchanges, see "How to Sell Shares--Contingent
Deferred Sales Charge." There is no specific limitation on exchange frequency;
however, Voyageur Fund is intended for long term investment and not as a trading
vehicle. Voyageur reserves the right to prohibit excessive exchanges (more than
four per quarter). VFM reserves the right, upon 60 days' prior notice, to
restrict the frequency of, or otherwise modify, condition, terminate or impose
charges upon, exchanges. An exchange is considered to be a sale of shares on
which the investor may realize a capital gain or loss for income tax purposes.
Exchange requests may be placed directly with the fund in which the investor
owns shares, through VFM or through other broker-dealers. An investor
considering an exchange should obtain a prospectus of the fund to be acquired
and should read such prospectus carefully. Contact Voyageur Fund, VFM or any of
such other broker-dealers for further information about the exchange privilege.
DETERMINATION OF NET ASSET VALUE
The net asset value of Voyageur Fund shares is determined once daily,
Monday through Friday, as of 3:00 p.m., Minneapolis time (the primary close of
trading on the Exchange), on each business day the Exchange is open for trading.
The net asset value per share of each class of Voyageur Fund shares is
determined by dividing the value of the securities, cash and other assets of the
Fund attributable to such class less all liabilities attributable to such class
by the total number of shares of such class outstanding. For purposes of
determining the net assets of Voyageur Fund, tax-exempt securities are stated on
the basis of valuations provided by a pricing service, approved by the Voyageur
Board of Directors, which uses information with respect to transactions in
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in determining value.
Market quotations are used when available. Non-tax-exempt securities for which
market quotations are readily available are stated at market value which is
currently determined using the last reported sale price, or, if no sales are
reported, as in the case of most securities traded over-the-counter, the last
reported bid price, except that U.S. Government securities are stated at the
mean between the last reported bid and asked prices. Short-term notes having
remaining maturities of 60 days or less are stated at amortized cost which
approximates market. All other securities and other assets are valued in good
faith at fair value by VFM in accordance with procedures adopted by the Voyageur
Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
DISTRIBUTIONS
The present policy of Voyageur Fund is to declare a distribution from net
investment income on each day that the Fund is open for business. Net investment
income consists of interest accrued on portfolio investments of the Fund, less
accrued expenses. Distributions of net investment income are paid monthly.
Short-term capital gains distributions are taxable to shareholders as ordinary
income. Net realized long-term capital gains, if any, are distributed annually,
after utilization of any available capital loss carryovers. Distributions paid
by the Fund, if any, with respect to Class A, Class B and Class C shares will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount, except that the higher Rule 12b-1 fees applicable to Class B
and ClassC shares will be borne exclusively by such shares. The per share
distributions on Class B and Class C shares will be lower than the per-share
distributions on Class A shares as a result of the higher Rule 12b-1 fees
applicable to Class B and Class C shares.
Shareholders of Voyageur Fund receive distributions from investment income
and capital gains in additional shares of the class of the Fund owned by such
shareholders at net asset value, without any sales charge, unless they elect
otherwise. The Fund sends to its shareholders no less than quarterly statements
with details of any reinvested dividends.
TAXES
FEDERAL INCOME TAXATION
Voyageur Fund is treated as a separate entity for federal income tax
purposes. Voyageur Fund intends to qualify during its current taxable year as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). The Fund also intends to take all other action required to ensure
that no federal income taxes will be payable by the Fund and that the Fund can
pay exempt-interest dividends.
Distributions of net interest income from tax-exempt obligations that are
designated by the Fund as exempt-interest dividends are excludable from the
gross income of the Fund's shareholders. Distributions paid from other interest
income and from any net realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Distributions paid from long-term capital gains (and designated as such)
are taxable as long-term capital gains for federal income tax purposes, whether
received in cash or shares, regardless of how long a shareholder has held shares
in the Fund.
Exempt-interest dividends attributable to interest income on certain
tax-exempt obligations issued after August7, 1986 to finance private activities
are treated as an item of tax preference for purposes of computing the
alternative minimum tax for individuals, estates and trusts.
The foregoing discussion relates to federal taxation as of the date of this
Prospectus/Proxy Statement. See "Taxes" in the Statement of Additional
Information. This discussion is not intended as a substitute for careful tax
planning. You are urged to consult your tax adviser with specific reference to
your own tax situation.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for Voyageur Fund may refer to
"yield," "taxable equivalent yield," "average annual total return" and
"cumulative total return" and may compare such performance quotations with
published indices and comparable quotations of other funds. Performance
quotations are computed separately for Class A, Class B and Class C shares of
the Fund. All such figures are based on historical earnings and performance and
are not intended to be indicative of future performance. Additionally,
performance information may not provide a basis for comparison with other
investments or other mutual funds using a different method of calculating
performance. The investment return on and principal value of an investment in
the Fund will fluctuate, so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
The advertised yield of Voyageur Fund will be based on a 30-day period
stated in the advertisement. Yield is calculated by dividing the net investment
income per share deemed earned during the period by the maximum offering price
per share on the last day of the period. The result is then annualized using a
formula that provides for semiannual compounding of income.
Taxable equivalent yield is calculated by applying the stated income tax
rate only to that portion of the yield that is exempt from taxation. The
tax-exempt portion of the yield is divided by the number 1 minus the stated
income tax rate (e.g., 1-28% = 72%). The result is then added to that portion of
the yield, if any, that is not tax-exempt.
Average annual total return is the average annual compounded rate of return
on a hypothetical $1,000 investment made at the beginning of the advertised
period. In calculating average annual total return, the maximum sales charge is
deducted from the hypothetical investment and all dividends and distributions
are assumed to be reinvested.
Cumulative total return is calculated by subtracting a hypothetical $1,000
payment to the Fund from the ending redeemable value of such payment (at the end
of the relevant advertised period), dividing such difference by $1,000 and
multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales load is deducted.
In addition to advertising total return and yield, comparative performance
information may be used from time to time in advertising the Fund's shares,
including data from Lipper Analytical Services, Inc. and Morningstar.
For Fund performance information and daily net asset value quotations,
investors may call 612-376-7010 or 800-525-6584. For additional information
regarding the calculation of the Fund's yield, taxable equivalent yield, average
annual total return and cumulative total return, see "Calculation of Performance
Data" in the Statement of Additional Information.
PROSPECTUS /PROXY STATEMENT
OCTOBER 4, 1996
PROPOSED ACQUISITION OF ASSETS OF
GREAT HALL NATIONAL
TAX-EXEMPT FUND
A SEPARATELY MANAGED SERIES OF
GREAT HALL INVESTMENT FUNDS, INC.
BY AND IN EXCHANGE FOR SHARES OF
VOYAGEUR NATIONAL HIGH YIELD
MUNICIPAL BOND FUND
A SEPARATELY MANAGED SERIES OF
VOYAGEUR MUTUAL FUNDS, INC.
=================
TABLE OF CONTENTS
=================
PAGE
INCORPORATION BY REFERENCE................................................. 2
SUMMARY.................................................................... 3
PRINCIPAL RISK FACTORS..................................................... 8
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS............. 11
CAPITALIZATION............................................................. 13
INFORMATION ABOUT THE REORGANIZATION....................................... 14
VOTING INFORMATION......................................................... 18
FINANCIAL STATEMENTS AND EXPERTS........................................... 20
LEGAL MATTERS.............................................................. 20
OTHER INFORMATION ABOUT GREAT HALL FUND AND VOYAGEUR FUND.................. 20
APPENDIX A--AGREEMENT AND PLAN OF REORGANIZATION............................ A-1
APPENDIX B--VOYAGEUR FUND INVESTMENTS, INVESTMENT TECHNIQUES AND RISKS...... B-1
APPENDIX C--VOYAGEUR FUND MANAGEMENT AND GENERAL INFORMATION................ C-1
APPENDIX D--VOYAGEUR FUND SHAREHOLDER GUIDE TO INVESTING.................... D-1
PART B
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 4, 1996
ACQUISITION OF THE ASSETS OF
GREAT HALL NATIONAL TAX-EXEMPT FUND
A SEPARATELY MANAGED SERIES OF
GREAT HALL INVESTMENT FUNDS, INC.
60 SOUTH SIXTH STREET, MINNEAPOLIS, MINNESOTA 55402
BY AND IN EXCHANGE FOR SHARES OF
VOYAGEUR NATIONAL HIGH YIELD MUNICIPAL BOND FUND
A NEWLY FORMED, SEPARATELY MANAGED SERIES OF
VOYAGEUR MUTUAL FUNDS, INC.
90 SOUTH SEVENTH STREET, SUITE 4400
MINNEAPOLIS, MINNESOTA 55402
(800-553-2143)
This Statement of Additional Information relates to the proposed Agreement
and Plan of Reorganization providing for (a) the acquisition of all or
substantially all of the assets and the assumption of certain stated and
identified liabilities of the Great Hall National Tax-Exempt Fund ("Great Hall
Fund"), a series of Great Hall Investment Funds, Inc. ("Great Hall Investment
Funds") by Voyageur National High Yield Municipal Bond Fund ("Voyageur Fund"), a
series of Voyageur Mutual Funds, Inc. ("Voyageur Mutual Funds" ) in exchange for
common shares of Voyageur Fund having an aggregate net asset value equal to the
aggregate value of the assets acquired (less the liabilities assumed) of Great
Hall Fund and (b) the liquidation of Great Hall Fund and the pro rata
distribution of Voyageur Fund shares to Great Hall Fund shareholders.
The following documents are incorporated by reference herein:
1. The Statement of Additional Information of Great Hall Fund dated
December1, 1995.
2. The Annual Report of Great Hall Fund for the fiscal year ended July
31, 1996.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus/Proxy Statement dated October 4, 1996.
This Statement of Additional Information does not include all information that a
shareholder should consider before voting on the proposal contained in the
Prospectus/Proxy Statement and shareholders should obtain and read the
Prospectus/Proxy Statement prior to voting. A copy of the Prospectus/Proxy
Statement may be obtained free of charge by contacting Voyageur Fund at 90 South
Seventh Street, Suite 4400, Minneapolis, Minnesota 55402. Telephone: (612)
376-7000 or (800) 553-2143.
TABLE OF CONTENTS
PAGE
Investment Policies and Restrictions....................................... 3
Board Members and Executive Officers of Voyageur Mutual Funds.............. 13
The Investment Adviser and Underwriter..................................... 15
Taxes .................................................................... 20
Special Purchase Plans .................................................... 22
Net Asset Value and Public Offering Price.................................. 23
Calculation of Performance Data............................................ 23
Monthly Cash Withdrawal Plan............................................... 25
Additional Information..................................................... 25
Financial Statements....................................................... 26
Appendix A - Descriptions of Bond Ratings.................................. A-1
Appendix B - General Characteristics and Risks of Options and Futures ..... B-1
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus/Proxy Statement dated October 4, 1996, and, if
given or made, such information or representations may not be relied upon as
having been authorized by Voyageur Fund. This Statement of Additional
Information does not constitute an offer to sell securities in any state or
jurisdiction in which such offering may not lawfully be made. The delivery of
this Statement of Additional Information at any time shall not imply that there
has been no change in the affairs of the Fund since the date hereof.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective, policies and restrictions of the Voyageur
National High Yield Municipal Bond Fund (the "Fund"), a separately managed
series of Voyageur Mutual Funds, Inc. ("Voyageur Mutual Funds"), are set forth
in the Prospectus/Proxy Statement and the appendices thereto. Certain additional
investment information is set forth below. All capitalized terms not defined
herein have the same meanings as set forth in the Prospectus/Proxy Statement.
MUNICIPAL OBLIGATIONS
Municipal Obligations are generally issued to obtain funds for various
public purposes, including the construction or improvement 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 refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
Municipal Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Fund may invest, including Municipal Obligations,
are subject to the provisions of bankruptcy, insolvency, reorganization and
other laws affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or a State's
legislature extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations within
constitutional limitations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations for the payment of interest on and principal of their Municipal
Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Municipal Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Municipal Obligations for investment by the
Fund and the value of the Fund's portfolio. In such event, management of the
Fund may discontinue the issuance of shares to new investors and may reevaluate
the Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service, LP ("Fitch"), or Standard & Poor's Ratings
Services ("S&P") for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for their investments in accordance with the
investment policies contained in the Prospectus/Proxy Statement and this
Statement of Additional Information. The ratings of Moody's, Fitch and S&P
represent their opinions as to the quality of the Municipal Obligations which
they undertake to rate. It should be emphasized, however, that ratings are
relative and subjective and are not absolute standards of quality. Although
these ratings provide an initial criterion for selection of portfolio
investments, Voyageur Fund Managers, Inc. ("VFM"), the Fund's investment
adviser, will subject these securities to other evaluative criteria prior to
investing in such securities.
FLOATING AND VARIABLE RATE DEMAND NOTES. The Fund may purchase floating and
variable rate demand notes. Generally, such notes are secured by letters of
credit or other credit support arrangements provided by banks. Such notes
normally have a stated long-term maturity but permit the holder to tender the
note for purchase and payment of principal and accrued interest upon a specified
number of days' notice. The issuer of floating and variable rate demand notes
normally has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus accrued interest
upon a specified number of days' notice to the noteholders. The interest rate on
a floating rate demand note is based on a specified interest index, such as a
bank's prime rate, and is adjusted automatically each time such index is
adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals, based upon current market conditions. VFM monitors the
creditworthiness of issuers of floating and variable rate demand notes in the
Fund's portfolio.
ESCROW SECURED BONDS OR DEFEASED BONDS. Escrow secured bonds or defeased
bonds are created when an issuer refunds in advance of maturity (or pre-refunds)
some of its outstanding bonds and it becomes necessary or desirable to set aside
funds for redemption or payment of the bonds at a future date or dates. In an
advance refunding, the issuer will use the proceeds of a new bond issue to
purchase high grade interest bearing debt securities which are then deposited in
an irrevocable escrow account held by an escrow agent to secure all future
payments of principal and interest of the advance refunded bond. Escrow secured
bonds will often receive a triple A rating from S&P, Moody's and Fitch.
STATE OR MUNICIPAL LEASE OBLIGATIONS. Municipal leases may take the form of
a lease with an option to purchase, an installment purchase contract, a
conditional sales contract or a participation certificate in any of the
foregoing. In determining leases in which the Fund will invest, VFM will
evaluate the credit rating of the lessee and the terms of the lease.
Additionally, VFM may require that certain municipal leases be secured by a
letter of credit or put arrangement with an independent financial institution.
State or municipal lease obligations frequently have the special risks described
below which are not associated with general obligation or revenue bonds issued
by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "non-appropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "non-appropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for non-appropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
CONCENTRATION POLICY. As a fundamental policy, the Fund may not invest 25%
or more of its total assets in the securities of any industry, although, for
purposes of this limitation, tax-exempt securities and U.S. Government
obligations are not considered to be part of any industry. The Fund may invest
25% or more of its total assets in industrial development revenue bonds. In
addition, it is possible that the Fund from time to time will invest 25% or more
of its total assets in a particular segment of the municipal bond market, such
as housing, health care, utility, transportation, education or industrial
obligations. In such circumstances, economic, business, political or other
changes affecting one bond (such as proposed legislation affecting the financing
of a project; shortages or price increases of needed materials; or a declining
market or need for the project) might also affect other bonds in the same
segment, thereby potentially increasing market or credit risk.
HOUSING OBLIGATIONS. The Fund may invest, from time to time, 25% or more of
its total assets in obligations of public bodies, including state and municipal
housing authorities, issued to finance the purchase of single-family mortgage
loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
HEALTH CARE OBLIGATIONS. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
UTILITY OBLIGATIONS. The Fund may invest, from time to time, 25% or more of
its total assets in obligations issued by public bodies, including state and
municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
TRANSPORTATION OBLIGATIONS. The Fund may, from time to time, invest 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance airports and highway, bridge and toll road
facilities. The major portion of an airport's gross operating income is
generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and other factors,
and several airlines are experiencing severe financial difficulties. The
revenues of issuers which derive their payments from bridge, road or tunnel toll
revenues could be adversely affected by competition from toll-free vehicular
bridges and roads and alternative modes of transportation. Such revenues could
also be adversely affected by a reduction in the availability of fuel to
motorists or significant increases in the costs thereof.
EDUCATION OBLIGATIONS. The Fund may, from time to time, invest 25% or more
of its total assets in obligations of issuers which are, or which govern the
operation of, schools, colleges and universities and whose revenues are derived
mainly from tuition, dormitory revenues, grants and endowments. General problems
of such issuers include the prospect of a declining percentage of the population
consisting of college aged individuals, possible inability to raise tuition and
fees sufficiently to cover increased operating costs, the uncertainty of
continued receipt of federal grants, state funding and alumni support, and
government legislation or regulations which may adversely affect the revenues or
costs of such issuers.
INDUSTRIAL REVENUE OBLIGATIONS. The Fund may, from time to time, invest 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance the cost of acquiring, constructing
or improving various industrial projects. These projects are usually operated by
corporate entities. Issuers are obligated only to pay amounts due on the bonds
to the extent that funds are available from the unexpended proceeds of the bonds
or receipts or revenues of the issuer under an arrangement between the issuer
and the corporate operator of a project. The arrangement may be in the form of a
lease, installment sale agreement, conditional sale agreement or loan agreement,
but in each case the payments of the issuer are designed to be sufficient to
meet the payments of amounts due on the bonds. Regardless of the structure,
payment of bonds is solely dependent upon the creditworthiness of the corporate
operator of the project and, if applicable, the corporate guarantor. Corporate
operators or guarantors may be affected by many factors which may have an
adverse impact on the credit quality of the particular company or industry.
These include cyclicality of revenues and earnings, regulatory and environmental
restrictions, litigation resulting from accidents or deterioration resulting
from leveraged buy-outs or takeovers. The bonds may be subject to special or
extraordinary redemption provisions which may provide for redemption at par or
accredited value, plus, if applicable, a premium.
OTHER RISKS. The exclusion from gross income for purposes of federal income
taxes for certain housing, health care, utility, transportation, education and
industrial revenue bonds depends on compliance with relevant provisions of the
Code. The failure to comply with these provisions could cause the interest on
the bonds to become includable in gross income, possibly retroactively to the
date of issuance, thereby reducing the value of the bonds, subjecting
shareholders to unanticipated tax liabilities and possibly requiring the Fund to
sell the bonds at the reduced value. Furthermore, such a failure to meet these
ongoing requirements may not enable the holder to accelerate payment of the bond
or require the issuer to redeem the bond.
TAXABLE OBLIGATIONS
As set forth in the Prospectus/Proxy Statement, the Fund may invest to a
limited extent in obligations and instruments, the interest on which is
includable in gross income for purposes of federal income taxation.
GOVERNMENT OBLIGATIONS. The Fund may invest in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally have
maturities of one year or less; Treasury Notes generally have maturities of one
to ten years; and Treasury Bonds generally have maturities of greater than ten
years. Some obligations issued or guaranteed by U. S. Government agencies and
instrumentalities, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U. S. Treasury;
other obligations, such as those of the Federal Home Loan Banks, are secured by
the right of the issuer to borrow from the Treasury; other obligations, such as
those issued by the Federal National Mortgage Association, are supported by the
discretionary authority of the U. S. Government to purchase certain obligations
of the agency or instrumentality; and other obligations, such as those issued by
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality itself. Although the U.S. Government provides financial support
to such U. S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law. The
Fund will invest in such securities only when VFM is satisfied that the credit
risk with respect to the issuer is minimal.
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements. The
Fund's custodian will hold the securities underlying any repurchase agreement or
such securities will be part of the Federal Reserve Book Entry System. The
market value of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the obligor under the agreement will promptly
furnish additional collateral to the Fund's custodian (so the total collateral
is an amount at least equal to the repurchase price plus accrued interest).
OTHER TAXABLE INVESTMENTS. The Fund also may invest in certificates of
deposit, bankers' acceptances and other time deposits. Certificates of deposit
are certificates representing the obligation of a bank to repay the funds
deposited (plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate.
OPTIONS AND FUTURES TRANSACTIONS
To the extent set forth in the Prospectus/Proxy Statement, the Fund may buy
and sell put and call options on the securities in which it may invest, and the
Fund may enter into futures contracts and options on futures contracts with
respect to fixed-income securities or based on financial indices including any
index of securities in which the Fund may invest. Futures and options will be
used to facilitate allocation of the Fund's investments among asset classes, to
generate income or to hedge against changes in interest rates or declines in
securities prices or increases in prices of securities proposed to be purchased.
Different uses of futures and options have different risk and return
characteristics. Generally, selling futures contracts, purchasing put options
and writing (i.e. selling) call options are strategies designed to protect
against falling securities prices and can limit potential gains if prices rise.
Purchasing futures contracts, purchasing call options and writing put options
are strategies whose returns tend to rise and fall together with securities
prices and can causes losses if prices fall. If securities prices remain
unchanged over time option writing strategies tend to be profitable, while
option buying strategies tend to decline in value.
WRITING OPTIONS. The Fund may write (i.e. sell) covered put and call
options with respect to the securities in which it may invest. By writing a call
option, the Fund becomes obligated during the term of the option to deliver the
securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, the Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by the Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of the Fund.
"Covered options" means that so long as the Fund is obligated as the writer
of a call option, it will own the underlying securities subject to the option
(or comparable securities satisfying the cover requirements of securities
exchanges). The Fund will be considered "covered" with respect to a put option
it writes if, so long as it is obligated as the writer of a put option, it
deposits and maintains with its custodian cash, U. S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater than
the exercise price of the option.
Through the writing of call or put options, the Fund may obtain a greater
current return than would be realized on the underlying securities alone. The
Fund receives premiums from writing call or put options, which it retains
whether or not the options are exercised. By writing a call option, the Fund
might lose the potential for gain on the underlying security while the option is
open, and by writing a put option, the Fund might become obligated to purchase
the underlying security for more than its current market price upon exercise.
PURCHASING OPTIONS. The Fund may purchase put options in order to protect
portfolio holdings in an underlying security against a decline in the market
value of such holdings. Such protection is provided during the life of the put
because the Fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Any loss to
the Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put is sold.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when no put options on those particular securities are
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio.
The Fund may also purchase call options. During the life of the call
option, the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, the Fund will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
SECURITIES INDEX OPTION TRADING. The Fund may purchase and write put and
call options on securities indexes. Options on securities indexes are similar to
options on securities except that, rather than the right to take or make
delivery of a security at a specified price, an option on an index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the index upon which the option is based is greater than,
in the case of a call, or less than, in the case of a put, the exercise price of
the option. The writer of the option is obligated to make delivery of this
amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in the Fund's
portfolio correlate with price movements of the index selected. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular security, whether the Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon movements
in the level of prices in the relevant underlying securities markets generally
or, in the case of certain indexes, in an industry market segment, rather than
movements in the price of a particular security. Accordingly, successful use by
the Fund of options on security indexes will be subject to VFM's ability to
predict correctly movements in the direction of the stock market or interest
rates market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. In the event VFM is unsuccessful in predicting the movements of an
index, the Fund could be in a worse position than had no hedge been attempted.
Because exercises of index options are settled in cash, the Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When the Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker as collateral for the option, cash,
high-grade liquid debt securities or "qualified securities" with a market value
determined on a daily basis of not less than 100% of the current market value of
the option.
Options purchased and written by the Fund may be exchange traded or may be
options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by VFM. OTC options are illiquid and it may not be possible for the Fund to
dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when VFM believes it would be advantageous to do
so.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may enter into
futures contracts and purchase and write options on these contracts, including
but not limited to interest rate and securities index contracts and put and call
options on these futures contracts. These contracts will be entered into on
domestic and foreign exchanges and boards of trade, subject to applicable
regulations of the Commodity Futures Trading Commission. These transactions may
be entered into for bona fide hedging and other permissible risk management
purposes.
In connection with transactions in futures contracts and writing related
options, the Fund will be required to deposit as "initial margin" a specified
amount of cash or short-term, U. S. Government securities. The initial margin
required for a futures contract is set by the exchange on which the contract is
traded. It is expected that the initial margin would be approximately 1-1/2% to
5% of a contract's face value. Thereafter, subsequent payments (referred to as
"variation margin") are made to and from the broker to reflect changes in the
value of the futures contract.
The Fund will not purchase or sell futures contracts or related options if,
as a result, the sum of the initial margin deposit on the Fund's existing
futures and related options positions and premiums paid for options or futures
contracts entered into for other than bona fide hedging purposes would exceed 5%
of the Fund's assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS.
HEDGING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several risks in
using securities index or interest rate futures contracts as hedging devices.
One risk arises because the prices of futures contracts may not correlate
perfectly with movements in the underlying index or financial instrument due to
certain market distortions. First, all participants in the futures market are
subject to initial margin and variation margin requirements. Rather than making
additional variation margin payments, investors may close the contracts through
offsetting transactions which could distort the normal relationship between the
index or security and the futures market. Second, the margin requirements in the
futures market are lower than margin requirements in the securities market, and
as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures market
may also cause temporary price distortions. Because of possible price distortion
in the futures market and because of imperfect correlation between movements in
indexes of securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by the Fund is subject to the ability
of VFM to predict correctly movements in the direction of interest rates or the
relevant underlying securities market. If the Fund has hedged against the
possibility of an increase in interest rates adversely affecting the value of
fixed-income securities held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its security which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
LIQUIDITY OF FUTURES CONTRACTS. The Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. The Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Fund intends to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISKS OF OPTIONS. The use of options on financial instruments and indexes
and on interest rate and index futures contracts also involves additional risk.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options involves less potential risk to the Fund because the maximum amount
at risk is the premium paid for the options (plus transactions costs). The
writing of a call option generates a premium, which may partially offset a
decline in the value of the Fund's portfolio assets. By writing a call option,
the Fund becomes obligated to sell an underlying instrument or a futures
contract, which may have a value higher than the exercise price. Conversely, the
writing of a put option generates a premium, but the Fund becomes obligated to
purchase the underlying instrument or futures contract, which may have a value
lower than the exercise price. Thus, the loss incurred by the Fund in writing
options may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other things,
on the Fund's ability to terminate options positions at a time when VFM deems it
desirable to do so. Although the Fund will enter into an option position only if
VFM believes that a liquid secondary market exists for such option, there is no
assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price. The Fund's transactions involving
options on futures contracts will be conducted only on recognized exchanges.
The Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by VFM, which
could prove to be inaccurate. Even if the expectations of VFM are correct, there
may be an imperfect correlation between the change in the value of the options
and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of a purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the value
of their portfolios. By using put options in this way, the Fund will reduce any
profit they might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in price of
securities that the Fund anticipates purchasing in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
As discussed above, options may be traded over-the-counter ("OTC options").
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. OTC options are illiquid and it
may not be possible for the Fund to dispose of options it has purchased or
terminate its obligations under an option it has written at a time when VFM
believes it would be advantageous to do so. Accordingly, OTC options are subject
to the Fund's limitation that a maximum of 15% of its net assets be invested in
illiquid securities. In the event of the bankruptcy of the writer of an OTC
option, the Fund could experience a loss of all or part of the value of the
option. VFM anticipates that options on Municipal Obligations will consist
primarily of OTC options.
ILLIQUID INVESTMENTS
The Fund is permitted to invest up to 15% of its net assets in illiquid
investments. An investment is generally deemed to be "illiquid" if it cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the investment company is valuing the
investment.
As set forth in the Prospectus/Proxy Statement, the Fund may invest in
certain restricted securities (securities which were originally sold in private
placements and which have not been registered under Securities Act of 1933 (the
"1933 Act")), commercial paper issued pursuant to Section 4(2) under the 1933
Act, and municipal lease obligations, and treat such securities as liquid when
they have been determined to be liquid by VFM subject to the oversight of and
pursuant to procedures adopted by the Fund's Board of Directors. Under these
procedures, factors taken into account in determining the liquidity of a
security include (a) the frequency of trades and quotes for the security; (b)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (c) dealer undertakings to make a market in the
security; and (d) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). With respect to restricted
securities, the liquidity of such securities increased as a result of the
adoption of Rule 144A under the 1933 Act, which provides a safe harbor exemption
from the registration requirements of the 1933 Act for resales of restricted
securities to "qualified institutional buyers," as defined in the rule.
Investing in such securities could have the effect of increasing the level of
Fund illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
DIVERSIFICATION
Although the Fund is characterized as a non-diversified fund under the 1940
Act, the Fund intends to conduct its operations so that it will qualify under
the Internal Revenue Code of 1986 as a "regulated investment company." In order
to qualify as a regulated investment company, the Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Internal Revenue Code requires that not more than 25% in value of the Fund's
total assets may be invested in the securities of a single issuer at the close
of each quarter of the taxable year.
For purposes of such diversification, the identification of the issuer of
Municipal Obligations depends on the terms and conditions of the security. If a
State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond is
backed only by certain revenues to be received from the non-governmental user of
the project financed by the bond, then such non-governmental user is deemed to
be the sole issuer. If, however, in any of the above cases, a State, political
subdivision or some other entity guarantees a security and the value of all
securities issued or guaranteed by the guarantor and owned by the Fund exceeds
10% of the value of the Fund's total assets, the guarantee is considered a
separate security and is treated as an issue of the guarantor.
PORTFOLIO TURNOVER
Portfolio turnover for the Fund is the ratio of the lesser of annual
purchases or sales of portfolio securities by the Fund to the average monthly
value of portfolio securities owned by the Fund, not including securities
maturing in less than 12 months. A 100% portfolio turnover rate would occur, for
example, if the lesser of the value of purchases or sales of the Fund's
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned by the Fund during the year. The Fund
estimates its portfolio turnover rate will be 100% or less.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions set forth below which,
together with the investment objective of the Fund and other policies which are
specifically identified as fundamental in the Prospectus/Proxy Statement or
herein, cannot be changed without approval by holders of a majority of the
outstanding voting shares of the Fund. As defined in the 1940 Act, this means
the lesser of the vote of (1) 67% of the shares of the Fund at a meeting where
more than 50% of the outstanding shares of the Fund are present in person or by
proxy or (2) more than 50% of the outstanding shares of the Fund. The following
investment restrictions apply to the Fund. The Fund will not:
(1) Borrow money, except from banks for temporary or emergency
purposes in an amount not exceeding 20% of the value of the Fund's total
assets, including the amount borrowed. The Fund may not borrow for leverage
purposes and securities will not be purchased while outstanding borrowings
exceed 5% of the value of the Fund's total assets. For purposes of the
foregoing investment restrictions, reverse repurchase agreements will not
be considered borrowings.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of portfolio investments, the Fund
may be deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities
which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which the Fund
may invest consistent with its investment policies, and through
repurchase agreements.
(5) Invest 25% or more of its total assets in the securities of any
industry, although, for purposes of this limitation, tax-exempt
securities and U.S. Government obligations are not considered to be
part of any industry.
(6) Issue any senior securities (as defined in the 1940 Act), except as
set forth in investment restriction number (1) above, and except to
the extent that using options, futures contracts and options on
futures contracts, purchasing or selling securities on a when-issued
or forward commitment basis or using similar investment strategies may
be deemed to constitute issuing a senior security.
(7) Purchase or sell commodities or futures or options contracts with
respect to physical commodities. This restriction shall not restrict
the Fund from purchasing or selling, on a basis consistent with any
restrictions contained in its then-current Prospectus, any financial
contracts or instruments which may be deemed commodities (including,
by way of example and not by way of limitation, options, futures, and
options on futures with respect, in each case, to interest rates,
currencies, stock indices, bond indices or interest rate indices).
The following non-fundamental investment restrictions may be changed by the
Board of the Fund at any time. The Fund will not:
(1) Invest more than 5% of its total assets in securities of any single
investment company, nor more than 10% of its total assets in
securities of two or more investment companies, except as part of a
merger, consolidation or acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(3) Write puts if, as a result, more than 50% of the Fund's assets would
be required to be segregated to cover such puts.
(4) Make short sales of securities or maintain a short position for the
account of the Fund, unless at all times when a short position is open
it owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount
to, the securities sold short.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
BOARD MEMBERS AND EXECUTIVE OFFICERS OF VOYAGEUR MUTUAL FUNDS
The Board members and officers of Voyageur Mutual Funds, their position
with Voyageur Mutual Funds and their principal occupations during the past five
years are set forth below. In addition to the occupations set forth below, the
Directors and officers also serve as directors and trustees or officers of
various other closed-end and open-end investment companies managed by VFM.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION PAST FIVE YEARS AND OTHER AFFILIATIONS
----------------------- -------- --------------------------------------
<S> <C> <C>
Clarence G. Frame, 78 Director Of counsel, Briggs & Morgan law firm. Mr. Frame currently
W-875 serves on the board of directors of Tosco Corporation (an
First National Bank Building oil refining and marketing company), Milwaukee Land Company,
332 Minnesota Street and Independence One Mutual Funds.
St. Paul, Minnesota 55101
Richard F. McNamara, 63 Director Chief Executive Officer of Activar, Inc., a
7808 CreekridgeCircle, Minneapolis-based holding company consisting of seventeen
#200 companies in industrial plastics, sheet metal, automotive
Minneapolis, Minnesota 55439 aftermarket, construction supply, electronics and financial
services. Mr. McNamara currently serves on the board of
directors of Rimage (electronics manufacturing) and
Interbank.
Thomas F. Madison, 60 Director President and CEO of MLM Partners, Inc. since January 1993;
200 South Fifth Street previously Vice Chairman- Office of the CEO, The Minnesota
Suite 2100 Mutual Life Insurance Company from February 1994 to
Minneapolis, Minnesota 55402 September 1994; President of U.S. West
Communications-Markets from 1988 to 1993; Mr. Madison
currently serves on the board of directors of Valmont
Industries, Inc. (metal manufacturing), Eltrax Systems, Inc.
(data communications integration), Minnegasco, Lutheran
Health Systems, Communications Holdings, Inc., Alexander and
Alexander (insurance and risk management), Span Link
Communications (telecommunications), Medical Benefits
Administrators, D&D Farms, Aether Works (software
applications), Digital River (digital data provider) and
various civic and educational organizations.
James W. Nelson, 54 Director Chairman and Chief Executive Officer of Eberhardt Holding
81 South Ninth Street Company and its subsidiaries.
Suite 400
Minneapolis, Minnesota 55440
Robert J. Odegard, 75 Director Special Assistant to the President of the University of
University of Minnesota Foundation Minnesota.
1300 South Second Street
Minneapolis, Minnesota 55454
John G. Taft, 42 President President and Director (since 1993) of VFM; Director (since
90 South Seventh Street 1993) and Executive Vice President (since 1995) of Voyageur
Suite 4400 Fund Distributors, Inc. ("VFD") previously, President of VFD
Minneapolis, Minnesota 55402 from 1991 to 1995; Management Committee member of VFM from
1991 to 1993.
Andrew M. McCullagh, Jr., 47 Executive Portfolio Manager of VFM; previously Director of VFM and VFD
717 Seventeenth Street Vice from 1993 to 1995.
Denver, Colorado 80202 President
Jane M. Wyatt, 41 Executive Chief Investment Officer of VFM (since 1993) and Portfolio
90 South Seventh Street Vice Manager of VFM; Director of VFM and VFD since 1993;
Suite 4400 President previously Executive Vice President and Portfolio Manager of
Minneapolis, Minnesota 55402 VFM from 1992 to 1993; Vice President and Portfolio Manager
from 1989 to 1992 of VFM.
Steven Eldredge, 40 Vice President Senior Tax Exempt Portfolio Manager of VFM since 1995;
90 South Seventh Street previously portfolio manager for ABT Mutual Funds from 1989
Suite 4400 to 1995.
Minneapolis, Minnesota 55402
Elizabeth H. Howell, 34 Vice President Senior Tax Exempt Portfolio Manager of VFM
90 South Seventh Street
Suite 4400
Minneapolis, Minnesota 55402
James C. King, 55 Vice President Senior Equity Portfolio Manager of VFM since 1993;
90 South Seventh Street previously Director of VFM and the Underwriter from 1993 to
Suite 4400 1995.
Minneapolis, Minnesota 55402
Kenneth R. Larsen, 33 Treasurer Treasurer of VFM and VFD; previously Director, Secretary and
90 South Seventh Street Treasurer of VFM and VFD from 1993 to 1995.
Suite 4400
Minneapolis, Minnesota
Thomas J. Abood, 32 Secretary Senior Vice President (since 1995) and General Counsel
90 South Seventh Street (since October 1994) of VFM, VFD and Voyageur Companies,
Suite 4400 Inc.; previously Vice President of VFM and Voyageur
Minneapolis, Minnesota 55402 Companies, Inc. from October 1994 to 1995; associated with
the law firm of Skadden, Arps, Slate, Meagher & Flom,
Chicago, Illinois from 1988 to 1994.
</TABLE>
The Fund does not compensate its officers. Each director or trustee (who is
not an employee of VFM or any of its affiliates) will receive a total annual fee
of $26,000 for serving as a director or trustee for each of the open-end and
closed-end investment companies (the "Fund Complex") for which VFM acts as
investment adviser, plus a $500 fee for each special in-person meeting attended
by such director. These fees are allocated among each series or fund in the Fund
Complex based on the relative average net asset value of each series or fund.
Currently the Fund Complex consists of ten open-end investment companies
comprising 32 series or funds and six closed-end investment companies. In
addition, each director or trustee who is not an employee of VFM or any of its
affiliates is reimbursed for expenses incurred in connection with attending
meetings. The following table sets forth the aggregate compensation received by
each director from the Fund Complex during the calendar year ended December 31,
1995. As of the date of this Statement of Additional Information, the Fund had
not paid any compensation to directors.
TOTAL COMPENSATION
DIRECTOR FROM FUND COMPLEX
-------- -----------------
Clarence G. Frame $24,500
Richard F. McNamara $24,500
Thomas F. Madison $24,500
James W. Nelson $24,500
Robert J. Odegard $24,500
THE INVESTMENT ADVISER AND UNDERWRITER
Voyageur Fund Managers, Inc., a Minnesota corporation ("VFM"), has been
retained under an investment advisory agreement (the "Advisory Agreement") to
act as the Fund's investment adviser, subject to the authority of the Board of
Directors. VFM and the Underwriter are each indirect wholly-owned subsidiaries
of Dougherty Financial Group Inc. ("DFG"), which is owned approximately 49% by
Michael E. Dougherty, 49% by Pohlad Companies and less than 1% by certain
retirement plans for the benefit of DFG employees. Mr. Dougherty co-founded the
predecessor of DFG in 1977 and has served as DFG's Chairman of the Board and
Chief Executive Officer since inception. Pohlad Companies is a holding company
owned in equal parts by each of James O. Pohlad, Robert C. Pohlad and William M.
Pohlad. Certain key employees of DFG and its subsidiaries and an employee
benefit plan benefitting the employees of such companies have been offered the
opportunity to purchase voting common shares of DFG through stock options
granted with respect thereto, with the shareholdings of Pohlad Companies and Mr.
Dougherty each to be diluted proportionately by any such purchases. Following
any such purchases, Mr. Dougherty and Pohlad Companies would each continue to
own greater than 25% of the outstanding voting common shares of DFG, and no
other person or entity would own greater than 25% of such shares. The principal
executive offices of VFM are located at 90 South Seventh Street, Suite 4400,
Minneapolis, Minnesota 55402.
Voyageur Fund Distributors, Inc. (the "Underwriter") is the principal
distributor of the Fund's shares. With regard to the Underwriter, Mr. Taft and
Ms.Wyatt are Executive Vice Presidents and directors, Mr. Abood is Senior Vice
President and General Counsel, and Mr. Larsen is Treasurer.
INVESTMENT ADVISORY AGREEMENT
The Fund does not maintain its own research department. The Fund has
contracted with VFM for investment advice and management. Pursuant to an
Investment Advisory Agreement, VFM has the sole and exclusive responsibility for
the management of the Fund's portfolio and the making and execution of all
investment decisions for the Fund subject to the objective and investment
policies and restrictions of the Fund and subject to the supervision of the
Fund's Board of Directors. VFM also furnishes, at its own expense, office
facilities, equipment and personnel for servicing the investments of the Fund.
VFM has agreed to arrange for officers and employees of VFM to serve without
compensation from the Fund as directors, officers or employees of the Fund if
duly elected to such positions by the shareholders or directors of the Fund.
As compensation for VFM's services, the Fund is obligated to pay to VFM a
monthly investment advisory and management fee equivalent on an annual basis to
.65% of its average daily net assets. The fee is based on the average daily
value of the Fund's net assets at the close of each business day. VFM has agreed
to waive fees such that the investment advisory fee will not exceed .50% through
December 31, 1998.
The Investment Advisory Agreement continues from year to year only if
approved annually (a) by the Fund's Board or by vote of a majority of the
outstanding voting securities of the Fund and (b) by vote of a majority of board
members of the Fund who are not parties to such Investment Advisory Agreement or
interested persons (as defined in the 1940 Act) of any such party, cast in
person at a meeting of the Board called for the purpose of voting on such
approval. The Investment Advisory Agreement may be terminated by either party on
60 days' notice to the other party and terminates automatically upon its
assignment. The Investment Advisory Agreement also provides that amendments to
the Agreement may be affected if approved by the Board (including a majority of
the directors who are not interested persons of VFM or the Fund), unless the
1940 Act requires that any such amendment must be submitted for approval by the
Fund's shareholders and that all proposed assignments of such agreement are
subject to approval by the Board of Directors (unless the 1940 Act otherwise
requires shareholder approval).
ADMINISTRATIVE SERVICES AGREEMENT
VFM also acts as the Fund's dividend disbursing, transfer, administrative
and accounting services agent pursuant to an Administrative Services Agreement.
Pursuant to the Administrative Services Agreement, VFM provides the Fund all
dividend disbursing, transfer agency, administrative and accounting services
required by the Fund including, without limitation, the following: (i) the
calculation of net asset value per share (including the pricing of the Fund's
portfolio of securities) at such times and in such manner as is specified in the
Fund's current Prospectus and Statement of Additional Information, (ii) upon the
receipt of funds for the purchase of the Fund's shares or the receipt of
redemption requests with respect to the Fund's shares outstanding, the
calculation of the number of shares to be purchased or redeemed, respectively,
(iii) upon the Fund's distribution of dividends, the calculation of the amount
of such dividends to be received per share, the calculation of the number of
additional shares of the Fund to be received by each shareholder of the Fund
(other than any shareholder who has elected to receive such dividends in cash)
and the mailing of payments with respect to such dividends to shareholders who
have elected to receive such dividends in cash, (iv) the provision of transfer
agency services, (v) the creation and maintenance of such records relating to
the business of the Fund as the Fund may from time to time reasonably request,
(vi) the preparation of tax forms, reports, notices, proxy statements, proxies
and other shareholder communications, and the mailing thereof to shareholders of
the Fund, and (vii) the provision of such other dividend disbursing, transfer
agency, administrative and accounting services as the Fund and VFM may from time
to time agree upon. Pursuant to the Administrative Services Agreement, VFM also
provides such regulatory, reporting and compliance related services and tasks as
the Fund may reasonably request.
As compensation for these services, the Fund pays VFM a monthly fee based
upon the Fund's average daily net assets and the number of shareholder accounts
then existing. This fee is equal to the sum of (i) $1.33 per shareholder account
per month, (ii) $1,000 per month if the Fund's average daily net assets do not
exceed $50 million, $1,250 per month if the Fund's average daily net assets are
greater than $50 million but do not exceed $100 million, and $1,500 per month if
the Fund's average daily net assets exceed $100 million, and (iii) 0.11% per
annum of the first $50 million of the Fund's average daily net assets, 0.06% per
annum of the next $100 million of the Fund's average daily net assets, 0.035%
per annum of the next $250 million of the Fund's average daily net assets, 0.03%
per annum of the next $300 million of the Fund's average daily net assets and
0.02% per annum of the Fund's average daily net assets in excess of $700
million. For purposes of calculating average daily net assets, as such term is
used in the Administrative Services Agreement, the Fund's net assets equal its
total assets minus its total liabilities. The Fund also reimburses VFM for its
out-of-pocket expenses in connection with VFM's provision of services under the
Fund's Administrative Services Agreement.
The Administrative Services Agreement is renewable from year to year if the
directors approve it in the same way they approve the Investment Advisory
Agreement. The Administrative Services Agreement can be terminated by either
party on 60 days' notice to the other party and the Agreement terminates
automatically upon its assignment. The Administrative Services Agreement also
provides that amendments to the Agreement may be effected if approved by the
Board (including a majority of the board members who are not interested persons
of VFM or the Fund), unless the 1940 Act requires that any such amendment must
be submitted for approval by the Fund's shareholders and that all proposed
assignments of such agreement are subject to approval by the Board (unless the
1940 Act otherwise requires shareholder approval thereof).
EXPENSES OF THE FUND
VFM is contractually obligated to pay the operating expenses of the Fund
(excluding interest, taxes, brokerage fees and commissions and Rule 12b-1 fees,
if any) which exceed 1% of the Fund's average daily net assets on an annual
basis up to the amount of the investment advisory and management fee, and the
dividend disbursing, administrative and accounting services fee. In addition,
VFM reserves the right to voluntarily waive its fees in whole or part and to
voluntarily absorb certain other of the Fund's expenses. Any such waiver or
absorption, however, is in VFM's sole discretion and may be lifted or reinstated
at any time.
All costs and expenses (other than those specifically referred to as being
borne by VFM or the Underwriter) incurred in the operation of the Fund are borne
by the Fund. These expenses include, among others, fees of the Board members who
are not employees of VFM or any of its affiliates, expenses of directors' and
shareholders' meetings, including the cost of printing and mailing proxies,
expenses of insurance premiums for fidelity bond and other coverage and expenses
of redemption of shares, expenses of issue and sale of shares (to the extent not
borne by the Underwriter under its agreement with the Fund), expenses of
printing and mailing stock certificates representing shares of the Fund,
association membership dues, charges of the Fund's custodian, and bookkeeping,
auditing and legal expenses. The Fund will also pay the fees and bear the
expense of registering and maintaining the registration of the Fund and its
shares with the Securities and Exchange Commission and registering or qualifying
its shares under state or other securities laws and the expense of preparing and
mailing prospectuses, reports and statements to shareholders.
RULE 12B-1 PLAN OF DISTRIBUTION; DISTRIBUTION AGREEMENT
The Fund has adopted a Plan of Distribution (the "Plan") relating to the
payment of certain expenses pursuant to Rule 12b-1 under the 1940 Act. Rule
12b-1(b) provides that any payments made by a Fund in connection with the
distribution of its shares may only be made pursuant to a written plan
describing all material aspects of the proposed financing of distribution and
also requires that all agreements with any person relating to implementation of
the plan must be in writing.
Rule 12b-1(b)(1) requires that such plan be approved by a vote of at least
a majority of the Fund's outstanding shares, and Rule 12b-1(b)(2) requires that
such plan, together with any related agreements, be approved by a vote of the
Board of Directors and of the directors who are not interested persons of the
Fund and have no direct or indirect financial interest in the operation of the
plan or in any agreements related to the plan, cast in person at a meeting
called for the purpose of voting on such plan or agreements. Rule 12b-1(b)(3)
requires that the plan or agreement provide, in substance:
(1) that it shall continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such continuance is
specifically approved at least annually in the manner described in paragraph
(b)(2) of Rule 12b-1;
(2) that any person authorized to direct the disposition of monies paid or
payable by a Fund pursuant to its plan or any related agreement shall provide to
the Board of Directors, and the directors shall review, at least quarterly, a
written report of the amount so expended and the purposes for which such
expenditures were made; and
(3) in the case of a plan, that it may be terminated at any time by vote of
a majority of the members of the Board of Directors who are not interested
persons of the Fund and have no direct or indirect financial interest in the
operation of the plan or in any agreements related to the plan or by vote of a
majority of the outstanding voting securities of the Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and that all material amendments of the plan must be approved in the manner
described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1 (c) provides that the
Fund may rely upon Rule 12b-1 only if the selection and nomination of that
Fund's disinterested directors are committed to the discretion of such
disinterested directors. Rule 12b-1(e) provides that the Fund may implement or
continue a plan pursuant to Rule 12b-1(b) only if the directors who vote to
approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under state
law, and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable
likelihood that the plan will benefit the Fund and its shareholders.
The Fund has entered into a Distribution Agreement with the Underwriter,
pursuant to which the Underwriter acts as the principal underwriter of the
Fund's shares. The Distribution Agreement and Plan provide that the Underwriter
agrees to provide, and shall pay costs which it incurs in connection with
providing, administrative or accounting services to shareholders of the Fund
(such costs are referred to as "Shareholder Servicing Expenses") and that the
Underwriter shall also pay all costs of distributing the shares of the Fund
("Distribution Expenses"). Shareholder Servicing Expenses include all expenses
of the Underwriter incurred in connection with providing administrative or
accounting services to shareholders of the Fund, including, but not limited to,
an allocation of the Underwriter's overhead and payments made to persons,
including employees of the Underwriter, who respond to inquiries of shareholders
regarding their ownership of Fund shares, or who provide other administrative or
accounting services not otherwise required to be provided by the Fund's
investment adviser or dividend disbursing, transfer, administrative and
accounting services agent. Distribution Expenses include, but are not limited
to, initial and ongoing sales compensation (in addition to sales loads) paid to
investment executives of the Underwriter and to other broker-dealers and
participating financial institutions; expenses incurred in the printing of
prospectuses, statements of additional information and reports used for sales
purposes; expenses of preparation and distribution of sales literature; expenses
of advertising of any type; an allocation of the Underwriter's overhead;
payments to and expenses of persons who provide support services in connection
with the distribution of Fund shares; and other distribution-related expenses.
Pursuant to the provisions of the Distribution Agreement, the Underwriter
is entitled to receive a total fee each quarter at an annual rate of .25% of the
average daily net assets attributable to the Fund's Class A shares, 1.00% of the
average daily net assets attributable to the Fund's Class B shares and 1.00% of
the average daily net assets attributable to the Fund's Class C shares to pay
distribution expenses. As determined from time to time by the Board, a portion
of such fees shall be designated as a "shareholder servicing fee" and a portion
shall be designated as a "distribution fee." The Board has determined that all
of the fee payable with respect to Class A shares shall be designated a
shareholder servicing fee. With respect to fees payable with respect to Class B
shares and Class C shares, that portion of the fee equal to .25% of average
daily net assets attributable to each of the Fund's Class B shares and Class C
shares is designated a shareholder servicing fee and that portion of the fee
equal to .75% of average daily net assets attributable to each of the Fund's
Class B shares and Class C shares is designated a distribution fee. Amounts
payable to the Underwriter under the Distribution Agreement may exceed or be
less than the Underwriter's actual distribution expenses and shareholder
servicing expenses. In the event such distribution expenses and shareholder
servicing expenses exceed amounts payable to the Underwriter under the Plan, the
Underwriter shall not be entitled to reimbursement by the Fund. In addition to
being paid shareholder servicing and distribution fees, the Underwriter also
receives for its services the sales charge on sales of Fund shares set forth in
the Prospectus/Proxy Statement.
The Fund's Distribution Agreement is renewable from year to year if the
Fund's Board approves the Agreement and the Fund's Plan. The Fund or the
Underwriter can terminate its Distribution Agreement on 60 days' notice to the
other party, and the Distribution Agreement terminates automatically upon its
assignment. In the Fund's Distribution Agreement, the Underwriter agrees to
indemnify the Fund against all costs of litigation and other legal proceedings
and against any liability incurred by or imposed on the Fund in any way arising
out of or in connection with the sale or distribution of the Fund's shares,
except to the extent that such liability is the result of information which was
obtainable by the Underwriter only from persons affiliated with the Fund but not
the Underwriter.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
As the Fund's portfolio is composed exclusively of debt, rather than equity
securities, most portfolio transactions are effected with dealers without the
payment of brokerage commissions, but rather at net prices which usually include
a spread or markup. In effecting such portfolio transactions on behalf of the
Fund, VFM seeks the most favorable net price consistent with the best execution.
However, frequently, VFM selects a dealer to effect a particular transaction
without contacting all dealers who might be able to effect such transaction,
because of the volatility of the bond market and the desire of VFM to accept a
particular price for a security because the price offered by the dealer meets
its guidelines for profit, yield or both.
Decisions with respect to placement of the Fund's portfolio transactions
are made by VFM. The primary consideration in making these decisions is
efficiency in the execution of orders and obtaining the most favorable net
prices for the Fund. When consistent with these objectives, business may be
placed with broker-dealers who furnish investment research services to VFM. Such
research services include advice, both directly and in writing, as to the value
of securities; the advisability of investing in, purchasing or selling
securities; and the availability of securities, or purchasers or sellers of
securities; as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts. This allows VFM to supplement its own investment research
activities and enables VFM to obtain the views and information of individuals
and research staffs of many different securities firms prior to making
investment decisions for the Fund. To the extent portfolio transactions are
effected with broker-dealers who furnish research services to VFM, VFM receives
a benefit, not capable of evaluation in dollar amounts, without providing any
direct monetary benefit to the Fund from these transactions.
VFM has not entered into any formal or informal agreements with any
broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of the Fund's portfolio transactions in exchange
for research services provided VFM, except as noted below. However, VFM does
maintain an informal list of broker-dealers, which is used from time to time as
a general guide in the placement of the Fund's business, in order to encourage
certain broker-dealers to provide VFM with research services which VFM
anticipates will be useful to it. Because the list is merely a general guide,
which is to be used only after the primary criterion for the selection of
broker-dealers (discussed above) has been met, substantial deviations from the
list are permissible and may be expected to occur. In the event any transactions
are executed on an agency basis, VFM will authorize the Fund to pay an amount of
commission for effecting a securities transaction in excess of the amount of
commission another broker-dealer would have charged only if VFM determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage and research services provided by such broker-dealer, viewed in
terms of either that particular transaction or VFM's overall responsibilities
with respect to the accounts as to which it exercises investment discretion. If
the Fund executes any transactions on an agency basis, it will generally pay
higher than the lowest commission rates available.
The Fund will not effect any brokerage transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with VFM,
unless such transactions, including the frequency thereof, the receipt of
commissions payable in connection therewith and the selection of the affiliated
broker-dealer effecting such transactions are not unfair or unreasonable to the
shareholders of the Fund. In determining the commissions to be paid to a
broker-dealer affiliated with VFM, it is the policy of the Fund that such
commissions will, in the judgment of VFM, subject to review by the Board of
Directors, be both (a) at least as favorable as those which would be charged by
other qualified brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time, and (b) at least as favorable as commissions contemporaneously
charged by such affiliated broker-dealers on comparable transactions for their
most favored comparable unaffiliated customers. While the Fund does not deem it
practicable and in its best interest to solicit competitive bids for commission
rates on each transaction, consideration will regularly be given to posted
commission rates as well as to other information concerning the level of
commissions charged on comparable transactions by other qualified brokers.
Pursuant to conditions set forth in rules of the Securities and Exchange
Commission, the Fund may purchase securities from an underwriting syndicate of
which an affiliated broker-dealer is a member (but not directly from such
affiliated broker-dealer itself). Such conditions relate to the price and amount
of the securities purchased, the commission or spread paid and the quality of
the issuer. The rules further require that such purchases take place in
accordance with procedures adopted and reviewed periodically by the Board of
Directors, particularly those Board members who are not interested persons of
the Fund.
Consistent with the Rules of Conduct of the National Association of
Securities Dealers, Inc. and subject to the policies set forth in the preceding
paragraphs and such other policies as the Fund's directors may determine, VFM
may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's securities transactions.
OTHER INFORMATION
CONVERSION OF CLASS B SHARES. In addition to information regarding
conversion set forth in the Prospectus/Proxy Statement, the conversion of Class
B shares to Class A shares is subject to the continuing availability of a ruling
from the Internal Revenue Service or an opinion of counsel that payment of
different dividends by each of the classes of shares does not result in the
Fund's dividends or distributions constituting "preferential dividends" under
the Code and that such conversions do not constitute taxable events for Federal
tax purposes. There can be no assurance that such ruling or opinion will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available. In such event, Class B shares would
continue to be subject to higher expenses than Class A shares for an indefinite
period.
SIGNATURE GUARANTY. In addition to information regarding redemption of
shares and signature guaranty set forth in the Prospectus/Proxy Statement, a
signature guaranty will be required when redemption proceeds: (1) exceed $50,000
(unless it is being wired to a pre-authorized bank account, in which case a
guarantee is not required), (2) are to be paid to someone other than the
registered shareholder or (3) are to be mailed to an address other than the
address of record or wired to an account other than the pre-authorized bank or
brokerage account. On joint account redemptions of the type previously listed,
each signature must be guaranteed. A signature guarantee may not be provided by
a notary public. Please contact your investment executive for instructions as to
what institutions constitute eligible signature guarantors.
VALUATION OF PORTFOLIO SECURITIES. Generally, trading in certain securities
such as tax-exempt securities, corporate bonds, U.S. Government securities and
money market instruments is substantially completed each day at various times
prior to the primary close of trading on the Exchange. The values of such
securities used in determining the net asset value of Fund shares are computed
as of such times. Occasionally events affecting the value of such securities may
occur between such times and the primary close of trading on the Exchange which
are not reflected in the computation of net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities are valued at their fair market value as determined in good faith by
VFM in accordance with procedures adopted by the Board of Directors.
BANK PURCHASES. Banks, acting as agents for their customers and not for the
Fund or the Underwriter, from time to time may purchase Fund shares for the
accounts of such customers. Generally, the Glass-Steagall Act prohibits banks
from engaging in the business of underwriting, selling or distributing
securities. Should the activities of any bank, acting as agent for its customers
in connection with the purchase of the Fund's shares, be deemed to violate the
Glass-Steagall Act, management will take whatever action, if any, is appropriate
in order to provide efficient services for the Fund. Management does not believe
that a termination of the relationship with a bank would result in any material
adverse consequences to the Fund. In addition, state securities laws on this
issue may differ and banks and financial institutions may be required to
register as dealers pursuant to state law. Fund shares are not deposits or
obligations of, or guaranteed or endorsed by, any bank and are not insured or
guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other federal agency.
TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), all or a
portion of the interest on indebtedness incurred or continued to purchase or
carry shares of an investment company paying exempt-interest dividends, such as
the Fund, will not be deductible by a shareholder. Indebtedness may be allocated
to shares of the Fund even though not directly traceable to the purchase of such
shares.
The Fund's present policy is to designate exempt-interest dividends at each
daily distribution of net interest income. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns.
An exchange of shares in one VFM fund for shares in another fund pursuant
to exercise of the Exchange Privilege is considered to be a sale of the shares
for federal tax purposes that may result in a taxable gain or loss. If a
shareholder incurs a sales charge in acquiring shares and then, after holding
those shares not more than 90 days, exchanges them pursuant to the Exchange
Privilege for shares of another VFM fund, the shareholder may not take into
account the initial sales charge (to the extent that the otherwise applicable
sales charge on the later-acquired shares is reduced) for purposes of
determining the shareholder's gain or loss on the exchange of the first held
shares. To the extent that the sales charge is disregarded upon the exchange of
the first shares, however, it may be taken into account in determining gain or
loss on the eventual sale or exchange of the later-acquired shares.
The Fund will be subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, the Fund must declare dividends by the end of the calendar year
representing 98% of the Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long- and short-term capital gain) for the
12-month period ending on October31 of such year. For purposes of the excise
tax, any income on which the Fund has paid corporate-level tax is considered to
have been distributed. The Fund intends to make sufficient distributions each
year to avoid the payment of the excise tax.
Under a special provision of the Revenue Reconciliation Act of 1993, all or
a portion of the gain that the Fund realizes on the sale of a Municipal
Obligation that it purchased at a market discount may have to be treated as
ordinary income rather than capital gain.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Exempt-interest
dividends attributable to interest income on certain tax-exempt obligations
issued after August 7, 1986 to finance private activities are treated as an item
of tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers and the federal
environmental tax on corporations. In addition, all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings for purposes of determining the federal corporate
AMT and the environmental tax imposed on corporations by Section 59A of the
Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Fund. The Fund will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in the Fund's portfolio lost its exempt status,
the Fund would make every effort to dispose of such investment on terms that are
not detrimental to the Fund.
The Code forbids a regulated investment company from earning 30% or more of
its gross income from the sale or other disposition of securities held less than
three months. This restriction may limit the extent to which the Fund may
purchase options. To the extent the Fund engages in short-term trading and
enters into options transactions, the likelihood of violating this 30%
requirement is increased.
Gain or loss on options is taken into account when realized by entering
into a closing transaction or by exercise. In addition, with respect to many
types of options held at the end of a Fund's taxable year, unrealized gain or
loss on such contracts is taken into account at the then current fair market
value thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from such options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by the
Fund in a subsequent sale or other disposition of such options will be adjusted
to reflect any capital gain or loss taken into account by the Fund in a prior
year as a result of the constructive sale under the "marked-to-market, 60/40
system."
SPECIAL PURCHASE PLANS
AUTOMATIC INVESTMENT PLAN. As a convenience to investors, shares may be
purchased through a pre-authorized automatic investment plan. Such
pre-authorized investments (at least $100) may be used to purchase shares of the
Fund at the public offering price next determined after the Fund receives the
investment (normally the 20th of each month, or the next business day
thereafter). Further information is available from the Underwriter.
COMBINED PURCHASE PRIVILEGE. The following persons (or groups of persons)
may qualify for reductions from the front end sales charge ("FESC") schedule for
Class A shares set forth in the Prospectus/Proxy Statement by combining
purchases of any class of shares of any one or more of the VFM funds which bears
a FESC (and, in certain circumstances, purchases of FESC shares of certain other
open-end investment companies) if the combined purchase of all such funds totals
at least $50,000:
(i) an individual, or a "company" as defined in Section 2(a)(8) of the
1940 Act;
(ii) an individual, his or her spouse and their children under age 21,
purchasing for his, her or their own account;
(iii) a trustee or other fiduciary purchasing for a single trust
estate or single fiduciary account (including a pension, profit-sharing or
other employee benefit trust) created pursuant to a plan qualified under
Section 401 of the Code;
(iv) tax-exempt organizations enumerated in Section 501(c)(3) of the
Code;
(v) employee benefit plans of a single employer or of affiliated
employers;
(vi) any organized group which has been in existence for more than six
months, provided that it is not organized for the purpose of buying
redeemable securities of a registered investment company, and provided that
the purchase is made through a central administration, or through a single
dealer, or by other means which result in economy of sales effort or
expense. An organized group does not include a group of individuals whose
sole organizational connection is participation as credit cardholders of a
company, policyholders of an insurance company, customers of either a bank
or broker-dealer, or clients of an investment adviser.
CUMULATIVE QUANTITY DISCOUNT (RIGHT OF ACCUMULATION). A purchase of Class A
shares may qualify for a Cumulative Quantity Discount. The applicable FESC will
then be based on the total of:
(i) the amount of the current purchase;
(ii) the amount previously invested (valued at the time of investment)
in shares of any class of one or more VFM funds which has a FESC owned by
the investor; and
(iii) the amount previously invested (valued at the time of
investment) in shares of any class of one or more VFM funds which has a
FESC owned by another shareholder eligible to participate with the investor
in a "Combined Purchase Privilege" (see above).
To qualify for the Combined Purchase Privilege or to obtain the Cumulative
Quantity Discount on a purchase through an investment dealer, when each purchase
is made the investor or dealer must provide the Fund with sufficient information
to verify that the purchase qualifies for the privilege or discount.
LETTER OF INTENTION. Investors may also obtain the reduced front end sales
charges shown in the Prospectus/Proxy Statement by means of a written Letter of
Intention, which expresses the investor's intention to invest not less than
$50,000 (including certain "credits," as described below) within a period of 13
months in any one or more of the VFM funds which has a FESC. Each purchase of
shares under a Letter of Intention will be made at the public offering price
applicable at the time of such purchase to a single transaction of the dollar
amount indicated in the Letter. A Letter of Intention may include purchases of
shares made not more than 90 days prior to the date that an investor signs a
Letter; however, the 13-month period during which the Letter is in effect will
begin on the date of the earliest purchase to be included. Investors qualifying
for the Combined Purchase Privilege described above may purchase shares under a
single Letter of Intention.
If, for example, on the date an investor signs a Letter of Intention to
invest at least $50,000 as set forth above and the investor and the investor's
spouse and children under age 21 have previously invested $20,000 in shares
which are still held by such persons, it will only be necessary to invest a
total of $30,000 during the 13 months following the first date of purchase of
such shares in order to qualify for the sales charges applicable to investments
of $50,000. The cumulative purchase would have to total at least $50,000 to
qualify for a reduced sales charge for the Fund.
The Letter of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Letter of Intention is 5% of such amount. Shares purchased with the first 5% of
such amount will be held in escrow to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased. When the full amount indicated has been purchased, the escrow will be
released. To the extent that an investor purchases more than the dollar amount
indicated on the Letter of Intention and qualifies for further reduced sales
charges, the sales charges will be adjusted for the entire amount purchased at
the end of the 13-month period. The difference in sales charges will be used to
purchase additional shares at the then current offering price applicable to the
actual amount of the aggregate purchases.
Investors electing to take advantage of the Letter of Intention should
carefully review the appropriate provisions on the authorization form received
from the Underwriter or attached to the then current Prospectus.
Shares of other open-end investment companies bearing a FESC will be
included with VFM fund shares bearing a FESC in a Combined Purchase Privilege,
Cumulative Quantity Discount or Letter of Intention only if such shares are
owned by customers of dealers that VFM or the Underwriter has engaged to provide
administration or accounting services to Fund omnibus accounts in connection
with the offering of the Fund as part of such other investment companies' family
of funds. Additionally, the maximum reduction of the Fund's FESC that may result
from the inclusion of shares of such other investment companies in a Combined
Purchase Privilege, Cumulative Quantity Discount or Letter of Intention shall be
a reduction to the front-end sales charge applicable to purchases of $500,000
but less than $1,000,000 (as set forth in the sales charge table in the
Prospectus/Proxy Statement).
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the net asset value of Fund shares is summarized
in Appendix D to the Prospectus/Proxy Statement in "Determination of Net Asset
Value." The public offering price of Class A shares is the net asset value of
Fund shares plus the applicable front end sales charge, if any. The maximum
front end sales charge is 3.90% of the net asset value. The public offering
price of Class B and Class C shares is the net asset value of Fund shares.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Fund may refer to
"yield," "taxable equivalent yield," "average annual total return" and
"cumulative total return." Yield, taxable equivalent yield, average annual total
return and cumulative total return are calculated as follows.
No performance data is provided because the Fund had not commenced
operations as of the date of this Statement of Additional Information.
YIELD
Yield is computed by dividing the net investment income per share deemed
earned during the computation period by the maximum offering price per share on
the last day of the period, according to the following formula:
6
YIELD = [(a-b ) ]
[(--- +1) -1]
[(cd ) ]
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends; and
d = the maximum offering price per share on the last
day of the period.
TAXABLE EQUIVALENT YIELD
Taxable equivalent yield is computed by dividing that portion of the yield
of the Fund (as computed above) which is tax-exempt by one minus a stated
marginal income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not tax-exempt.
The taxable equivalent yield is based on current Federal marginal income
tax rates for a single taxpayer. The marginal rates do not reflect federal rules
concerning the phase-out of personal exemptions and limitations on the allowance
of itemized deductions for certain high-income taxpayers.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning
of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus/Proxy Statement, and includes all recurring fees, such as
investment advisory and management fees, charged as expenses to all shareholder
accounts.
CUMULATIVE TOTAL RETURN
Cumulative total return is computed by finding the cumulative compounded
rate of return over the period indicated in the advertisement that would equate
the initial amount invested to the ending redeemable value, according to the
following formula:
CRT = (ERV-P)
(-----) 100
( P )
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning
of such period; and
P = initial payment of $1,000.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus/Proxy Statement, and includes all recurring fees, such as
investment advisory and management fees, charged as expenses to all shareholder
accounts.
MONTHLY CASH WITHDRAWAL PLAN
Any investor who owns or buys shares of the Fund valued at $10,000 or more
at the current offering price may open a Withdrawal Plan and have a designated
sum of money paid monthly to the investor or another person. Shares are
deposited in a Withdrawal Plan account and all distributions are reinvested in
additional shares of the Fund at net asset value or distributed in cash. Shares
in a Withdrawal Plan account are then redeemed to make each withdrawal payment.
Deferred sales charges may apply to monthly redemptions of Class B and Class C
shares (or to redemptions of Class A shares in connection with initial purchases
of $1,000,000 or more which were not subject to a FESC). Redemptions for the
purpose of withdrawal are made on the 25th of the month (or on the preceding
business day if the 25th falls on a weekend or is a holiday) at that day's
closing net asset value and checks are mailed on the next business day. Payments
will be made to the registered shareholder. As withdrawal payments may include a
return on principal, they cannot be considered a guaranteed annuity or actual
yield of income to the investor. The redemption of shares in connection with a
Withdrawal Plan may result in a gain or loss for tax purposes. Continued
withdrawals in excess of income will reduce and possibly exhaust invested
principal, especially in the event of a market decline. The maintenance of a
Withdrawal Plan concurrently with purchases of additional Class A shares of the
Fund would normally be disadvantageous to the investor because of the FESC
payable on such purchases. For this reason, an investor may not maintain a plan
for the accumulation of Class A shares of the Fund (other than through
reinvestment of distributions) and a Withdrawal Plan at the same time. The cost
of administering Withdrawal Plans is borne by the Fund as an expense of all
shareholders. The Fund or the Underwriter may terminate or change the terms of
the Withdrawal Plan at any time. The Withdrawal Plan is fully voluntary and may
be terminated by the shareholder at any time without the imposition of any
penalty.
Since the Withdrawal Plan may involve invasion of capital, investors should
consider carefully with their own financial advisers whether the Withdrawal Plan
and the specified amounts to be withdrawn are appropriate in their
circumstances. The Fund makes no recommendations or representations in this
regard.
ADDITIONAL INFORMATION
As of October 4, 1996, there were no public shareholders of the Fund's
shares.
Organizational costs in connection with start-up and initial registration
will be amortized over 60 months on a straight-line basis. If VFM redeems any or
all of its shares of the Fund prior to the end of the Fund's 60-month
amortization period, the redemption proceeds will be reduced by its pro rata
portion of such Fund's unamortized organizational costs. If the Fund liquidates
prior to the date such costs are fully amortized, VFM will bear all unamortized
organizational costs of the Fund.
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A., Sixth Street & Marquette Avenue, Minneapolis,
Minnesota 55479, acts as custodian of the Fund's assets and portfolio
securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota 55402,
serves as counsel for the Fund.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota 55402,
serves as independent auditors for the Fund.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director owes certain fiduciary duties to the
Fund and to its shareholders. Minnesota law provides that a director "shall
discharge the duties of the position of director in good faith, in a manner the
director reasonably believes to be in the best interest of the corporation, and
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances." Fiduciary duties of a director of a Minnesota
corporation include, therefore, both a duty of "loyalty" (to act in good faith
and act in a manner reasonably believed to be in the best interests of the
corporation) and a duty of "care" (to act with the care an ordinarily prudent
person in a like position would exercise under similar circumstances). Minnesota
law authorizes corporations to eliminate or limit the personal liability of a
director to the corporation or its shareholders for monetary damages for breach
of the fiduciary duty of "care". Minnesota law does not, however, permit a
corporation to eliminate or limit the liability of directors (i) for any breach
of the directors' duty of "loyalty" to the corporation or its shareholders, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for authorizing a dividend, stock
repurchase or redemption or other distribution in violation of Minnesota law or
for violation of certain provisions of Minnesota securities law, or (iv) for any
transaction from which the directors derived an improper personal benefit. The
Articles of Incorporation of the Fund limit the liability of the Fund's
directors to the fullest extent permitted by Minnesota statutes, except to the
extent that such liability cannot be limited as provided in the 1940 Act (which
Act prohibits any provisions which purport to limit the liability of directors
arising from such directors' willful misfeasance, bad faith, gross negligence,
or reckless disregard of the duties involved in the conduct of their role as
directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or rescissionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the 1940 Act and the rules and regulations
adopted thereunder.
SHAREHOLDER MEETINGS
The Fund is not required under Minnesota law to hold annual or periodically
scheduled regular meetings of shareholders. Regular and special shareholder
meetings are held only at such times and with such frequency as required by law.
Minnesota corporation law provides for the Board of Directors to convene
shareholder meetings when it deems appropriate. In addition, if a regular
meeting of shareholders has not been held during the immediately preceding
fifteen months, a shareholder or shareholders holding three percent or more of
the voting shares of the Fund may demand a regular meeting of shareholders of
the Fund by written notice of demand given to the chief executive officer or the
chief financial officer of the Fund. Within ninety days after receipt of the
demand, a regular meeting of shareholders must be held at the expense of the
Fund. Additionally, the 1940 Act requires shareholder votes for all amendments
to fundamental investment policies and restrictions and for amendments to
investment advisory contracts and certain amendments to Rule 12b-1 distribution
plans.
FINANCIAL STATEMENTS
The financial statements of Great Hall National Tax-Exempt Fund ("Great
Hall Fund") included as part of its Annual Report for the fiscal year ended July
31, 1996 are incorporated herein by reference. No financial statements are
included for Voyageur National High Yield Municipal Bond Fund because the Fund
will not be in operation prior to the Reorganization. Accordingly, no pro forma
financial information showing the impact of the Reorganization is presented.
APPENDIX A
DESCRIPTIONS OF BOND RATINGS
Description of Standard and Poor's Ratings Services ("S&P"), Moody's
Investors Service, Inc. ("Moody's") and Fitch Investors Service, LP ("Fitch")
ratings:
S&P'S RATINGS FOR MUNICIPAL BONDS
An S&P municipal bond rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. S&P's
letter ratings may be modified by the addition of a plus or minus sign, which is
used to show relative standing within the major rating categories, except in the
AAA (Prime Grade) category.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable, and will include: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA
AAA is the highest rating assigned by S&P. An issuer's capacity to pay
interest and repay the principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A
Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Bonds rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BBB
Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB and B
Debt rated BB and B (as well as debt rated CCC, C and C) is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation within this category, B represents a somewhat
higher degree of speculation and C represents the highest degree of speculation
of these ratings.
Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal repayments.
Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
C1
The rating C1 is reserved for income bonds on which no interest is being
paid.
D
Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-)
The ratings from AA to CCC may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
NR
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
S&P RATINGS FOR MUNICIPAL NOTES
SP-1
The issuers of these municipal notes exhibit very strong or strong capacity
to pay principal and interest. Those issues determined to possess overwhelming
safety characteristics are given a plus (+) designation.
SP-2
The issuers of these municipal notes exhibit satisfactory capacity to pay
principal and interest.
MOODY'S RATINGS FOR MUNICIPAL BONDS
Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1, Ba1 and B1.
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what generally are known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium-grade obligations, I.E.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are considered of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Unrated
When no rating has been assigned or when a rating has been suspended or
withdrawn, it may be for reasons unrelated to the quality of the issue.
MOODY'S RATINGS FOR MUNICIPAL NOTES
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. A short-term rating designated VMIG may also be assigned an issue having a
demand feature. The municipal obligations bearing the designation MIG 1/VMIG 1
are of the best quality. There is present strong protection by established cash
flows, superior liquidity support or demonstrated broad-based access to the
market for refinancing. The municipal obligations bearing the designation are
ample although not so large as in the preceding group.
Description of S&P A-1+
and
A-1 Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must possess overwhelming safety
characteristics regarding timely payment. Commercial paper rated A-1 must have a
degree of safety that is either overwhelming or very strong.
Description of
Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 (P-1) is the highest commercial paper rating assigned by
Moody's. Issuers of P-1 paper must have a superior capacity for repayment of
short-term promissory obligations, and will normally be evidenced by leading
market positions in well established industries, high rates of return on funds
employed, conservative capitalization structures with moderate reliance on debt
and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation and well established access
to a range of financial markets and assured sources of alternate liquidity.
FITCH'S RATINGS FOR MUNICIPAL BONDS
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
AAA
Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA
Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA". Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A
Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB
Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
('BB' to 'C') represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ('DDD' to 'D') is an
assessment of the ultimate recovery value through reorganization or liquidation.
BB
Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified, which could assist the
obligor in satisfying its debt service requirements.
B
Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirement, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC
Bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC
Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C
Bonds are in imminent default in payment of interest or principal.
DDD, DD and D
Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. 'DDD' represents
the highest potential for recovery on these bonds, and 'D' represents the lowest
potential for recovery.
Plus(+) Minus(-)
Plus and minus signs are used with a rating symbol to indicate the relative
position of a credit within the rating category. Plus and minus signs, however,
are not used in the "AAA" category.
NR
Indicates that Fitch does not rate the specific issue.
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS
OF OPTIONS AND FUTURES
GENERAL. As described in Appendix B to the Prospectus/Proxy Statement under
"Investment Objective and Policies of Voyageur Fund--Miscellaneous Investment
Practices--Options and Futures," the Fund may purchase and sell options on the
securities in which it may invest and the Fund may purchase and sell options on
futures contracts (as defined below) and may purchase and sell futures
contracts. The Fund intends to engage in such transactions if it appears
advantageous to VFM to do so in order to pursue the Fund's investment objective,
to seek to hedge against the effects of market conditions and to seek to
stabilize the value of its assets. The Fund will engage in hedging and risk
management transactions from time to time in VFM's discretion, and may not
necessarily be engaging in such transactions when movements in interest rates
that could affect the value of the assets of the Fund occur.
Conditions in the securities, futures and options markets will determine
whether and in what circumstances the Fund will employ any of the techniques or
strategies described below. The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the Commodity Futures
Trading Commission (the "CFTC") and the federal tax requirements applicable to
regulated investment companies. Transactions in options and futures contracts
may give rise to income that is subject to regular federal income tax and,
accordingly, in normal circumstances the Fund does not intend to engage in such
practices to a significant extent.
The use of futures and options, and the possible benefits and attendant
risks, are discussed below.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may enter into contracts
for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which the Fund may invest. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities, or
the cash value of an index, called for by the contract at a specified price
during a specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. The Fund
may also purchase and sell (write) call and put options on financial futures
contracts. 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 at a
specified exercise price at any time during, or at the termination of, the
period specified in the terms of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. The
Fund would be required to deposit with its custodian initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. The Fund's
ability to establish and close out positions in futures contracts and options on
futures contracts will be subject to the liquidity of the market. Although the
Fund generally will purchase or sell only those futures contracts and options
thereon for which there appears to be a liquid market, there is no assurance
that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. Where it is not possible to
effect a closing transaction in a contract or to do so at a satisfactory price,
the Fund will have to make or take delivery under the futures contract, or, in
the case of a purchased option, exercise the option. The Fund may incur
brokerage fees when it purchases or sells futures contracts.
At the time a futures contract is purchased or sold, the Fund must deposit
in a custodial account cash or securities as a good faith deposit payment (known
as "initial margin"). It is expected that the initial margin on futures
contracts the Fund may purchase or sell may range from approximately 1.5% to
approximately 5% of the value of the securities (or the securities index)
underlying the contract. In certain circumstances, however, such as during
periods of high volatility, the Fund may be required by an exchange to increase
the level of its initial margin payment. Initial margin requirements may be
increased generally in the future by regulatory action. An outstanding futures
contract is valued daily in a process known as "marking to market." If the
market value of the futures contract has changed, the Fund will be required to
make or will be entitled to receive a payment in cash or specified high quality
debt securities in an amount equal to any decline or increase in the value of
the futures contract. These additional deposits or credits are calculated and
required on a daily basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of the
futures contract the Fund purchases or sells and the portfolio securities being
hedged. In addition, the ordinary market price relationships between securities
and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts, even if VFM correctly forecasts market
trends the Fund's hedging strategy may not be successful. If this should occur,
the Fund could lose money on the futures contracts and also on the value of its
portfolio securities.
Although the Fund believes that the use of futures contracts and options
thereon will benefit it, if VFM's judgment about the general direction of
securities prices or interest rates is incorrect, the Fund's overall performance
may be poorer than if it had not entered into futures contracts or purchased or
sold options thereon. For example, if the Fund seeks to hedge against the
possibility of an increase in interest rates, which generally would adversely
affect the price of fixed-income securities held in its portfolio, and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its assets which it has hedged due to the decrease in
interest rates because it will have offsetting losses in its futures positions.
In addition, particularly in such situations, the Fund may have to sell assets
from its portfolio to meet daily margin requirements at a time when it may be
disadvantageous to do so.
OPTIONS ON SECURITIES. The Fund may purchase and sell (write) options on
securities, which options may be either exchange-listed or over-the-counter
options. The Fund may write call options only if the call option is "covered." A
call option written by the Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Fund may write put
options only if the put option is "secured." A put option written by the Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the value
of its portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
The Fund may purchase and sell options that are exchange-traded or that are
traded over-the-counter ("OTC options"). Exchange-traded options in the United
States are issued by a clearing organization affiliated with the exchange on
which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when the Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although the Fund will enter into OTC options only with dealers that agree
to enter into, and which are expected to be capable of entering into, closing
transactions with the Fund, there can be no assurance that the Fund will be able
to liquidate an OTC option at a favorable price at any time prior to expiration.
Until the Fund is able to effect a closing purchase transaction in a covered OTC
call option the Fund has written, it will not be able to liquidate securities
used as cover until the option expires or is exercised or different cover is
substituted. This may impair the Fund's ability to sell a portfolio security at
a time when such a sale might be advantageous. In the event of insolvency of the
counterparty, the Fund may be unable to liquidate an OTC option. In the case of
options written by the Fund, the inability to enter into a closing purchase
transaction may result in material losses to the Fund.
REGULATORY RESTRICTIONS. To the extent required to comply with applicable
SEC releases and staff positions, when entering into futures contracts or
certain option transactions, such as writing a put option, the Fund will
maintain, in a segregated account, cash or liquid high-grade securities equal to
the value of such contracts. Compliance with such segregation requirements may
restrict the Funds' ability to invest in intermediate- and long-term Municipal
Obligations.
The Fund intends to comply with CFTC regulations and avoid "commodity pool
operator" status. These regulations require that futures and options positions
be used (a) for "bona fide hedging purposes" (as defined in the regulations) or
(b) for other purposes so long as aggregate initial margins and premiums
required in connection with non-hedging positions do not exceed 5% of the
liquidation value of the Fund's portfolio. The Fund currently does not intend to
engage in transactions in futures contracts or options thereon for speculation.
ACCOUNTING CONSIDERATIONS. When the Fund writes an option, an amount equal
to the premium received by it is included in the Fund's Statement of Assets and
Liabilities as a liability. The amount of the liability subsequently is marked
to market to reflect the current market value of the option written. When the
Fund purchases an option, the premium paid by the Fund is recorded as an asset
and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the Fund,
an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset subsequently is adjusted to reflected changes in the amount
of the deposit as well as changes in the value of the contract.
