<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
File No. 333-38801
File No. 811-8457
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ x ]
Pre-Effective Amendment No. ______ [ ]
Post-Effective Amendment No. 1 [ x ]
------
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ x ]
Amendment No. 2
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DELAWARE GROUP FOUNDATION FUNDS
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(Exact Name of Registrant as Specified in Charter)
1818 Market Street, Philadelphia, Pennsylvania 19103
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (215) 751-2923
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George M. Chamberlain, Jr., 1818 Market Street, Philadelphia, PA 19103
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(Name and Address of Agent for Service)
Approximate Date of Public Offering: March 22, 1998
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It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b)
_____ on (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
__X__ on March 22, 1998 pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
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Title of Securities Being Registered
The securities being registered are a number of individual classes of separate
series of shares of beneficial interest of Delaware Group Foundation Funds, a
Delaware business trust, as follows:
Income Portfolio
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Income Portfolio A Class
Income Portfolio B Class
Income Portfolio C Class
Income Portfolio Institutional Class
Balanced Portfolio
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Balanced Portfolio A Class
Balanced Portfolio B Class
Balanced Portfolio C Class
Balanced Portfolio Institutional Class
Growth Portfolio
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Growth Portfolio A Class
Growth Portfolio B Class
Growth Portfolio C Class
Growth Portfolio Institutional Class
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--- C O N T E N T S ---
1. Facing Page
2. Contents Page
3. Cross-Reference Sheet
4. Part A - Prospectuses*
5. Part B - Statements of Additional Information
6. Part C - Other Information
7. Signatures
*This Post-Effective Amendment relates to the Registrant's 3 series of shares
and their classes: Income Portfolio A Class Income Portfolio B Class, Income
Portfolio C Class, Income Portfolio Institutional Class, Balanced Portfolio A
Class, Balanced Portfolio B Class, Balanced Portfolio C Class, Balanced
Portfolio Institutional Class, Growth Portfolio A Class, Growth Portfolio B
Class, Growth Portfolio C Class and Growth Portfolio Institutional Class. Shares
of each Portfolio are described in separate prospectuses, however, they share a
common Statement of Additional Information and Part C. The Registrant's Income
Portfolio, Balanced Portfolio and Growth Portfolio A Class, B Class and C Class
Prospectus and Income Portfolio, Balanced Portfolio and Growth Portfolio
Institutional Class Prospectus each dated December 31, 1997 are incorporated
into this filing by reference to the electronic filing of those Prospectuses on
Form N-1A on December 30, 1997.
<PAGE>
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses*
- -------- ----------- -------------
Income Portfolio
Balanced Portfolio
Growth Portfolio
A Class/ Institutional
B Class/ Class
C Class
<S> <C> <C> <C>
1 Cover Page...................................................... Cover Cover
2 Synopsis........................................................ Synopsis; Synopsis;
Summary of Summary of
Expenses Expenses
3 Condensed Financial Information................................. Financial Financial
Highlights Highlights
4 General Description of Registrant .............................. Investment Investment
Objectives and Objectives and
Policies; Shares; Policies; Shares;
Investments of the Investments of the
Underlying Funds; Underlying Funds;
Other Investment Other Investment
Policies and Policies and
Risk Factors Risk Factors
5 Management of the Fund ......................................... Management of Management of
the Portfolios the Portfolios
6 Capital Stock and Other Securities ............................. Delaware Dividends and
Difference; Distributions;
Dividends and Taxes;
Distributions; Shares
Taxes; Shares
7 Purchase of Securities Being Offered............................ Cover; Cover;
How to Buy How to Buy Shares;
Shares; Calculation Calculation of
of Offering Price Net Asset
and Net Asset Value Per Share;
Value Per Share; Management of
Management of the Portfolios
the Portfolios
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET
PART A
(continued)
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses*
-------- ----------- -------------
Income Portfolio
Balanced Portfolio
Growth Portfolio
A Class/ Institutional
B Class/ Class
C Class
<S> <C> <C> <C>
8 Redemption or Repurchase........................................ How to Buy How to Buy
Shares; Shares;
Redemption and Redemption and
Exchange Exchange
9 Pending Legal Proceedings....................................... None None
</TABLE>
* The Registrant's Income Portfolio, Balanced Portfolio and Growth Portfolio A
Class, B Class and C Class Prospectus and Income Portfolio, Balanced Portfolio
and Growth Portfolio Institutional Class Prospectus each dated December 31, 1997
are incorporated into this filing by reference to the electronic filing of those
Prospectuses on Form N-1A on December 30, 1997.
<PAGE>
CROSS-REFERENCE SHEET
PART B
<TABLE>
<CAPTION>
Location in Statement
Item No. Description of Additional Information
-------- ----------- -------------------------
<S> <C> <C>
10 Cover Page.......................................................... Cover
11 Table of Contents................................................... Table of Contents
12 General Information and History..................................... General Information
13 Investment Objectives and Policies.................................. Investment Objectives
and Policies
14 Management of the Registrant........................................ Officers and Trustees
15 Control Persons and Principal Holders
of Securities....................................................... Officers and Trustees
16 Investment Advisory and Other Services.............................. Plans Under Rule 12b-1
for the Fund Classes
(under Purchasing Shares);
Asset Allocation
Agreements; Officers and
Trustees; General Information;
Financial Statements
17 Brokerage Allocation................................................ Trading Practices
and Brokerage
18 Capital Stock and Other Securities.................................. Capitalization and
Noncumulative Voting
(under General Information)
19 Purchase, Redemption and Pricing of
Securities Being Offered............................................ Purchasing Shares;
Determining Offering Price
and Net Asset Value;
Redemption and Repurchase;
Exchange Privilege
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET
PART B
(Continued)
<TABLE>
<CAPTION>
Location in Statement
Item No. Description of Additional Information
-------- ----------- -------------------------
<S> <C> <C>
20 Tax Status.......................................................... Taxes
21 Underwriters ....................................................... Purchasing Shares
22 Calculation of Performance Data..................................... Performance Information
23 Financial Statements................................................ Financial Statements
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
PART C
<TABLE>
<CAPTION>
Location
Item No. Description in Part C
-------- ----------- ---------
<S> <C> <C>
24 Financial Statements and Exhibits................................... Item 24
25 Persons Controlled by or under Common
Control with Registrant............................................. Item 25
26 Number of Holders of Securities..................................... Item 26
27 Indemnification..................................................... Item 27
28 Business and Other Connections of
Investment Adviser.................................................. Item 28
29 Principal Underwriters.............................................. Item 29
30 Location of Accounts and Records.................................... Item 30
31 Management Services................................................. Item 31
32 Undertakings........................................................ Item 32
</TABLE>
<PAGE>
The Registrant's Income Portfolio, Balanced Portfolio and Growth Portfolio A
Class, B Class and C Class Prospectus and Income Portfolio, Balanced Portfolio
and Growth Portfolio Institutional Class Prospectus each dated December 31, 1997
are incorporated into this filing by reference to the electronic filing of those
Prospectuses on Form N-1A on December 30, 1997.
<PAGE>
The Delaware Group includes --------------------------------------
funds with a wide range of investment
objectives. Stock funds, income funds,
national and state-specific tax-exempt DELAWARE GROUP FOUNDATION FUNDS
funds, money market funds, global and
international funds and closed-end --------------------------------------
funds give investors the ability to
create a portfolio that fits their
personal financial goals. For more INCOME PORTFOLIO
information, shareholders of the Fund --------------------------------------
Classes should contact their financial
adviser or call Delaware Group at
800-523-4640, and shareholders of the BALANCED PORTFOLIO
Institutional Class should contact --------------------------------------
Delaware Group at 800-828-5052.
INVESTMENT MANAGER GROWTH PORTFOLIO
Delaware Management Company, Inc. --------------------------------------
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
PART B
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING, STATEMENT OF
ACCOUNTING SERVICES ADDITIONAL INFORMATION
AND TRANSFER AGENT
Delaware Service Company, Inc. --------------------------------------
1818 Market Street
Philadelphia, PA 19103
JANUARY 22, 1998
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
<PAGE>
DELAWARE
GROUP
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PART B--STATEMENT OF ADDITIONAL INFORMATION
JANUARY 22, 1998
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DELAWARE GROUP FOUNDATIONS FUNDS
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1818 Market Street
Philadelphia, PA 19103
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For more information about the Institutional Classes: 800-828-5052
For Prospectus and Performance of Class A Shares, Class B Shares and
Class C Shares: Nationwide 800-523-4640
Information on Existing Accounts of Class A Shares, Class B Shares and
Class C Shares: (SHAREHOLDERS ONLY) Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
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TABLE OF CONTENTS
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Cover Page
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Investment Objectives and Policies
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Accounting and Tax Issues
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Performance Information
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Trading Practices and Brokerage
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Purchasing Shares
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Investment Plans
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Determining Offering Price and Net Asset Value
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Redemption and Repurchase
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Dividends and Realized Securities Profits Distributions
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Taxes
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Asset Allocation Agreements
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Officers and Trustees
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Exchange Privilege
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General Information
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Appendix A--IRA Information
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Financial Statements
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<PAGE>
Delaware Group Foundation Funds (the "Trust") is a
professionally-managed mutual fund of the series type which currently offers
three series of shares: the Income Portfolio, the Balanced Portfolio and the
Growth Portfolio (individually, a "Portfolio" and collectively, the
"Portfolios").
Each Portfolio offers three retail classes: Class A Shares, Class B
Shares and Class C Shares (collectively referred to as the "Fund Classes").
Each Portfolio also offers an Institutional Class shares (collectively, the
"Institutional Classes").
Class B Shares, Class C Shares and Institutional Class shares of each
Portfolio may be purchased at a price equal to the next determined net asset
value per share. Class A Shares may be purchased at the public offering price,
which is equal to the next determined net asset value per share, plus a
front-end sales charge. Class A Shares are subject to a maximum front-end
sales charge of 4.75%, and annual 12b-1 Plan expenses that may not exceed
0.30% and have currently been fixed by the Board at 0.25%. Class B Shares are
subject to a contingent deferred sales charge ("CDSC") which may be imposed on
redemptions made within six years of purchase and annual 12b-1 Plan expenses
of up to 1% which are assessed against Class B Shares for approximately eight
years after purchase. See Automatic Conversion of Class B Shares under Classes
of Shares in the Prospectuses for the Fund Classes. Class C Shares are subject
to a CDSC which may be imposed on redemptions made within 12 months of
purchase and annual 12b-1 Plan expenses of up to 1%, which are assessed
against Class C Shares for the life of the investment. See Distribution and
Service under Asset Allocation Agreements.
This Statement of Additional Information ("Part B" of the
registration statement) supplements the information contained in the current
Prospectuses for the Portfolios dated December 31, 1997, as they may be
amended from time to time. Part B should be read in conjunction with the
respective class' Prospectus. Part B is not itself a prospectus but is, in its
entirety, incorporated by reference into each class' Prospectus. A Prospectus
for each class may be obtained by writing or calling your investment dealer or
by contacting the Trust's national distributor, Delaware Distributors, L.P.
(the "Distributor"), 1818 Market Street, Philadelphia, PA 19103.
All references to "shares" in this Part B refer to all classes of
shares of the Trust, except where noted. Capitalized terms not otherwise
defined herein should have the meanings ascribed to them in the Prospectus.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Investment Restrictions
The following restrictions are fundamental policies, which may not be
amended without approval of a majority of the outstanding voting securities of
the affected Portfolio, which is the lesser of more than 50% of the
outstanding voting securities or 67% of the voting securities of the affected
Portfolio present at a shareholder meeting if 50% or more of the voting
securities are present in person or represented by proxy. The percentage
limitations contained in the restrictions and policies set forth herein apply
at the time of purchase of securities.
1. Each such Portfolio will not invest more than 25% of its total
assets in any one industry (including investments in Underlying Funds that
concentrate in that industry) provided that there is no limitation with
respect to investments in obligations issued or guaranteed as to principal or
interest by the U.S. Government, its agencies or instrumentalities . For
purposes of this restriction, investments in the Underlying Funds will not be
deemed to be investments in "investment company" industry.
2. Each such Portfolio will not make loans other than by the purchase
of all or a portion of a publicly or privately distributed issue of bonds,
debentures or other debt securities of the types commonly offered publicly or
privately and purchased by financial institutions (including repurchase
agreements and loan participations), whether or not the purchase was made upon
the original issuance of the securities, and except that each Portfolio may
loan its assets (other than shares of the Underlying Funds) to qualified
broker/dealers or institutional investors.
3. Each such Portfolio will not engage in underwriting of securities
of other issuers, except that portfolio securities, including securities
purchased in private placements, may be acquired under circumstances where, if
sold, the Portfolio might be deemed to be an underwriter under the Securities
Act of 1933. No limit is placed on the proportion of the Portfolio's assets
which may be invested in such securities.
4. Each such Portfolio will not borrow money or issue senior
securities, except to the extent permitted by the 1940 Act or any rule or
order thereunder or interpretation thereof. Subject to the foregoing, each
Portfolio may engage in short sales, purchase securities on margin, and write
put and call options.
5. Each such Portfolio will not purchase or sell physical commodities
or physical commodity contracts, including physical commodity option or
futures contracts in a contract market or other futures market.
6. Purchase or sell real estate; provided that the Portfolio may
invest in securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein.
In addition to the above fundamental investment restrictions, each
Portfolio has the following investment restrictions which may be amended or
changed without approval of shareholders.
1. No Portfolio will invest for the purpose of acquiring control of
any company. This policy will not prohibit acquisition of a controlling
interest in an Underlying Fund.
2. To the extent that a Portfolio invests in securities of other
investment companies, it will only do so in accordance with the provisions of
the Investment Company Act in effect at the time of the investment.
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<PAGE>
3. No Portfolio will invest in interests in oil, gas and other
mineral leases or other mineral exploration or development programs.
4. No Portfolio will purchase securities on margin except short-term
credits that may be necessary for the clearance of purchases and sales of
securities. This restriction does not apply to the purchase of futures or
options contracts.
Investment Policies
The Portfolios will invest primarily in open-end investment companies
(mutual funds) that are members of the Delaware Group of Funds (individually,
an "Underlying Fund" and collectively, the "Underlying Funds") listed below .
In addition, if the Trust receives an exemptive order from the Securities and
Exchange Commission "(SEC"), the Portfolios may invest in the same kinds of
securities as those in which the Underlying Funds may invest and employ the
same investment strategies as any of the Underlying Funds, to the extent
consistent with each Portfolio's investment objective stated in the
Prospectuses.
The Underlying Funds include funds investing in U.S. and foreign
stocks, bonds, and money market instruments. The list of Underlying Funds set
forth below may change from time to time, and Underlying Funds may be added or
deleted upon the recommendation of the Manager without shareholder approval.
U.S. Equity
Aggressive Growth Fund Fixed Income
Blue Chip Fund Delchester Fund
Decatur Total Return Fund Global Bond Fund
DelCap Fund Limited-Term Government Fund
Devon Fund U.S. Government Fund
Small Cap Value Fund High-Yield Opportunities Fund
Trend Fund
U.S. Growth Fund Money Market
The Real Estate Investment Trust Delaware Cash Reserve
Portfolio
International Equity
Emerging Markets Fund
International Equity Fund
International Small Cap Fund
New Pacific Fund
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<PAGE>
The following investment policies relate to the Underlying Funds,
consistent with each fund's investment objective as described in the
Prospectuses. In addition, if the Trust receives an exemptive order from the
SEC, each Portfolio may engage in these investment instruments and strategies
directly.
U.S. Government Securities
Securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities ("Government Securities") in which the
Underlying Funds may invest include debt obligations of varying maturities
issued by the U.S. Treasury or issued or guaranteed by an agency or
instrumentality of the U.S. government, including the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Central Bank for Cooperatives,
Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks, Federal Land Banks, Federal
National Mortgage Association, Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board, Student Loan Marketing
Association and Resolution Trust Corporation. Direct obligations of the United
States Treasury include a variety of securities that differ in their interest
rates, maturities and dates of issuance. Because the U.S. government is not
obligated by law to provide support to an instrumentality that it sponsors,
each Underlying Fund invests in obligations issued by an instrumentality of
the U.S. government only if its investment manager determines that the
instrumentality's credit risk does not make its securities unsuitable for
investment by an Underlying Fund.
Money Market Instruments
Money market instruments in which the Underlying Funds may invest
include U.S. government securities; certificates of deposit, time deposits and
bankers' acceptances issued by domestic banks (including their branches
located outside the U.S. and subsidiaries located in Canada), domestic
branches of foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase agreements with
respect to the foregoing types of instruments.
Certain types of money market instruments are described below.
U.S. Government Securities--Securities issued or guaranteed by the U.S.
government, including Treasury Bills, Notes and Bonds.
U.S. Government Agency Securities--Obligations issued or guaranteed by
agencies or instrumentalities of the U.S. government whether supported by the
full faith and credit of the U.S. Treasury or the credit of a particular agency
or instrumentality.
Bank Obligations--Certificates of deposit, bankers' acceptances and
other short-term obligations of U.S. commercial banks and their overseas
branches and foreign banks of comparable quality, provided each such bank
combined with its branches has total assets of at least one billion dollars.
Any obligations of foreign banks shall be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of U.S.
banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. In particular, a foreign country could impose exchange
controls which might delay the release of proceeds from that country. Such
deposits are not covered by the Federal Deposit Insurance Corporation. Because
of conflicting laws and regulations, an issuing bank could maintain that
liability for an investment is solely that of the overseas branch which could
expose the Underlying Fund to a greater risk of loss. The Underlying Funds
will only buy short-
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<PAGE>
term instruments in nations where these risks are minimal. The Underlying Funds
will consider these factors along with other appropriate factors in making an
investment decision to acquire such obligations and will only acquire those
which, in the opinion of management, are of an investment quality comparable to
other debt securities bought by the Underlying Funds.
Commercial Paper--The Underlying Funds may invest in short-term
promissory notes issued by corporations which at the time of purchase are
rated P-1 and/or A-1. Commercial paper ratings P-1 by Moody's and A-1 by S&P
are the highest investment grade category.
Corporate Debt--The Underlying Funds may invest in corporate notes
and bonds rated A or above. Excerpts from Moody's Investors Service, Inc.
("Moody's") description of those categories of bond ratings: Aaa--judged to be
the best quality. They carry the smallest degree of investment risk;
Aa--judged to be of high quality by all standards; A--possess favorable
attributes and are considered "upper medium" grade obligations.
Rule 144A Securities
The Underlying Funds may invest in restricted securities, including
unregistered securities eligible for resale without registration pursuant to
Rule 144A ("Rule 144A Securities") under the 1933 Act. Rule 144A Securities
may be freely traded among qualified institutional investors without
registration under the 1933 Act.
Investing in Rule 144A Securities could have the effect of increasing
the level of an Underlying Fund's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities. After the purchase of a Rule 144A Security, however, the directors
of the Underlying Fund and its investment manager will continue to monitor the
liquidity of that security to ensure that the Underlying Fund's holdings of
illiquid securities does not exceed its limit on investments in such
securities.
Repurchase Agreements
A repurchase agreement is a short-term investment by which the
purchaser acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the purchaser's holding period. Should an issuer of a
repurchase agreement fail to repurchase the underlying security, the loss to
the Underlying Funds, if any, would be the difference between the repurchase
price and the market value of the security. An Underlying Fund will limit its
investments in repurchase agreements to those which the respective investment
manager, under the guidelines of the directors of the Underlying Fund,
determines to present minimal credit risks and which are of high quality. In
addition, each Underlying Fund must have collateral of at least 100% of the
repurchase price, including the portion representing such Underlying Fund's
yield under such agreements which is monitored on a daily basis. While the
Underlying Funds are permitted to do so, they normally do not invest in
repurchase agreements, except to invest cash balances.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
Delaware Group funds jointly to invest cash balances. The Underlying Funds may
invest cash balances in a joint repurchase agreement in accordance with the
terms of the Order and subject generally to the conditions described above.
Reverse Repurchase Agreements
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<PAGE>
Certain Underlying Funds are authorized to enter into reverse
repurchase agreements. A reverse repurchase agreement is the sale of a
security by an Underlying Fund and its agreement to repurchase the security at
a specified time and price. An Underlying Fund will maintain in a segregated
account with the Custodian cash, cash equivalents or U.S. government
securities in an amount sufficient to cover its obligations under reverse
repurchase agreements with broker/dealers (but no collateral is required on
reverse repurchase agreements with banks). Under the 1940 Act, reverse
repurchase agreements may be considered borrowings by an Underlying Fund;
accordingly, an Underlying Fund will limit its investments in reverse
repurchase agreements, together with any other borrowings, to no more than
one-third of its total assets. The use of reverse repurchase agreements by an
Underlying Fund creates leverage which increases the Underlying Fund's
investment risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the costs of the agreements,
an Underlying Fund's earnings or net asset value will increase faster than
otherwise would be the case; conversely, if the income and gains fail to
exceed the costs, earnings or net asset value would decline faster than
otherwise would be the case.
Portfolio Loan Transactions
It is the understanding of the respective investment manager that the
staff of the SEC permits portfolio lending by registered investment companies
if certain conditions are met. These conditions are as follows: 1) each
transaction must have 100% collateral in the form of cash, short-term U.S.
government securities, or irrevocable letters of credit payable by banks
acceptable to an Underlying Fund involved from the borrower; 2) this
collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Underlying Fund involved; 3) the Underlying Fund must be able to terminate the
loan after notice, at any time; 4) the Underlying Fund must receive reasonable
interest on any loan, and any dividends, interest or other distributions on
the lent securities, and any increase in the market value of such securities;
5) the Underlying Fund may pay reasonable custodian fees in connection with
the loan; and 6) the voting rights on the lent securities may pass to the
borrower; however, if the directors of the Underlying Funds know that a
material event will occur affecting an investment loan, they must either
terminate the loan in order to vote the proxy or enter into an alternative
arrangement with the borrower to enable the directors to vote the proxy.
The major risk to which an Underlying Fund would be exposed on a loan
transaction is the risk that the borrower would go bankrupt at a time when the
value of the security goes up. Therefore, the Underlying Fund will only
enter into loan arrangements after a review of all pertinent facts by the
respective investment manager, under the supervision of the directors,
including the creditworthiness of the borrowing broker, dealer or institution
and then only if the consideration to be received from such loans would
justify the risk. Credit worthiness will be monitored on an ongoing basis by
the respective investment manager.
High-Yield Securities
Among the possible risks of investing in high-yield securities are
the possibility of legislative and regulatory action and proposals. There are
a variety of legislative actions which have been taken or which are considered
from time to time by the United States Congress which could adversely affect
the market for high-yield securities. For example, Congressional legislation
limited the deductibility of interest paid on certain high-yield securities
used to finance corporate acquisitions. Also, Congressional legislation has,
with some exceptions, generally prohibited federally-insured savings and loan
institutions from investing in high-yield securities. Regulatory actions have
also affected the high-yield market. For example, many insurance companies
have restricted or eliminated their purchases of high-yield securities as a
result of, among other factors, actions taken by the National Association of
Insurance Commissioners. If similar legislative and
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<PAGE>
regulatory actions are taken in the future, they could result in further
tightening of the secondary market for high-yield issues, could reduce the
number of new high-yield securities being issued and could make it more
difficult for an Underlying Fund to attain its investment objective.
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<PAGE>
Investment Company Securities
Any investments that certain Underlying Funds make in either
closed-end or open-end investment companies will be limited by the 1940 Act,
and would involve an indirect payment of a portion of the expenses, including
advisory fees, of such other investment companies. Under the 1940 Act's
current limitations, an Underlying Fund may not (1) own more than 3% of the
voting stock of another investment company; (2) invest more than 5% of the
Underlying Fund's total assets in the shares of any one investment company;
nor (3) invest more than 10% of the Underlying Fund's total assets in shares
of other investment companies. If an Underlying Fund elects to limit its
investment in other investment companies to closed-end investment companies,
the 3% limitation described above is increased to 10%. These percentage
limitations also apply to and Underlying Fund's investments in unregistered
investment companies. The Underlying Funds may not acquire securities of
registered open-end investment companies or registered unit investment trusts
in reliance on sections 12(d)(1)(F) or (G) of the 1940 Act.
Unseasoned Companies
Certain Underlying Funds may invest in relatively new or unseasoned
companies which are in their early stages of development, or small companies
positioned in new and emerging industries where the opportunity for rapid
growth is expected to be above average. Securities of unseasoned companies
present greater risks than securities of larger, more established companies.
The companies in which an Underlying Fund may invest may have relatively small
revenues, limited product lines, and may have a small share of the market for
their products or services. Small companies may lack depth of management, they
may be unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing or favorable
terms, or they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due
these and other factors, small companies may suffer significant losses as well
as realize substantial growth, and investments in such companies tend to be
volatile and are therefore speculative.
Mortgage-Backed Securities
In addition to mortgage-backed securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, certain Underlying Funds
may also invest its assets in securities issued by certain private,
nongovernment corporations, such as financial institutions, if the securities
are fully collateralized at the time of issuance by securities or certificates
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Two principal types of mortgage-backed securities are
collateralized mortgage obligations (CMOs) and real estate mortgage investment
conduits (REMICs).
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes
or series with different maturities. The classes or series are retired in
sequence as the underlying mortgages are repaid. Prepayment may shorten the
stated maturity of the obligation and can result in a loss of premium, if any
has been paid. Certain of these securities may have variable or floating
interest rates and others may be stripped (securities which provide only the
principal or interest feature of the underlying security).
Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal from
the mortgage assets, while the other class will receive most of the interest
and the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the "interest-only" class), while the other class
will receive all of
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the principal (the "principal-only" class). The yield to maturity on an
interest-only class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Underlying Fund's
yield to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Underlying Fund may fail to fully
recoup its initial investment in these securities even if the securities are
rated in the highest rating categories.
Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a
result, established trading markets have not yet been fully developed and,
accordingly, these securities are generally illiquid and to such extent,
together with any other illiquid investments, will not exceed its limit in
such securities.
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities and certain REMICs also may be
stripped.
CMOs and REMICs issued by private entities are not government
securities and are not directly guaranteed by any government agency. They are
secured by the underlying collateral of the private issuer. Certain Underlying
Funds will invest in such private-backed securities only if they are 100%
collateralized at the time of issuance by securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities.
Mortgage Dollar Rolls
Certain Underlying Funds may enter into mortgage "dollar rolls" in
which the Underlying Fund sells mortgage-backed securities for delivery in the
current month and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. Dollar
roll transactions consist of the sale by a Fund of mortgage-backed securities,
together with a commitment to purchase similar, but not necessarily identical,
securities at a future date. Any difference between the sale price and the
purchase price is netted against the interest income foregone on the
securities to arrive at an implied borrowing (reverse repurchase) rate.
Alternatively, the sale and purchase transactions which constitute the dollar
roll can be executed at the same price, with the Underlying Fund being paid a
fee as consideration for entering into the commitment to purchase. Dollar
rolls may be renewed prior to cash settlement and initially may involve only a
firm commitment agreement by the Underlying Fund to buy a security. If the
broker/dealer to whom the Underlying Fund sells the security becomes
insolvent, the Underlying Fund's right to purchase or repurchase the security
may be restricted; the value of the security may change adversely over the
term of the dollar roll; the security that the Underlying Fund is required to
repurchase may be worth less than the security that the Underlying Fund
originally held, and the return earned by the Underlying Fund with the
proceeds of a dollar roll may not exceed transaction costs. The Underlying
Fund will place U.S. government or other liquid, high quality assets in a
segregated account in an amount sufficient to cover its repurchase obligation.
Asset-Backed Securities
Certain Underlying Funds may invest a portion of its assets in
asset-backed securities. The rate of principal payment on asset-backed
securities generally depends on the rate of principal payments received on the
underlying assets. Such rate of payments may be affected by economic and
various other factors such as changes in interest rates or, in the case of
certain Underlying Funds, the concentration of collateral in a particular
geographic area. Therefore, the yield may be difficult to predict and actual
yield to maturity may be more or less than the anticipated yield to maturity.
The credit quality of most asset-backed securities depends
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primarily on the credit quality of the assets underlying such securities, how
well the entities issuing the securities are insulated from the credit risk of
the originator or affiliated entities, and the amount of credit support
provided to the securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection, and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments due on the underlying pool is timely. Protection against losses
resulting from ultimate default enhances the likelihood of payments of the
obligations on at least some of the assets in the pool. Such protection may be
provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Underlying Funds will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal thereof and interest thereon, with the result that
defaults on the underlying assets are borne first by the holders of the
subordinated class), creation of "reserve funds" (where cash or investments,
sometimes funded from a portion of the payments on the underlying assets, are
held in reserve against future losses) and "over collateralization" (where the
scheduled payments on, or the principal amount of, the underlying assets
exceeds that required to make payments of the securities and pay any servicing
or other fees). The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit
information and respecting the level of credit risk associated with the
underlying assets. Delinquencies or losses in excess of those anticipated
could adversely affect the return on an investment in such issue.
Convertible Securities
Certain Underlying Funds may invest in convertible securities,
including corporate debentures, bonds, notes and preferred stocks that may be
converted into or exchanged for common stock. While providing a fixed-income
stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a non-convertible debt security), a
convertible security also affords the investor an opportunity, through its
conversion feature, to participate in the capital appreciation of the common
stock into which it is convertible. As the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis and so may not experience market declines to the same extent as
the underlying common stock. When the market price of the underlying common
stock increases, the price of a convertible security tends to rise as a
reflection of the value of the underlying common stock. To obtain such a
higher yield, an Underlying Fund may be required to pay for a convertible
security an amount in excess of the value of the underlying common stock.
Common stock acquired by an Underlying Fund upon conversion of a convertible
security will generally be held for so long as the respective manager
anticipates such stock will provide an Underlying Fund with opportunities
which are consistent with an Underlying Fund's investment objectives and
policies.
An Underlying Fund may invest not more than 5% of its assets in
convertible debentures that are rated below investment grade or are unrated
but are determined by its investment manager to be of comparable quality.
Investing in convertible debentures that are rated below investment grade or
unrated but of comparable quality entails certain risks, including the risk of
loss of principal, which may be greater than the risks involved
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in investing in investment grade convertible debentures. Under rating agency
guidelines, lower rated securities and comparable unrated securities will
likely have some quality and protective characteristics that are outweighed by
large uncertainties or major risk exposures to adverse conditions.
An Underlying Fund may have difficulty disposing of such lower rated
convertible debentures because the trading market for such securities may be
thinner than the market for higher rated convertible debentures. To the extent
a secondary trading market for these securities does exist, it generally is
not as liquid as the secondary trading market for higher rated securities. The
lack of a liquid secondary market as well as adverse publicity with respect to
these securities, may have an adverse impact on market price and the
Underlying Fund's ability to dispose of particular issues in response to a
specific economic event such as a deterioration in the creditworthiness of the
issuer. The lack of a liquid secondary market for certain securities also may
make it more difficult for an Underlying Fund to obtain accurate market
quotations for purposes of pricing the Underlying Fund's portfolio and
calculating its net asset value. The market behavior of convertible securities
in lower rating categories is often more volatile than that of higher quality
securities. Lower quality convertible securities are judged by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group
("S&P") to have speculative elements or characteristics; their future cannot
be considered as well assured and earnings and asset protection may be
moderate or poor in comparison to investment grade securities.
In addition, such lower quality securities face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions, which could lead to inadequate capacity to meet timely payments.
The market values of securities rated below investment grade tend to be more
sensitive to company specific developments and changes in economic conditions
than higher rated securities. Issuers of these securities are often highly
leveraged, so that their ability to service their debt obligations during an
economic downturn or during sustained periods of rising interest rates may be
impaired. In addition, such issuers may not have more traditional methods of
financing available to them, and may be unable to repay debt at maturity by
refinancing.
When-Issued and Delayed Delivery Securities
Certain Underlying Funds may purchase securities on a when-issued or
delayed delivery basis. In such transactions, instruments are purchased with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous yield or price at the time of the
transaction. Delivery of and payment for these securities may take as long as
a month or more after the date of the purchase commitment. An Underlying Fund
will maintain with its custodian a separate account with a segregated
portfolio of securities in an amount at least equal to these commitments. The
payment obligation and the interest rates that will be received are each fixed
at the time an Underlying Fund enters into the commitment and no interest
accrues to the Underlying Fund until settlement. Thus, it is possible that the
market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
Combined Transactions
Certain Underlying Funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward currency contracts) and
multiple interest rate transactions and any combination of futures, options,
currency and interest rate transactions ("component" transactions), instead of
a single transaction, as part of a single or combined strategy when, in the
opinion of the investment manager, it is in the best interests of the
Underlying Fund to do so. A combined transaction will usually contain elements
of risk that are present in each of its component transactions. Although
combined transactions are normally entered into based on the investment
manager's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management
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goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Certain Underlying Funds may enter into interest rate, currency and
index swaps and the purchase or sale of related caps, floors and collars. The
Underlying Funds expect to enter into these transactions primarily to preserve
a return or spread on a particular investment or portion of its portfolio, to
protect against currency fluctuations, as a duration management technique or
to protect against any increase in the price of securities the Underlying Fund
anticipates purchasing at a later date. The Underlying Funds intend to use
these transactions as hedges and not speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Underlying Fund may be obligated
to pay. Interest rate swaps involve the exchange by the Underlying Fund with
another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments with
respect to a nominal amount of principal. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement
to swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that
a specified index falls below a predetermined interest rate or amount. A
collar is a combination of a cap and a floor that preserves a certain return
within a predetermined range of interest rates or values.
An Underlying Fund will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the
payment date or dates specified in the instrument, with the Underlying Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these swaps, caps, floors and collars are entered into
for good faith hedging purposes, the investment managers and the Underlying
Funds believe such obligations do not constitute senior securities under the
1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. An Underlying Fund will not enter into any swap, cap,
floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the counterparty, combined with
any credit enhancements, is rated at least A by S&P or Moody's or is
determined to be of equivalent credit quality by the investment manager. If
there is a default by the counterparty, the Underlying Fund may have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agent
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments
Certain Underlying Funds may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are
available from time to time. Eurodollar futures contracts enable purchasers to
obtain a fixed rate for the lending of funds and sellers to obtain a fixed
rate for borrowings. An Underlying Fund might use Eurodollar futures contracts
and options thereon to hedge against changes in LIBOR, to which many interest
rate swaps and fixed-income instruments are linked.
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"Roll" Transactions
Certain Underlying Funds may engage in "roll" transactions. A "roll"
transaction is the sale of securities together with a commitment (for which an
Underlying Fund may receive a fee) to purchase similar, but not identical,
securities at a future date. Under the 1940 Act, these transactions may be
considered borrowings by an Underlying Fund; accordingly, an Underlying Fund
will limit its use of these transactions, together with any other borrowings,
to no more than one-third of its total assets. An Underlying Fund will
segregate liquid assets such as cash, U.S. government securities or other high
grade debt obligations in an amount sufficient to meet their payment
obligations in these transactions. Although these transactions will not be
entered into for leveraging purposes, to the extent an Underlying Fund's
aggregate commitments under these transactions exceed its holdings of cash and
securities that do not fluctuate in value (such as short-term money market
instruments), the Underlying Fund temporarily will be in a leveraged position
(i.e., it will have an amount greater than its net assets subject to market
risk). Should the market value of an Underlying Fund's portfolio securities
decline while the Underlying Fund is in a leveraged position, greater
depreciation of its net assets would likely occur than were it not in such a
position. As an Underlying Fund's aggregate commitments under these
transactions increase, the opportunity for leverage similarly increases.
Variable and Floating Rate Notes
Variable rate master demand notes, in which certain Underlying Funds
may invest, are unsecured demand notes that permit the indebtedness thereunder
to vary and provide for periodic adjustments in the interest rate according to
the terms of the instrument. An Underlying Fund will not invest over 5% of its
assets in variable rate master demand notes. Because master demand notes are
direct lending arrangements between an Underlying Fund and the issuer, they
are not normally traded. Although there is no secondary market in the notes,
an Underlying Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies,
issuers of variable amount master demand notes (which are normally
manufacturing, retail, financial, and other business concerns) must satisfy
the same criteria as set forth above for commercial paper. In determining
average weighted portfolio maturity, a variable amount master demand note will
be deemed to have a maturity equal to the period of time remaining until the
principal amount can be recovered from the issuer through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however,
unrated variable and floating rate notes purchased by an Underlying Fund will
be determined by the Underlying Fund's investment manager under guidelines
established by the Board to be of comparable quality at the time of purchase
to rated instruments eligible for purchase under the Underlying Fund's
investment policies. In making such determinations, the investment manager
will consider the earning power, cash flow and other liquidity ratios of the
issuers of such notes (such issuers include financial, merchandising, bank
holding and other companies) and will continuously monitor their financial
condition. Although there may be no active secondary market with respect to a
particular variable or floating rate note purchased by an Underlying Fund, the
Underlying Fund may re-sell the note at any time to a third party. The absence
of such an active secondary market, however, could make it difficult for the
Underlying Fund to dispose of the variable or floating rate note involved in
the event the issuer of the note defaulted on its payment obligations, and the
Underlying Fund could, for this or other reasons, suffer a loss to the extent
of the default. Variable or floating rate notes may be secured by bank letters
of credit.
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Variable and floating rate notes for which no readily available
market exists will be purchased in an amount which, together with securities
with legal or contractual restrictions on resale or for which no readily
available market exists (including repurchase agreements providing for
settlement more than seven days after notice), exceed 10% of the Underlying
Fund's total assets only if such notes are subject to a demand feature that
will permit the Underlying Fund to demand payment of the Principal within
seven days after demand by the Underlying Fund. If not rated, such instruments
must be found by the Underlying Fund's investment manager under guidelines
established by the Board of Directors, to be of comparable quality to
instruments that are rated high quality. A rating may be relied upon only if
it is provided by a nationally recognized statistical rating organization that
is not affiliated with the issuer or guarantor of the instruments. For a
description of the rating symbols of S&P and Moody's used in this paragraph,
see the Prospectuses. An Underlying Fund may also invest in Canadian
Commercial Paper which is commercial paper issued by a Canadian corporation or
a Canadian counterpart of a U.S. corporation and in Europaper which is U.S.
dollar denominated commercial paper of a foreign issuer.
Municipal Securities
Municipal Securities are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, roads, schools, water and sewer works, and other
utilities. Other public purposes for which Municipal Securities may be issued
include refunding outstanding obligations, obtaining funds for general
operating expenses and obtaining funds to lend to other public institutions
and facilities. In addition, certain debt obligations known as "private
activity bonds" may be issued by or on behalf of municipalities and public
authorities to obtain funds to provide certain water, sewage and solid waste
facilities, qualified residential rental projects, certain local electric, gas
and other heating or cooling facilities, qualified hazardous waste facilities,
high-speed intercity rail facilities, governmentally-owned airports, docks and
wharves and mass commuting facilities, certain qualified mortgages, student
loan and redevelopment bonds and bonds used for certain organizations exempt
from federal income taxation. Certain debt obligations known as "industrial
development bonds" under prior federal tax law may have been issued by or on
behalf of public authorities to obtain funds to provide certain
privately-operated housing facilities, sports facilities, industrial parks,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities, sewage or solid waste
disposal facilities, and certain facilities for water supply. Other private
activity bonds and industrial development bonds issued to finance the
construction, improvement, equipment or repair of privately-operated
industrial, distribution, research, or commercial facilities may also be
Municipal Securities, but the size of such issues is limited under current and
prior federal tax law.
Information about the financial condition of issuers of Municipal
Securities may be less available than about corporations with a class of
securities registered under the Securities Exchange Act of 1934.
Foreign Securities
Investors should recognize that investing in foreign issuers involves
certain considerations, including those set forth in the Prospectuses, which
are not typically associated with investing in United States issuers. Since
the stocks of foreign companies are frequently denominated in foreign
currencies, and since an Underlying Fund may temporarily hold uninvested
reserves in bank deposits in foreign currencies, an Underlying Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions
between various currencies. The investment policies of certain Underlying
Funds permit it to enter into forward foreign currency exchange contracts in
order to hedge the Underlying Fund's holdings and commitments against changes
in the level of future currency rates. Such contracts involve an obligation to
purchase or sell a specific currency at a future date at a price set at the
time of the contract.
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There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by an Underlying Fund.
Payment of such interest equalization tax, if imposed, would reduce an
Underlying Fund's rate of return on its investment. Dividends paid by foreign
issuers may be subject to withholding and other foreign taxes which may
decrease the net return on such investments as compared to dividends paid to
an Underlying Fund by United States corporations. Special rules govern the
federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules generally include the following: (i) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury Regulations, preferred stock);
(ii) the accruing of certain trade receivables and payables; and (iii) the
entering into or acquisition of any forward contract, futures contract, option
and similar financial instruments other than any "regulated futures contract"
or "nonequity option" marked to market. The disposition of a currency other
than the U.S. dollar by a U.S. taxpayer is also treated as a transaction
subject to the special currency rules. However, foreign currency-related
regulated futures contracts and nonequity options are generally not subject to
the special currency rules, if they are or would be treated as sold for their
fair market value at year-end under the marking to market rules applicable to
other futures contracts, unless an election is made to have such currency
rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss
on the underlying transaction and is normally taxable as ordinary gain or
loss. A taxpayer may elect to treat as capital gain or loss foreign currency
gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), and the
Treasury Regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. The income tax
effects of integrating and treating a transaction as a single transaction are
generally to create a synthetic debt instrument that is subject to the
original discount provisions. It is anticipated that some of the non-U.S.
dollar denominated investments and foreign currency contracts the Underlying
Fund may make or enter into will be subject to the special currency rules
described above.
Foreign Currency Transactions
Certain Underlying Funds may purchase or sell currencies and/or
engage in forward foreign currency transactions in order to expedite
settlement of portfolio transactions and to minimize currency value
fluctuations.
Forward foreign currency contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for trades. An Underlying Fund
will account for forward contracts by marking to market each day at daily
exchange rates.
When an Underlying Fund enters into a forward contract to sell, for a
fixed amount of U.S. dollars or other appropriate currency, the amount of
foreign currency approximating the value of some or all of a Fund's assets
denominated in such foreign currency, the Underlying Fund's Custodian Bank or
subcustodian will place cash or liquid high grade debt securities in a
separate account of the Underlying Fund in an amount not less than the value
of the Underlying Fund's total assets committed to the consummation of such
forward contracts. If the additional cash or securities placed in the separate
account declines, additional cash or securities will be placed in the account
on a daily basis so that the value of the account will equal the amount of an
Underlying Fund's commitments with respect to such contracts.
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Depositary Receipts
Certain Underlying Funds may make foreign investments through the
purchase and sale of sponsored or unsponsored American Depositary Receipts
("ADRs") and European and Global Depositary Receipts ("Depositary Receipts").
ADRs are receipts typically issued by a U.S. bank or trust company, while
Depositary Receipts are issued by a foreign bank or trust company. ADRs and
Depositary Receipts evidence ownership of underlying securities issued by a
foreign corporation. "Sponsored" ADRs and Depositary Receipts are issued
jointly by the issuer of the underlying security and a depository, whereas
"unsponsored" ADRs and Depositary Receipts are issued without participation of
the issuer of the deposited security. Holders of unsponsored ADRs and
Depositary Receipts generally bear all the costs of such facilities and the
depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the
deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities. Therefore, there may not be a
correlation between information concerning the issuer of the security and the
market value of an unsponsored ADR or Depositary Receipt.
Options
Certain Underlying Funds may write call options on a covered basis
only, purchase call options, write secured put options and purchase put
options, and will not engage in option writing strategies for speculative
purposes.
Certain Underlying Funds may invest in options that are either listed
on U.S. or recognized foreign exchanges or traded over-the-counter. Certain
over-the-counter options may be illiquid. Thus, it may not be possible to
close options positions and this may have an adverse impact on an Underlying
Fund's ability to effectively hedge its securities.
Covered Call Writing -- Certain Underlying Funds may write covered
call options from time to time on such portion of its portfolio, without
limit, as the investment manager determines is appropriate in seeking to
obtain the Underlying Fund's investment objective. A call option gives the
purchaser of such option the right to buy, and the writer, in this case an
Underlying Fund, has the obligation to sell the underlying security at the
exercise price during the option period. The advantage to an Underlying Fund
of writing covered calls is that the Underlying Fund receives additional
income, in the form of a premium, which may offset any capital loss or decline
in market value of the security. However, if the security rises in value, the
Underlying Fund may not fully participate in the market appreciation.
During the option period, a covered call option writer may be
assigned an exercise notice by the broker/dealer through whom such call option
was sold requiring the writer to deliver the underlying security against
payment of the exercise price. This obligation is terminated upon the
expiration of the option period or at such earlier time in which the writer
effects a closing purchase transaction. A closing purchase transaction cannot
be effected with respect to an option once the option writer has received an
exercise notice for such option.
With respect to both options on actual portfolio securities owned by
an Underlying Fund and options on stock indices, an Underlying Fund may enter
into closing purchase transactions. A closing purchase transaction is one in
which an Underlying Fund, when obligated as a writer of an option, terminates
its obligation by purchasing an option of the same series as the option
previously written.
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Closing purchase transactions will ordinarily be effected to realize
a profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable an
Underlying Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. An Underlying
Fund may realize a net gain or loss from a closing purchase transaction
depending upon whether the net amount of the original premium received on the
call option is more or less than the cost of effecting the closing purchase
transaction. Any loss incurred in a closing purchase transaction may be
partially or entirely offset by the premium received from a sale of a
different call option on the same underlying security. Such a loss may also be
wholly or partially offset by unrealized appreciation in the market value of
the underlying security. Conversely, a gain resulting from a closing purchase
transaction could be offset in whole or in part by a decline in the market
value of the underlying security.
If a call option expires unexercised, an Underlying Fund will realize
a short-term capital gain in the amount of the premium on the option, less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, an Underlying Fund will realize a gain or loss from the
sale of the underlying security equal to the difference between the cost of
the underlying security, and the proceeds of the sale of the security plus the
amount of the premium on the option, less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
An Underlying Fund will write call options only on a covered basis,
which means that Underlying Fund will own the underlying security subject to
the call option at all times during the option period. Unless a closing
purchase transaction is effected, the Underlying Fund would be required to
continue to hold a security which it might otherwise wish to sell, or deliver
a security it would want to hold. Options written by an Underlying Fund will
normally have expiration dates between one and nine months from the date
written. The exercise price of a call option may be below, equal to or above
the current market value of the underlying security at the time the option is
written.
Purchasing Call Options--Certain Underlying Funds may purchase call
options to the extent that premiums paid by the Underlying Fund do not
aggregate more than 2% of the Underlying Fund's total assets. When an
Underlying Fund purchases a call option, in return for a premium paid by an
Underlying Fund to the writer of the option, the Underlying Fund obtains the
right to buy the security underlying the option at a specified exercise price
at any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon
exercise of the option, to deliver the underlying security against payment of
the exercise price. The advantage of purchasing call options is that an
Underlying Fund may alter portfolio characteristics and modify portfolio
maturities without incurring the cost associated with portfolio transactions.
An Underlying Fund may, following the purchase of a call option,
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. An Underlying Fund will realize a profit from a closing sale
transaction if the price received on the transaction is more than the premium
paid to purchase the original call option; an Underlying Fund will realize a
loss from a closing sale transaction if the price received on the transaction
is less than the premium paid to purchase the original call option.
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Although an Underlying Fund will generally purchase only those call
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an Exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an Exchange may exist. In such event, it may not be
possible to effect closing transactions in particular options, with the result
that an Underlying Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of such
options and upon the subsequent disposition of the underlying securities
acquired through the exercise of such options. Further, unless the price of
the underlying security changes sufficiently, a call option purchased by an
Underlying Fund may expire without any value to the Underlying Fund.
Writing Put Options--An Underlying Fund may also write put options on
a secured basis which means that the Underlying Fund will maintain in a
segregated account with its custodian, cash or U.S. government securities in
an amount not less than the exercise price of the option at all times during
the option period. The amount of cash or U.S. government securities held in
the segregated account will be adjusted on a daily basis to reflect changes in
the market value of the securities covered by the put option written by the
Underlying Fund. Secured put options will generally be written in
circumstances where the investment manager wishes to purchase the underlying
security for the Underlying Fund's portfolio at a price lower than the current
market price of the security. In such event, the Underlying Fund would write a
secured put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay.
Following the writing of a put option, the Underlying Fund may wish
to terminate the obligation to buy the security underlying the option by
effecting a closing purchase transaction. This is accomplished by buying an
option of the same series as the option previously written. The Underlying
Fund may not, however, effect such a closing transaction after it has been
notified of the exercise of the option.
Purchasing Put Options--Certain Underlying Funds may invest in put
options. An Underlying Fund will, at all times during which it holds a put
option, own the security covered by such option.
Certain Underlying Funds may purchase put options in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option ("protective puts"). The
ability to purchase put options will allow an Underlying Fund to protect an
unrealized gain in an appreciated security in its portfolio without actually
selling the security. If the security does not drop in value, the Underlying
Fund will lose the value of the premium paid. An Underlying Fund may sell a
put option which it has previously purchased prior to the sale of the
securities underlying such option. Such sales will result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option which is sold.
An Underlying Fund may sell a put option purchased on individual
portfolio securities or stock indices. Additionally, an Underlying Fund may
enter into closing sale transactions. A closing sale transaction is one in
which an Underlying Fund, when it is the holder of an outstanding option,
liquidates its position by selling an option of the same series as the option
previously purchased.
Over-the-Counter Options and Illiquid Securities -- Certain
Underlying Funds may deal in over-the-counter ("OTC") options. The Underlying
Funds understand the position of the staff of the Securities and Exchange
Commission ("SEC") to be that purchased OTC options and the assets used as
"cover" for written OTC options are illiquid securities. Certain Underlying
Funds and their investment managers disagree with this position and have found
the dealers with which they engage in OTC options transactions generally
agreeable to
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and capable of entering into closing transactions. The Underlying Funds have
adopted procedures for engaging in OTC options for the purpose of reducing any
potential adverse impact of such transactions upon the liquidity of the
portfolio.
As part of these procedures certain Underlying Funds will engage in
OTC options transactions only with primary dealers that have been specifically
approved by the Board and the investment managers believe that the approved
dealers should be agreeable and able to enter into closing transactions if
necessary and, therefore, present minimal credit risks to the Underlying Fund.
An Underlying Fund anticipates entering into written agreements with those
dealers to whom the Underlying Fund may sell OTC options, pursuant to which
the Underlying Fund would have the absolute right to repurchase the OTC
options from such dealers at any time at a price determined pursuant to a
formula set forth in certain no action letters published by the SEC staff. An
Underlying Fund will not engage in OTC options transactions if the amount
invested by the Underlying Fund in OTC options plus, with respect to OTC
options written by the Underlying Fund, the amounts required to be treated as
illiquid pursuant to the terms of such letters (and the value of the assets
used as cover with respect to OTC option sales which are not within the scope
of such letters), plus the amount invested by the Underlying Fund in illiquid
securities, would exceed 15% of the Underlying Fund's total assets. OTC
options on securities other than U.S. government securities may not be within
the scope of such letters and, accordingly, the amount invested by an
Underlying Fund in OTC options on such other securities and the value of the
assets used as cover with respect to OTC option sales regarding such non-U.S.
government securities will be treated as illiquid and subject to the
limitation on the Underlying Fund's net assets that may be invested in
illiquid securities.
Options on Foreign Currencies--Certain Underlying Funds may purchase
and write options on foreign currencies for hedging purposes in a manner
similar to that in which futures contracts on foreign currencies, or forward
contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, an Underlying Fund may purchase put options on the
foreign currency. If the value of the currency does decline, an Underlying
Fund will have the right to sell such currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, an Underlying Fund may purchase call options thereon.
The purchase of such options could offset, at least partially, the effects of
the adverse movement in exchange rates. As in the case of other types of
options, however, the benefit to an Underlying Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, an Underlying Fund could
sustain losses on transactions in foreign currency options which would require
it to forego a portion or all of the benefits of advantageous changes in such
rates.
An Underlying Fund may write options on foreign currencies for the
same types of hedging purposes. For example, where an Underlying Fund
anticipates a decline in the dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates, it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the option will most likely not be exercised, and the
diminution in the value of portfolio securities will be offset by the amount
of the premium received.
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Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, an
Underlying Fund could write a put option on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow an
Underlying Fund to hedge such increased cost up to the amount of the premium.
As in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Underlying Fund would be required
to purchase or sell the underlying currency at a loss which may not be offset
by the amount of the premium. Through the writing of options on foreign
currencies, an Underlying Fund also may be required to forego all or a portion
of the benefit which might otherwise have been obtained from favorable
movements in exchange rates.
Certain Underlying Funds intend to write covered call options on
foreign currencies. A call option written on a foreign currency by an
Underlying Fund is "covered" if the Underlying Fund owns the underlying
foreign currency covered by the call or has an absolute and immediate right to
acquire that foreign currency without additional cash consideration (or for
additional cash consideration held in a segregated account by the Custodian
Bank) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Underlying Fund has a call on
the same foreign currency and in the same principal amount as the call written
where the exercise price of the call held (a) is equal to or less than the
exercise price of the call written, or (b) is greater than the exercise price
of the call written if the difference is maintained by the Underlying Fund in
cash, U.S. government securities or other high-grade liquid debt securities in
a segregated account with its Custodian Bank.
With respect to writing put options, at the time the put is written,
an Underlying Fund will establish a segregated account with its Custodian Bank
consisting of cash, U.S. government securities or other high-grade liquid debt
securities in an amount equal in value to the amount the Underlying Fund will
be required to pay upon exercise of the put. The account will be maintained
until the put is exercised, has expired, or the Underlying Fund has purchased
a closing put of the same series as the one previously written.
In order to comply with the securities laws of one state, an
Underlying Fund will not write put or call options if the aggregate value of
the securities underlying the calls or obligations underlying the puts
determined as of the date the options are sold exceed 25% of the Underlying
Fund's net assets. Should state laws change or an Underlying Fund receives a
waiver of their application for, the Underlying Funds reserve the right to
increase this percentage.
Options on Stock Indices--A stock index assigns relative values to
the common stocks included in the index with the index fluctuating with
changes in the market values of the underlying common stock.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or
make delivery of the underlying stock at a specified price. A stock index
option gives the holder the right to receive a cash "exercise settlement
amount" equal to (i) the amount by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case of a call)
the closing value of the underlying index on the date of exercise, multiplied
by (ii) a fixed "index multiplier." Receipt of this cash amount will depend
upon the closing level of the stock index upon which the option is based being
greater than (in the case of a call) or less than (in the case of a put) the
exercise price of the option. The amount of cash received will be equal to
such difference between the closing price of the index and exercise price of
the option expressed in dollars times a specified multiple. The writer of the
option is obligated, in return for the premium received, to make delivery of
this amount. Gain or loss to an Underlying Fund on
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transactions in stock index options will depend on price movements in the
stock market generally (or in a particular industry or segment of the market)
rather than price movements of individual securities.
As with stock options, an Underlying Fund may offset its position in
stock index options prior to expiration by entering into a closing transaction
on an Exchange or it may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the
stock so included. Some stock index options are based on a broad market index
such as the Standard & Poor's 500 ("S&P 500") or the New York Stock Exchange
Composite Index, or a narrower market index such as the Standard & Poor's 100
("S&P 100"). Indices are also based on an industry or market segment such as
the AMEX Oil and Gas Index or the Computer and Business Equipment Index.
Options on stock indices are currently traded on the following Exchanges among
others: The Chicago Board Options Exchange, New York Stock Exchange and
American Stock Exchange.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price movements in an
Underlying Fund's portfolio correlate with price movements of the stock 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 stock, whether an
Underlying Fund will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular stock.
Since an Underlying Fund's portfolio will not duplicate the components of an
index, the correlation will not be exact. Consequently, an Underlying Fund
bears the risk that the prices of the securities being hedged will not move in
the same amount as the hedging instrument. It is also possible that there may
be a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both such securities and the hedging instrument. Accordingly, successful use
of options on stock indices will be subject to the investment manager's
ability to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Positions in stock index options may be closed out only on an
Exchange which provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular stock index option.
Thus, it may not be possible to close such an option. The inability to close
options positions could have an adverse impact on an Underlying Fund's ability
to effectively hedge its securities. An Underlying Fund will enter into an
option position only if there appears to be a liquid secondary market for such
options.
The Underlying Funds will not engage in transactions in options on
stock indices for speculative purposes but only to protect appreciation
attained, to offset capital losses and to take advantage of the liquidity
available in the option markets.
Futures
Certain Underlying Funds may enter into contracts for the purchase or
sale for future delivery of securities or foreign currencies. While futures
contracts provide for the delivery of securities, deliveries usually do not
occur. Contracts are generally terminated by entering into an offsetting
transaction. When an Underlying Fund enters into a futures transaction, it
must deliver to the futures commission merchant selected by the Underlying
Fund an amount referred to as "initial margin." This amount is maintained by
the futures commission merchant in an account at the Underlying Fund's
Custodian Bank. Thereafter, a "variation margin" may be paid by an Underlying
Fund to, or drawn by the Underlying Fund from, such account in accordance
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with controls set for such accounts, depending upon changes in the price of
the underlying securities subject to the futures contract.
In addition, when an Underlying Fund engages in futures transactions,
to the extent required by the SEC, it will maintain with its Custodian Bank,
assets in a segregated account to cover its obligations with respect to such
contracts, which assets will consist of cash, cash equivalents or high quality
debt securities from its portfolio in an amount equal to the difference
between the fluctuating market value of such futures contracts and the
aggregate value of the margin payments made by an Underlying Fund with respect
to such futures contracts.
Certain Underlying Funds may enter into such futures contracts to
protect against the adverse affects of fluctuations in interest or foreign
exchange rates without actually buying or selling the securities or foreign
currency. For example, if interest rates are expected to increase, an
Underlying Fund might enter into futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling an
equivalent value of the debt securities owned by an Underlying Fund. If
interest rates did increase, the value of the debt securities in the portfolio
would decline, but the value of the futures contracts to an Underlying Fund
would increase at approximately the same rate, thereby keeping the net asset
value of the Underlying Fund from declining as much as it otherwise would
have. Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to hedge in anticipation of subsequent purchases of
securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, an Underlying Fund
could take advantage of the anticipated rise in value of debt securities
without actually buying them until the market had stabilized. At that time,
the futures contracts could be liquidated and the Underlying Fund could then
buy debt securities on the cash market.
With respect to options on futures contracts, when an Underlying Fund
is not fully invested, it may purchase a call option on a futures contract to
hedge against a market advance due to declining interest rates. The purchase
of a call option on a futures contract is similar in some respects to the
purchase of a call option on an individual security. Depending on the pricing
of the option compared to either the price of the futures contract upon which
it is based, or the price of the underlying debt securities, it may or may not
be less risky than ownership of the futures contract or underlying debt
securities. As with the purchase of futures contracts, when an Underlying Fund
is not fully invested, it may purchase a call option on a futures contract to
hedge against a market advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a
partial hedge against the declining price of the security or foreign currency
which is deliverable upon exercise of the futures contract. If the futures
price at the expiration of the option is below the exercise price, an
Underlying Fund will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
Underlying Fund's portfolio holdings. The writing of a put option on a futures
contract constitutes a partial hedge against the increasing price of the
security or foreign currency which is deliverable upon exercise of the futures
contract. If the futures price at the expiration of the option is higher than
the exercise price, the Underlying Fund will retain the full amount of the
option premium which provides a partial hedge against any increase in the
price of securities which the Underlying Fund intends to purchase.
If a put or call option an Underlying Fund has written is exercised,
the Underlying Fund will incur a loss which will be reduced by the amount of
the premium it receives. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value of
its futures positions, an Underlying Fund's losses from existing options on
futures may, to some extent, be reduced or increased by
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changes in the value of portfolio securities. The purchase of a put option on
a futures contract is similar in some respects to the purchase of protective
puts on portfolio securities. For example, an Underlying Fund will purchase a
put option on a futures contract to hedge the Underlying Fund's portfolio
against the risk of rising interest rates.
To the extent that interest rates move in an unexpected direction, an
Underlying Fund may not achieve the anticipated benefits of futures contracts
or options on futures contracts or may realize a loss. For example, if an
Underlying Fund is hedged against the possibility of an increase in interest
rates which would adversely affect the price of securities held in its
portfolio and interest rates decrease instead, the Underlying Fund will lose
part or all of the benefit of the increased value of its securities which it
has because it will have offsetting losses in its futures position. In
addition, in such situations, if the Underlying Fund had insufficient cash, it
may be required to sell securities from its portfolio to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. An Underlying Fund may
be required to sell securities at a time when it may be disadvantageous to do
so.
Further, with respect to options on futures contracts, an Underlying
Fund may seek to close out an option position by writing or buying an
offsetting position covering the same securities or contracts and have the
same exercise price and expiration date. The ability to establish and close
out positions on options will be subject to the maintenance of a liquid
secondary market, which cannot be assured.
Futures Contracts and Options on Futures Contracts
Certain Underlying Funds may enter into futures contracts on stocks
and stock indices, purchase and sell options on such futures, and enter into
closing transactions with respect to those activities. A futures contract may
be purchased and sold only on an exchange, known as a "contract market,"
designated by the Commodity Futures Trading Commission for the trading of such
contract, and only through a registered futures commission merchant which is a
member of such contract market. A commission must be paid on each completed
purchase and sale transaction.
When an Underlying Fund enters into a futures transaction, it must
deliver to the futures commission merchant selected by the Underlying Fund an
amount referred to as "initial margin." This amount is maintained by the
futures commission merchant in an account at the Underlying Fund's custodian
bank. Thereafter, a "variation margin" may be paid by the Underlying Fund to,
or drawn by the Underlying Fund from, such account in accordance with controls
set for such accounts, depending upon changes in the price of the underlying
securities subject to the futures contract.
Although futures contracts by their terms generally call for the
actual delivery or acquisition of underlying securities or the cash value of
the index, in most cases the contractual obligation is fulfilled before the
date of the contract without having to make or take such delivery. The
contractual obligation is offset 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, as the case may be, delivery
of the securities or cash value of the index underlying the contractual
obligations. At the time such transaction is effected, a final determination
of variation margin is made and any loss experienced by the Underlying Fund
must be paid to the contract market clearing house while any profit due to the
Underlying Fund must be delivered to it.
Positions taken in futures markets are not normally held to maturity,
but instead liquidated through offsetting transactions which may result in a
profit or a loss. While the Underlying Fund's futures contracts on
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securities will usually be liquidated in this manner, the Underlying Fund may
instead make or take delivery of the underlying securities whenever it appears
economically advantageous to do so. The clearing house associated with the
market on which futures on the securities are traded guarantees that, if still
open, the sale or purchase will be performed on settlement date.
The Underlying Fund may enter into such futures contracts to protect
against the adverse affects of fluctuations in security prices or interest
rates without actually buying or selling the securities. For example, if
interest rates are expected to increase, the Underlying Fund might enter into
futures contracts for the sale of debt securities. Such a sale would have much
the same effect as selling an equivalent value of the debt securities in the
portfolio owned by the Underlying Fund. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the futures contracts to the Underlying Fund would increase at approximately
the same rate, thereby keeping the net asset value of the Underlying Fund from
declining as much as it otherwise would have. Similarly, when it is expected
that interest rates may decline, futures contracts may be purchased to hedge
in anticipation of subsequent purchases of securities at higher prices. Since
the fluctuations in the value of futures contracts should be similar to those
of debt securities, the Underlying Fund could take advantage of the
anticipated rise in value of debt securities without actually buying them
until the market had stabilized. At that time, the futures contracts could be
liquidated and the Underlying Fund could then buy debt securities on the cash
market.
With respect to options on futures contracts, when the Underlying
Fund is not fully invested, it may purchase a call option on a futures
contract to hedge against a market advance due to declining interest rates.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based, or the price of the underlying debt
securities, it may or may not be less risky than ownership of the futures
contract or underlying debt securities.
The writing of a call option on a futures contract constitutes a
partial hedge against the declining price of the security which is deliverable
upon exercise of the futures contract. If the futures price at the expiration
of the option is below the exercise price, the Underlying Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Underlying Fund's portfolio holdings.
The writing of a put option on a futures contract constitutes a partial hedge
against the increasing price of the security which is deliverable upon
exercise of the futures contract. If the futures price at the expiration of
the option is higher than the exercise price, the Underlying Fund will retain
the full amount of the option premium which provides a partial hedge against
any increase in the price of securities which the Underlying Fund intends to
purchase.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to purchase or sell stock at a
specified price, options on a stock index future give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the futures contract. If an
option is exercised on the last trading day prior to the expiration date of
the option, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing price of
the futures contract on the expiration date.
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If a put or call option the Underlying Fund has written is exercised,
the Underlying Fund will incur a loss which will be reduced by the amount of
the premium it receives. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value of
its futures positions, the Underlying Fund's losses from existing options on
futures may, to some extent, be reduced or increased by changes in the value
of portfolio securities. The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective puts on portfolio
securities. For example, the Underlying Fund will purchase a put option on a
futures contract to hedge the Underlying Fund's portfolio against the risk of
rising interest rates.
To the extent that interest rates move in an unexpected direction,
the Underlying Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize a loss. For example,
if the Underlying Fund is hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities held in
its portfolio and interest rates decrease instead, the Underlying Fund will
lose part or all of the benefit of the increased value of its securities which
it has because it will have offsetting losses in its futures position. In
addition, in such situations, if the Underlying Fund had insufficient cash, it
may be required to sell securities from its portfolio to meet daily variation
margin requirements. Such sales of securities may, but will not necessarily,
be at increased prices which reflect the rising market. The Underlying Fund
may be required to sell securities at a time when it may be disadvantageous to
do so.
Further, with respect to options on futures contracts, the Underlying
Fund may seek to close out an option position by writing or buying an
offsetting position covering the same securities or contracts and have the
same exercise price and expiration date. The ability to establish and close
out positions on options will be subject to the maintenance of a liquid
secondary market, which cannot be assured.
Short Sales Against the Box
Whereas a short sale is the sale of a security an Underlying Fund
does not own, a short sale is "against the box" if at all times during which
the short position is open, the Underlying Fund owns at least an equal amount
of the securities or securities convertible into, or exchangeable without
further consideration for, securities of the same issue as the securities sold
short. Short sales against the box are typically used by sophisticated
investors to defer recognition of capital gains or losses.
Forward Foreign Currency Exchange Contracts
The Underlying Funds' dealings in forward contracts will be limited
to hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward contracts with respect
to specific receivables or payables of an Underlying Fund generally arising in
connection with the purchase or sale of its portfolio securities and accruals
of interest or dividends receivable and fund expenses. Position hedging is the
sale of a foreign currency with respect to portfolio security positions
denominated or quoted in that currency. An Underlying Fund may not position
hedge with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of a forward
contract) of securities held in its portfolio denominated or quoted in, or
currently convertible into, such currency.
When an Underlying Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when an Underlying
Fund anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Underlying Fund may desire to "lock
in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment as the case may be. By entering into a
forward contract for a fixed amount of dollars for the purchase or sale of the
amount of foreign currency involved in the underlying transactions, an
Underlying Fund will be able to protect itself against a
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possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
Additionally, when the investment adviser believes that the currency
of a particular foreign country may suffer a substantial decline against the
U.S. dollar, an Underlying Fund may enter into a forward contract for a fixed
amount of dollars, to sell the amount of foreign currency approximating the
value of some or all of the securities of the Underlying Fund denominated in
such foreign currency.
Certain Underlying Funds may use currency forward contracts to manage
currency risks and to facilitate transactions in foreign securities. The
following discussion summarizes the principal currency management strategies
involving forward contracts that could be used by these Funds.
In connection with purchases and sales of securities denominated in
foreign currencies, an Underlying Fund may enter into currency forward
contracts to fix a definite price for the purchase or sale in advance of the
trade's settlement date. This technique is sometimes referred to as a
"settlement hedge" or "transaction hedge." The investment manager expects to
enter into settlement hedges in the normal course of managing the Underlying
Funds' foreign investments. The Underlying Funds could also enter into forward
contracts to purchase or sell a foreign currency in anticipation of future
purchases or sales of securities denominated in foreign currency, even if the
specific investments have not yet been selected by the investment manager.
Certain Underlying Funds may also use forward contracts to hedge
against a decline in the value of existing investments denominated in foreign
currency. For example, if an Underlying Fund owned securities denominated in
pounds sterling, it could enter into a forward contract to sell pounds
sterling in return for U.S. dollars to hedge against possible declines in the
pound's value. Such a hedge (sometimes referred to as a "position hedge")
would tend to offset both positive and negative currency fluctuations, but
would not offset changes in security values caused by other factors. The
Underlying Fund could also hedge the position by selling another currency
expected to perform similarly to the pound sterling -- for example, by
entering into a forward contract to sell Deutschemarks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as
a "proxy hedge," could offer advantages in terms of cost, yield, or
efficiency, but generally will not hedge currency exposure as effectively as a
simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedged securities are denominated.
Under certain conditions, SEC guidelines require mutual funds to set
aside cash and appropriate liquid assets in a segregated custodian account to
cover currency forward contracts. As required by SEC guidelines, certain
Underlying Funds will segregate assets to cover currency forward contracts, if
any, whose purpose is essentially speculative. The Underlying Funds will not
segregate assets to cover forward contracts, including settlement hedges,
position hedges, and proxy hedges. Successful use of forward currency
contracts will depend on the investment manager's skill in analyzing and
predicting currency values. Forward contracts may substantially change an
Underlying Fund's investment exposure to changes in currency exchange rates,
and could result in losses to the Underlying Fund if currencies do not perform
as the investment manager anticipates. For example, if a currency's value rose
at a time when the investment manager had hedged an Underlying Fund by selling
that currency in exchange for dollars, the Underlying Fund would be unable to
participate in the currency's appreciation. If the investment manager hedges
currency exposure through proxy hedges, an Underlying Fund could realize
currency losses from the hedge and the security position at the same time if
the two currencies do not move in tandem. Similarly, if the investment manager
increases an Underlying
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Fund's exposure to a foreign currency, and that currency's value declines, the
Underlying Fund will realize a loss. There is no assurance that the investment
manager's use of forward currency contracts will be advantageous to the
Underlying Funds or that it will hedge at an appropriate time.
Foreign Currency Conversion
Although foreign exchange dealers do not charge a fee for currency
conversion, they do realize a profit based on the difference (the "spread")
between prices at which they are buying and selling various currencies. Thus,
a dealer may offer to sell a foreign currency to an Underlying Fund at one
rate, while offering a lesser rate of exchange should the Underlying Fund
desire to resell that currency to the dealer.
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ACCOUNTING AND TAX ISSUES
When a Portfolio writes a call, or purchases a put option, an amount
equal to the premium received or paid by it is included in the section of the
Portfolio's assets and liabilities as an asset and as an equivalent liability.
In writing a call, the amount of the liability is subsequently
"marked to market" to reflect the current market value of the option written.
The current market value of a written option is the last sale price on the
principal Exchange on which such option is traded or, in the absence of a
sale, the mean between the last bid and asked prices. If an option which a
Portfolio has written expires on its stipulated expiration date, the Portfolio
reports a realized gain. If a Portfolio enters into a closing purchase
transaction with respect to an option which the Portfolio has written, the
Portfolio realizes a gain (or loss if the cost of the closing transaction
exceeds the premium received when the option was sold) without regard to any
unrealized gain or loss on the underlying security, and the liability related
to such option is extinguished. Any such gain or loss is a short-term capital
gain or loss for federal income tax purposes. If a call option which a
Portfolio has written is exercised, the Portfolio realizes a capital gain or
loss (long-term or short-term, depending on the holding period of the
underlying security) from the sale of the underlying security and the proceeds
from such sale are increased by the premium originally received.
The premium paid by a Portfolio for the purchase of a put option is
recorded in the section of the Portfolio's assets and liabilities as an
investment and subsequently adjusted daily to the current market value of the
option. For example, if the current market value of the option exceeds the
premium paid, the excess would be unrealized appreciation and, conversely, if
the premium exceeds the current market value, such excess would be unrealized
depreciation. The current market value of a purchased option is the last sale
price on the principal Exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an
option which a Portfolio has purchased expires on the stipulated expiration
date, the Portfolio realizes a short-term or long-term capital loss for
federal income tax purposes in the amount of the cost of the option. If a
Portfolio sells the put option, it realizes a short-term or long-term capital
gain or loss, depending on whether the proceeds from the sale are greater or
less than the cost of the option. If a Portfolio exercises a put option, it
realizes a capital gain or loss (long-term or short-term, depending on the
holding period of the underlying security) from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. However, since the purchase of a put option is treated as a
short sale for federal income tax purposes, the holding period of the
underlying security will be affected by such a purchase.
Options on Certain Stock Indices--Accounting for options on certain
stock indices will be in accordance with generally accepted accounting
principles. The amount of any realized gain or loss on closing out such a
position will result in a realized gain or loss for tax purposes. Such options
held by the Portfolio at the end of each fiscal year will be required to be
"marked to market" for federal income tax purposes. Sixty percent of any net
gain or loss recognized on such deemed sales or on any actual sales will be
treated as long-term capital gain or loss, and the remainder will be treated
as short-term capital gain or loss.
Other Tax Requirements--Each Portfolio intends to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). As such, a Portfolio will not be subject to
federal income tax, or to any excise tax, to the extent its earnings are
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distributed as provided in the Code and it satisfies other requirements
relating to the sources of its income and diversification of its assets.
In order to qualify as a regulated investment company for federal
income tax purposes, each Portfolio must meet certain specific requirements,
including:
(i) The Portfolio must maintain a diversified portfolio of
securities, wherein no security (other than U.S. government securities and
securities of other regulated investment companies) can exceed 25% of the
Portfolio's total assets, and, with respect to 50% of the Portfolio's total
assets, no investment (other than cash and cash items, U.S. government
securities and securities of other regulated investment companies) can exceed
5% of the Portfolio's total assets;
(ii) The Portfolio must derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or disposition of stock and securities or foreign currencies, or
other income derived with respect to its business of investing in such stock,
securities, or currencies;
(iii) The Portfolio must distribute to its shareholders at least 90% of
its investment company taxable income and net tax-exempt income for each of its
fiscal years, and
(iv) The Portfolio must realize less than 30% of its gross income for
each fiscal year from gains from the sale of securities and certain other
assets that have been held by the Portfolio for less than three months
("short-short income"). The Taxpayer Relief Act of 1997 (the "1997 Act")
repealed the 30% short-short income test for tax years of regulated investment
companies beginning after August 5, 1997; however, this rule may have
continuing effect in some states for purposes of classifying the Portfolio as
a regulated investment company.
The Code requires the Portfolios to distribute at least 98% of its
taxable ordinary income earned during the calendar year and 98% of its capital
gain net income earned during the 12 month period ending October 31 (in
addition to amounts from the prior year that were neither distributed nor
taxed to a Portfolio) to you by December 31 of each year in order to avoid
federal excise taxes. The Portfolios intend as a matter of policy to declare
and pay sufficient dividends in December or January (which are treated by you
as received in December) but does not guarantee and can give no assurances
that its distributions will be sufficient to eliminate all such taxes.
The straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any,
can be recognized in the year of loss. Deferred losses will be carried forward
and recognized in the year that unrealized losses exceed unrealized gains.
The 1997 Act has also added new provisions for dealing with
transactions that are generally called "Constructive Sale Transactions." Under
these rules, the Portfolio must recognize gain (but not loss) on any
constructive sale of an appreciated financial position in stock, a partnership
interest or certain debt instruments. The Portfolio will generally be treated
as making a constructive sale when it: 1) enters into a short sale on the same
or substantially identical property; 2) enters into an offsetting notional
principal contract; or 3) enters into a futures or forward contract to deliver
the same or
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substantially identical property. Other transactions (including certain
financial instruments called collars) will be treated as constructive sales as
provided in Treasury regulations to be published. There are also certain
exceptions that apply for transactions that are closed before the end of the
30th day after the close of the taxable year.
Investment in Foreign Currencies and Foreign Securities--The
Portfolios are authorized to invest certain limited amounts in foreign
securities. Such investments, if made, will have the following additional tax
consequences to each Portfolio:
Under the Code, gains or losses attributable to fluctuations in
foreign currency exchange rates which occur between the time a Portfolio
accrues income (including dividends), or accrues expenses which are
denominated in a foreign currency, and the time a Portfolio actually collects
such income or pays such expenses generally are treated as ordinary income or
loss. Similarly, on the disposition of debt securities denominated in a
foreign currency and on the disposition of certain options, futures, forward
contracts, gain or loss attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of its disposition are also treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Portfolio's net investment company
taxable income, which, in turn, will affect the amount of income to be
distributed to you by a Portfolio.
If a Portfolio's Section 988 losses exceed a Portfolio's other
investment company taxable income during a taxable year, a Portfolio generally
will not be able to make ordinary dividend distributions to you for that year,
or distributions made before the losses were realized will be recharacterized
as return of capital distributions for federal income tax purposes, rather than
as an ordinary dividend or capital gain distribution. If a distribution is
treated as a return of capital, your tax basis in your Portfolio shares will
be reduced by a like amount (to the extent of such basis), and any excess of
the distribution over your tax basis in your Portfolio shares will be treated
as capital gain to you.
The 1997 Act generally requires that foreign income be translated
into U.S. dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than
two years after the taxable year to which they relate. This new law may
require a Portfolio to track and record adjustments to foreign taxes paid on
foreign securities in which it invests. Under a Portfolio's current reporting
procedure, foreign security transactions are recorded generally at the time of
each transaction using the foreign currency spot rate available for the date
of each transaction. Under the new law, a Portfolio will be required to record
at fiscal year end (and at calendar year end for excise tax purposes) an
adjustment that reflects the difference between the spot rates recorded for
each transaction and the year-end average exchange rate for all of a
Portfolio's foreign securities transactions. There is a possibility that the
mutual fund industry will be given relief from this new provision, in which
case no year-end adjustments will be required.
The Portfolios may be subject to foreign withholding taxes on income
from certain of its foreign securities. If more than 50% of the total assets
of a Portfolio at the end of its fiscal year are invested in securities of
foreign corporations, a Portfolio may elect to pass-through to you your pro
rata share of foreign taxes paid by a Portfolio. If this election is made, you
will be: (i) required to include in your gross income your pro rata share of
foreign source income (including any foreign taxes paid by a Portfolio); and
(ii) entitled to either deduct your share of such foreign taxes in computing
your taxable income or to
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claim a credit for such taxes against your U.S. income tax, subject to certain
limitations under the Code. You will be informed by a Portfolio at the end of
each calendar year regarding the availability of any such foreign tax credits
and the amount of foreign source income (including any foreign taxes paid by a
Portfolio). If a Portfolio elects to pass-through to you the foreign income
taxes that it has paid, you will be informed at the end of the calendar year
of the amount of foreign taxes paid and foreign source income that must be
included on your federal income tax return. If a Portfolio invests 50% or less
of its total assets in securities of foreign corporations, it will not be
entitled to pass-through to you your pro-rata shares of foreign taxes paid by
a Portfolio. In this case, these taxes will be taken as a deduction by a
Portfolio, and the income reported to you will be the net amount after these
deductions. The 1997 Act also simplifies the procedures by which investors in
funds that invest in foreign securities can claim tax credits on their
individual income tax returns for the foreign taxes paid by a Portfolio. These
provisions will allow investors who pay foreign taxes of $300 or less on a
single return or $600 or less on a joint return during any year (all of which
must be reported on IRS Form 1099-DIV from a Portfolio to the investor) to
claim a tax credit against their U.S. federal income tax for the amount of
foreign taxes paid by a Portfolio. This process will allow you, if you
qualify, to bypass the burdensome and detailed reporting requirements on the
foreign tax credit schedule (Form 1116) and report your foreign taxes paid
directly on page 2 of Form 1040. You should note that this simplified
procedure will not be available until calendar year 1998.
Investment in Passive Foreign Investment Company securities--The
Portfolios may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs").
In general, a foreign corporation is classified as a PFIC if at least one-half
of its assets constitute investment-type assets or 75% or more of its gross
income is investment-type income. If a Portfolio receives an "excess
distribution" with respect to PFIC stock, the Portfolio itself may be subject
to U.S. federal income tax on a portion of the distribution, whether or not
the corresponding income is distributed by a Portfolio to you. In general,
under the PFIC rules, an excess distribution is treated as having been
realized ratably over the period during which a Portfolio held the PFIC
shares. A Portfolio itself will be subject to tax on the portion, if any, of
an excess distribution that is so allocated to prior Portfolio taxable years,
and an interest factor will be added to the tax, as if the tax had been
payable in such prior taxable years. In this case, you would not be permitted
to claim a credit on your own tax return for the tax paid by a Portfolio.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
distribution might have been classified as capital gain. This may have the
effect of increasing Portfolio distributions to you that are treated as
ordinary dividends rather than long-term capital gain dividends.
A Portfolio may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, a Portfolio generally would be required to include in its gross
income its share of the earnings of a PFIC on a current basis, regardless of
whether distributions are received from the PFIC during such period. If this
election were made, the special rules, discussed above, relating to the
taxation of excess distributions, would not apply. In addition, the 1997 Act
provides for another election that would involve marking-to-market the
Portfolio's PFIC shares at the end of each taxable year (and on certain other
dates as prescribed in the Code), with the result that unrealized gains would
be treated as though they were realized. The Portfolio would also be allowed
an ordinary deduction for the excess, if any, of the adjusted basis of its
investment in the PFIC stock over its fair market value at the end of the
taxable year. This deduction would be limited to the amount of any net
mark-to-market gains previously included with respect to that particular PFIC
security. If a
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Portfolio were to make this second PFIC election, tax at the Portfolio level
under the PFIC rules would generally be eliminated.
The application of the PFIC rules may affect, among other things, the
amount of tax payable by a Portfolio (if any), the amounts distributable to
you by a Portfolio, the time at which these distributions must be made, and
whether these distributions will be classified as ordinary income or capital
gain distributions to you.
You should be aware that it is not always possible at the time shares
of a foreign corporation are acquired to ascertain that the foreign
corporation is a PFIC, and that there is always a possibility that a foreign
corporation will become a PFIC after a Portfolio acquires shares in that
corporation. While a Portfolio will generally seek to avoid investing in PFIC
shares to avoid the tax consequences detailed above, there are no guarantees
that it will do so and it reserves the right to make such investments as a
matter of its fundamental investment policy.
Most foreign exchange gains are classified as ordinary income which
will be taxable to you as such when distributed. Similarly, you should be
aware that any foreign exchange losses realized by a Portfolio, including any
losses realized on the sale of foreign debt securities, are generally treated
as ordinary losses for federal income tax purposes. This treatment could
increase or reduce a Portfolio's income available for distribution to you, and
may cause some or all of a Portfolio's previously distributed income to be
classified as a return of capital.
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PERFORMANCE INFORMATION
From time to time, each Portfolio may state its Classes' total return
in advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life-of-fund, if applicable) periods. Each
Portfolio may also advertise aggregate and average total return information of
its Classes over additional periods of time. In addition, each Portfolio may
include illustrations showing the power of compounding in advertisements and
other types of literature
The average annual total rate of return for each Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of $1,000 from
which, in the case of only Class A Shares, the
maximum front-end sales charge is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical $1,000
purchase at the end of the period after the
deduction of the applicable CDSC, if any, with
respect to Class B Shares and Class C Shares.
In presenting performance information for Class A Shares, the Limited
CDSC applicable to only certain redemptions of those shares will not be
deducted from any computation of total return. See the Prospectuses for the
Fund Classes for a description of the Limited CDSC and the limited instances
in which it applies. All references to a CDSC in this Performance Information
section will apply to Class B Shares or Class C Shares of the Portfolios.
Aggregate or cumulative total return is calculated in a similar
manner, except that the results are not annualized. Each calculation assumes
the maximum front-end sales charge, if any, is deducted from the initial
$1,000 investment at the time it is made with respect to Class A Shares and
that all distributions are reinvested at net asset value, and, with respect to
Class B Shares and Class C Shares, reflects the deduction of the CDSC that
would be applicable upon complete redemption of such shares. In addition, each
Portfolio may present total return information that does not reflect the
deduction of the maximum front-end sales charge or any applicable CDSC.
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Statistical and performance information and various indices compiled
and maintained by organizations such as the following may also be used in
preparing exhibits comparing certain industry trends and competitive mutual
fund performance to comparable activities and performances of the Portfolios
and in illustrating general financial planning principles. From time to time,
certain mutual fund performance ranking information, calculated and provided
by these organizations, may also be used in the promotion of sales of the
Portfolios. Any indices used are not managed for any investment goal, and a
direct investment in an index is not possible.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and
Morningstar, Inc. are performance evaluation services that maintain
statistical performance databases, as reported by a diverse universe
of independently-managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a
variety of historical data including total return, capital
appreciation and income on the stock market as well as other
investment asset classes, and inflation. With its permission, this
information will be used primarily for comparative purposes and to
illustrate general financial planning principles.
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators,
such as historical and current price/earning information, individual
equity and fixed-income price and return information.
Compustat Industrial Databases, a service of S&P, may also be used in
preparing performance and historical stock and bond market exhibits.
This firm maintains fundamental databases that provide financial,
statistical and market information covering more than 7,000
industrial and non-industrial companies.
Salomon Brothers and Lehman Brothers are statistical research firms
that maintain databases of international market, bond market,
corporate and government-issued securities of various maturities.
This information, as well as unmanaged indices compiled and
maintained by these firms, will be used in preparing comparative
illustrations. In addition, the performance of multiple indices
compiled and maintained by these firms may be combined to create a
blended performance result for comparative purposes. Generally, the
indices selected will be representative of the types of securities in
which the Portfolios may invest and the assumptions that were used in
calculating the blended performance will be described.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. In addition, current rate information on
municipal debt obligations of various durations, as reported daily by The Bond
Buyer, may also be used. The Bond Buyer is published daily and is an
industry-accepted source for current municipal bond market information.
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From time to time, the Portfolios may quote actual total return
performance for each Class in advertising and other types of literature
compared to indices or averages of alternative financial products available to
prospective investors. For example, the performance comparisons may include
the average return of various bank instruments, some of which may carry
certain return guarantees, offered by leading banks and thrifts as monitored
by Bank Rate Monitor, and those of generally-accepted corporate bond and
government security price indices of various durations prepared by Lehman
Brothers and Salomon Brothers, Inc. These indices are not managed for any
investment goal. Comparative information on the Consumer Price Index may also
be included. The Consumer Price Index, as prepared by the U.S. Bureau of Labor
Statistics, is the most commonly used measure of inflation. It indicates the
cost fluctuations of a representative group of consumer goods. It does not
represent a return from an investment.
Total return performance for each Class of the Portfolios will
reflect the appreciation or depreciation of principal, reinvestment of income
and any capital gains distributions paid during any indicated period, and, in
the case of Class A Shares, the impact of the maximum front-end sales charge,
if any, paid on the illustrated investment amount, annualized. Performance of
Class A Shares may also be shown without reflecting the impact of any
front-end sales charge. The results will not reflect any income taxes, if
applicable, payable by shareholders on the reinvested distributions included
in the calculations. The performance of Class B Shares and Class C Shares will
be calculated both with the applicable CDSC included and excluded. The net
asset values of the Portfolios fluctuate so shares, when redeemed, may be
worth more or less than the original investment, and the Portfolios' results
should not be considered a guarantee of future performance.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Trust and other mutual funds in the
Delaware Group, will provide general information about investment alternatives
and scenarios that will allow investors to assess their personal goals. This
information will include general material about investing as well as materials
reinforcing various industry-accepted principles of prudent and responsible
personal financial planning. One typical way of addressing these issues is to
compare an individual's goals and the length of time the individual has to
attain these goals to his or her risk threshold. In addition, the Distributor
will provide information that discusses the Manager's overriding investment
philosophy and how that philosophy impacts the Portfolios', and other Delaware
Group funds', investment disciplines employed in seeking their objectives. The
Distributor may also from time to time cite general or specific information
about the institutional clients of the Manager, including the number of such
clients serviced by the Manager.
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Security prices tend to move up and down over various market cycles and logic
says to invest when prices are low. However, even experts can't always pick
the highs and the lows. By using a strategy known as dollar-cost averaging,
you schedule your investments ahead of time. If you invest a set amount on a
regular basis, that money will always buy more shares when the price is low
and fewer when the price is high. You can choose to invest at any regular
interval--for example, monthly or quarterly--as long as you stick to your
regular schedule. Dollar-cost averaging looks simple and it is, but there are
important things to remember.
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Dollar-cost averaging works best over longer time periods, and it
doesn't guarantee a profit or protect against losses in declining markets. If
you need to sell your investment when prices are low, you may not realize a
profit no matter what investment strategy you utilize. That's why dollar-cost
averaging can make sense for long-term goals. Since the potential success of a
dollar-cost averaging program depends on continuous investing, even through
periods of fluctuating prices, you should consider your dollar-cost averaging
program a long-term commitment and invest an amount you can afford and
probably won't need to withdraw. You also should consider your financial
ability to continue to purchase shares during periods of high fund share
prices. Delaware Group offers three services -- Automatic Investing Plan,
Direct Deposit Purchase Plan and the Wealth Builder Option -- that can help to
keep your regular investment program on track. See Investing by Electronic
Fund Transfer - Direct Deposit Purchase Plan and Automatic Investing Plan
under Investment Plans and Wealth Builder Option under Investment Plans for a
complete description of these services, including restrictions or limitations.
The example below illustrates how dollar-cost averaging can work. In
a fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $ 5.00 20
Month 4 $100 $10.00 10
-----------------------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of any stock or bond fund in the Delaware
Group of funds.
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TRADING PRACTICES AND BROKERAGE
Each Portfolio selects banks, brokers or dealers to execute
transactions for the purchase or sale of portfolio securities on the basis of
the Portfolio's judgment of the professional capability of such banks, brokers
or dealers to provide the service. The primary consideration is to have banks,
brokers or dealers execute transactions at best price and execution. Best
price and execution refers to many factors, including the price paid or
received for a security, the commission charged, the promptness and
reliability of execution, the confidentiality and placement accorded the order
and other factors affecting the overall benefit obtained by the account on the
transaction. In most instances, trades of fixed-income securities are made on
a net basis where the Portfolios either buy the securities directly from the
dealer or sell them to the dealer. In these instances, there is no direct
commission charged but there is a spread (the difference between the buy and
sell price) which is the equivalent of a commission. When a commission is
paid, the Portfolio involved pays reasonably competitive brokerage commission
rates based upon the professional knowledge of the Manager as to rates paid
and charged for similar transactions throughout the securities industry. In
some instances, a Portfolio pays a minimal share transaction cost when the
transaction presents no difficulty.
The Manager may allocate out of all commission business generated by
all of the funds and accounts under its management, brokerage business to
brokers or dealers who provide brokerage and research services. These services
include advice, either directly or through publications or writings, 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; furnishing of analyses and reports concerning issuers, securities
or industries; providing information on economic factors and trends; assisting
in determining portfolio strategy; providing computer software and hardware
used in security analyses; and providing portfolio performance evaluation and
technical market analyses. Such services are used by the Manager in connection
with its investment decision-making processes with respect to one or more
funds and accounts managed by it, and may not be used, or used exclusively,
with respect to the fund or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act")
and the Portfolios' Investment Management Agreements higher commissions are
permitted to be paid to broker/dealers who provide brokerage and research
services than to broker/dealers who do not provide such services if such
higher commissions are deemed reasonable in relation to the value of the
brokerage and research services provided. Although transactions are directed
to broker/dealers who provide such brokerage and research services, the
Portfolios believe that the commissions paid to such broker/dealers are not,
in general, higher than commissions that would be paid to broker/dealers not
providing such services and that such commissions are reasonable in relation
to the value of the brokerage and research services provided. In some
instances, services may be provided to the Manager which constitute in some
part brokerage and research services used by the Manager in connection with
its investment decision-making process and constitute in some part services
used by the Manager in connection with administrative or other functions not
related to its investment decision-making process. In such cases, the Manager
will make a good faith allocation of brokerage and research services and will
pay out of its own resources for services used by the Manager in connection
with administrative or other functions not related to its investment
decision-making process. In addition, so long as no fund is disadvantaged,
portfolio transactions which generate commissions or their equivalent are
allocated to broker/dealers who provide daily portfolio pricing services to
the Portfolios and to other funds in the Delaware Group. Subject to best price
and execution, commissions allocated to brokers providing such pricing
services may or may not be generated by the funds receiving the pricing
service.
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The Manager may place a combined order for two or more accounts or
funds engaged in the purchase or sale of the same security if, in its
judgment, joint execution is in the best interest of each participant and will
result in best price and execution. Transactions involving commingled orders
are allocated in a manner deemed equitable to each account or fund. When a
combined order is executed in a series of transactions at different prices,
each account participating in the order may be allocated an average price
obtained from the executing broker. It is believed that the ability of the
accounts to participate in volume transactions will generally be beneficial to
the accounts and funds. Although it is recognized that, in some cases, the
joint execution of orders could adversely affect the price or volume of the
security that a particular account or fund may obtain, it is the opinion of
the Manager and the Trust's Board of Trustees that the advantages of combined
orders outweigh the possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), and subject to seeking best price and
execution, the Portfolios may place orders with broker/dealers that have
agreed to defray certain expenses of the funds in the Delaware Group of funds
such as custodian fees, and may, at the request of the Distributor, give
consideration to sales of shares of such funds as a factor in the selection of
brokers and dealers to execute portfolio transactions of the Portfolios.
Portfolio Turnover
The rate of portfolio turnover will not be a limiting factor when
portfolio changes are deemed appropriate. Given the Portfolios' investment
objectives, their annual portfolio turnover rates are not expected to exceed
100%. A turnover rate of 100% would occur, for example, if all the investments
held by a Portfolio at the beginning of the year were replaced by the end of
the year. The degree of portfolio activity may affect taxes payable by the
Portfolios' shareholders. To the extent a Portfolio realizes gains on
securities held for less than six months, such gains are taxable to the
shareholder or to the Portfolio at ordinary income tax rates. The turnover
rates also may be affected by cash requirements from redemptions and
repurchases of Portfolio shares.
The portfolio turnover rate of the Portfolio is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Portfolio during the particular fiscal year, exclusive
of securities whose maturities at the time of acquisition are one year or
less.
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PURCHASING SHARES
The Distributor serves as the national distributor for each
Portfolio's classes of shares - Class A Shares, Class B Shares, Class C Shares
and the Institutional Class - and has agreed to use its best efforts to sell
shares of each Portfolio. See the Prospectuses for additional information on
how to invest. Shares of the Portfolios are offered on a continuous basis, and
may be purchased through authorized investment dealers or directly by
contacting the Trust or the Distributor.
The minimum initial investment generally is $1,000 for Class A
Shares, Class B Shares and Class C Shares. Subsequent purchases of such
classes generally must be at least $100. The initial and subsequent minimum
investments for Class A Shares will be waived for purchases by officers,
directors and employees of any Delaware Group fund, the Manager or any of the
its affiliates if the purchases are made pursuant to a payroll deduction
program. Shares purchased pursuant to the Uniform Gifts to Minors Act or
Uniform Transfers to Minors Act and shares purchased in connection with an
Automatic Investing Plan are subject to a minimum initial purchase of $250 and
a minimum subsequent purchase of $25. Accounts opened under the Delaware Group
Asset Planner service are subject to a minimum initial investment of $2,000
per Asset Planner Strategy selected. There are no minimum purchase
requirements for the Portfolios' Institutional Classes, but certain
eligibility requirements must be satisfied.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. See Investment Plans for purchase limitations
applicable to retirement plans. The Trust will reject any purchase order for
more than $250,000 of Class B Shares and $1,000,000 or more of Class C Shares.
An investor may exceed these limitations by making cumulative purchases over a
period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan
expenses than Class B Shares and Class C Shares and generally are not subject
to a CDSC.
Selling dealers are responsible for transmitting orders promptly. The
Trust reserves the right to reject any order for the purchase of shares of
either Portfolio if in the opinion of management such rejection is in such
Portfolio's best interests.
The NASD has adopted Conduct Rules, as amended, relating to
investment company sales charges. The Trust and the Distributor intend to
operate in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 4.75%; however, lower front-end sales
charges apply for larger purchases. See the table below. Class A Shares are
also subject to annual 12b-1 Plan expenses.
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Class B Shares are purchased at net asset value and are subject to a
CDSC of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3%
if shares are redeemed during the third or fourth year following purchase;
(iii) 2% if shares are redeemed during the fifth year following purchase; and
(iv) 1% if shares are redeemed during the sixth year following purchase. Class
B Shares are also subject to annual 12b-1 Plan expenses which are higher than
those to which Class A Shares are subject and are assessed against Class B
Shares for approximately eight years after purchase. See Automatic Conversion
of Class B Shares under Classes of Shares in the Fund Classes' Prospectuses.
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
Institutional Class shares are purchased at the net asset value per
share without the imposition of a front-end or contingent deferred sales
charge or 12b-1 Plan expenses. See Determining Offering Price and Net Asset
Value and Plans Under Rule 12b-1 for the Fund Classes in this Part B.
Class A Shares, Class B Shares, Class C Shares and Institutional
Class shares represent a proportionate interest in a Portfolio's assets and
will receive a proportionate interest in that Portfolio's income, before
application, as to Class A, Class B and Class C Shares, of any expenses, if
any, under a Portfolio's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
unless, in the case of Class A Shares or Institutional Class shares, a
shareholder submits a specific request. Certificates are not issued in the
case of Class B Shares or Class C Shares or in the case of any retirement plan
accounts including self-directed IRAs. However, purchases not involving the
issuance of certificates are confirmed to the investor and credited to the
shareholder's account on the books maintained by Delaware Service Company,
Inc. (the "Transfer Agent"). The investor will have the same rights of
ownership with respect to such shares as if certificates had been issued. An
investor that is permitted to obtain a certificate may receive a certificate
representing full share denominations purchased by sending a letter signed by
each owner of the account to the Transfer Agent requesting the certificate. No
charge is assessed by the Trust for any certificate issued. A shareholder may
be subject to fees for replacement of a lost or stolen certificate, under
certain conditions, including the cost of obtaining a bond covering the lost
or stolen certificate. Please contact a Portfolio for further information.
Investors who hold certificates representing any of their shares may only
redeem those shares by written request. The investor's certificate(s) must
accompany such request.
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Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class C
Shares of each Portfolio permit investors to choose the method of purchasing
shares that is most suitable for their needs given the amount of their
purchase, the length of time they expect to hold their shares and other
relevant circumstances. Investors should determine whether, given their
particular circumstances, it is more advantageous to purchase Class A Shares
of a Portfolio and incur a front-end sales charge and annual 12b-1 Plan
expenses of up to a maximum of 0.30% of the average daily net assets of Class
A Shares (currently, no more than 0.25% of the average daily net assets of
Class A Shares , pursuant to Board action) or to purchase either Class B or
Class C Shares of a Portfolio and have the entire initial purchase amount
invested in the Portfolio with the investment thereafter subject to a CDSC and
annual 12b-1 Plan expenses. Class B Shares are subject to a CDSC if the shares
are redeemed within six years of purchase, and Class C Shares are subject to a
CDSC if the shares are redeemed within 12 months of purchase. Class B and
Class C Shares are each subject to annual 12b-1 Plan expenses of up to a
maximum of 1% (0.25% of which are service fees to be paid to the Distributor,
dealers or others for providing personal service and/or maintaining
shareholder accounts) of average daily net assets of the respective Class.
Class B Shares will automatically convert to Class A Shares at the end of
approximately eight years after purchase and, thereafter, be subject to annual
12b-1 Plan expenses of up to a maximum of 0.30% of average daily net assets of
such shares. Unlike Class B Shares, Class C Shares do not convert to another
class.
Class A Shares
Purchases of $100,000 or more of Class A Shares at the offering price
carry reduced front-end sales charges as shown in the accompanying table, and
may include a series of purchases over a 13-month period under a Letter of
Intention signed by the purchaser. See Special Purchase Features -- Class A
Shares, below for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
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Income Portfolio
Balanced Portfolio
Growth Portfolio
Class A Shares
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as % as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- -------------------------------------------------------------------------------------------------------------------------------
Income Balanced Growth
Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C>
Less than $100,000 4.75% 4.94% 4.94% 4.94% 4.00%
$100,000 but under $250,000 3.75 3.88 3.88 3.88 3.00
$250,000 but under $500,000 2.50 2.59 2.59 2.59 2.00
$500,000 but under $1,000,000* 2.00 2.00 2.00 2.00 1.60
</TABLE>
* There is no front-end sales charge on purchases of $1,000,000 or more of
Class A Shares but, under certain limited circumstances, a 1% contingent
deferred sales charge may apply upon redemption of such shares. The
contingent deferred sales charge ("Limited CDSC") that may be applicable
arises only in the case of certain shares that were purchased at net asset
value and triggered the payment of a dealer's commission.
** Based upon an initial net asset value of $8.50 per share of the
respective Class A Shares.
*** Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
A Portfolio must be notified when a sale takes place which would
qualify for the reduced front-end sales charge on the basis of
previous or current purchases. The reduced front-end sales charge
will be granted upon confirmation of the shareholder's holdings by
such Portfolio. Such reduced front-end sales charges are not
retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
front- end sales charges shown above. Dealers who receive 90% or more
of the sales charge may be deemed to be underwriters under the
Securities Act of 1933 (the "1933 Act").
- --------------------------------------------------------------------------------
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Certain dealers who enter into an agreement to provide extra training
and information on Delaware Group products and services and who increase sales
of Delaware Group funds may receive an additional commission of up to 0.15% of
the offering price in connection with sales of Class A Shares. Such dealers
must meet certain requirements in terms of organization and distribution
capabilities and their ability to increase sales. The Distributor should be
contacted for further information on these requirements as well as the basis
and circumstances upon which the additional commission will be paid.
Participating dealers may be deemed to have additional responsibilities under
the securities laws.
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers
through whom such purchases are effected in accordance with the following
schedule:
Dealer's Commission
(as a percentage of
Amount of Purchase amount purchased)
------------------ -----------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption
and Exchange in the Fund Classes' Prospectuses) may be aggregated with those
of Class A Shares of a Portfolio. Financial advisers also may be eligible for
a dealer's commission in connection with certain purchases made under a Letter
of Intention or pursuant to an investor's Right of Accumulation. Financial
advisers should contact the Distributor concerning the applicability and
calculation of the dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The
schedule and program for payment of the dealer's commission are subject to
change or termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below, and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time
of purchase of the shares being redeemed or the net asset value of those
shares at the time of redemption. No CDSC will be imposed on increases in net
asset value above the initial purchase price, nor will a CDSC be assessed on
redemptions of shares acquired through reinvestment of dividends or capital
gains distributions. See Waiver of Contingent Deferred Sales Charge - Class B
and Class C Shares under Redemption and Exchange in the Prospectuses for the
Fund Classes for a list of the instances in which the CDSC is waived.
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The following table sets forth the rates of the CDSC for Class B
Shares of each Portfolio:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ ------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares, absent any applicable fee
waiver, will still be subject to the annual 12b-1 Plan expenses of up to 1% of
average daily net assets of those shares. At the end of approximately eight
years after purchase, the investor's Class B Shares will be automatically
converted into Class A Shares of the same Portfolio. See Automatic Conversion
of Class B Shares under Classes of Shares in the Fund Classes' Prospectuses.
Such conversion will constitute a tax-free exchange for federal income tax
purposes. See Taxes in the Prospectuses for the Fund Classes.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, the Trust has adopted a
separate plan for each of the Class A Shares, Class B Shares and Class C
Shares of each Portfolio (the "Plans"). Each Plan permits the relevant
Portfolio to pay for certain distribution, promotional and related expenses
involved in the marketing of only the class of shares to which the Plan
applies. The Plans do not apply to Institutional Classes of shares. Such
shares are not included in calculating the Plans' fees, and the Plans are not
used to assist in the distribution and marketing of shares of the
Institutional Classes. Shareholders of the Institutional Classes may not vote
on matters affecting the Plans.
The Plans permit a Portfolio, pursuant to its Distribution Agreement,
to pay out of the assets of Class A Shares, Class B Shares and Class C Shares
monthly fees to the Distributor for its services and expenses in distributing
and promoting sales of shares of such classes. These expenses include, among
other things, preparing and distributing advertisements, sales literature and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, and paying distribution and maintenance fees to
securities brokers and dealers who enter into agreements with the Distributor.
The Plan expenses relating to Class B and Class C Shares are also used to pay
the Distributor for advancing the commission costs to dealers with respect to
the initial sale of such shares.
In addition, absent any applicable fee waiver, each Portfolio may
make payments out of the assets of Class A, Class B and Class C Shares
directly to other unaffiliated parties, such as banks, who either aid in the
distribution of shares of, or provide services to, such classes.
The maximum aggregate fee payable by a Portfolio under its Plans, and
the Portfolios' Distribution Agreements, is on an annual basis, up to 0.30% of
the Class A Shares' average daily net assets for the year, and up to 1% (0.25%
of which are service fees to be paid to the Distributor, dealers and others
for providing
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personal service and/or maintaining shareholder accounts) of each of the Class
B Shares' and Class C Shares' average daily net assets for the year. The
Trust's Board of Trustees may reduce these amounts at any time.
Pursuant to Board action, the maximum aggregate fee payable by Class
A Shares 0.25%. While this describes the current basis for calculating the
fees which will be payable under the Class A Shares Plans, such Plans permit a
full 0.30% on all Class A Shares' assets to be paid at any time following
appropriate Board approval.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of
Class A, Class B and Class C Shares would be borne by such persons without any
reimbursement from such Fund Classes. Subject to seeking best price and
execution, a Portfolio may, from time to time, buy or sell portfolio
securities from or to firms which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from
its own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreements, as amended, have all been
approved by the Board of Trustees of the Trust, including a majority of the
trustees who are not "interested persons" (as defined in the 1940 Act) of the
Trust and who have no direct or indirect financial interest in the Plans, by
vote cast in person at a meeting duly called for the purpose of voting on the
Plans and such Agreements. Continuation of the Plans and the Distribution
Agreements, as amended, must be approved annually by the Board of Trustees in
the same manner as specified above.
Each year, the trustees must determine whether continuation of the
Plans is in the best interest of shareholders of, respectively, Class A
Shares, Class B Shares and Class C Shares of each Portfolio and that there is
a reasonable likelihood of the Plan relating to a Fund Class providing a
benefit to that Class. The Plans and the Distribution Agreements, as amended,
may be terminated with respect to a Class at any time without penalty by a
majority of those trustees who are not "interested persons" or by a majority
vote of the outstanding voting securities of the relevant Fund Class. Any
amendment materially increasing the percentage payable under the Plans must
likewise be approved by a majority vote of the outstanding voting securities
of the relevant Fund Class, as well as by a majority vote of those trustees
who are not "interested persons." With respect to each Class A Shares' Plan,
any material increase in the maximum percentage payable thereunder must also
be approved by a majority of the outstanding voting securities of Class B of
the same Portfolio. Also, any other material amendment to the Plans must be
approved by a majority vote of the trustees including a majority of the
noninterested trustees of the Trust having no interest in the Plans. In
addition, in order for the Plans to remain effective, the selection and
nomination of trustees who are not "interested persons" of the Trust must be
effected by the directors who themselves are not "interested persons" and who
have no direct or indirect financial interest in the Plans. Persons authorized
to make payments under the Plans must provide written reports at least
quarterly to the Board of Trustees for their review.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all
registered broker/dealers whose aggregate sales of Fund Classes exceed certain
limits as set by the Distributor, may receive from the Distributor an
additional payment of up to 0.25% of the dollar amount of such sales. The
Distributor may also provide additional promotional incentives or payments to
dealers that sell shares of the Delaware Group of funds. In some instances,
these incentives or payments may be offered only to certain dealers who
maintain, have sold or
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<PAGE>
may sell certain amounts of shares. The Distributor may also pay a portion of
the expense of preapproved dealer advertisements promoting the sale of
Delaware Group fund shares.
Special Purchase Features -- Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased without a front-end sales charge
under the Dividend Reinvestment Plan and, under certain circumstances, the
Exchange Privilege and the 12-Month Reinvestment Privilege.
Current and former officers, trustees and employees of the Trust, any
other fund in the Delaware Group, the Manager, the Manager's affiliates, or
any of the Manager's affiliates that may in the future be created, legal
counsel to the funds and registered representatives and employees of
broker/dealers who have entered into Dealer's Agreements with the Distributor
may purchase Class A Shares of the Portfolios and any such class of shares of
any of the other funds in the Delaware Group, including any fund that may be
created, at the net asset value per share. Family members of such persons at
their direction, and any employee benefit plan established by any of the
foregoing funds, corporations, counsel or broker/dealers may also purchase
Class A Shares at net asset value. Class A Shares may also be purchased at net
asset value by current and former officers, directors and employees (and
members of their families) of the Dougherty Financial Group LLC. Purchases of
Class A Shares may also be made by clients of registered representatives of an
authorized investment dealer at net asset value within 12 months of a change
of the registered representative's employment, if the purchase is funded by
proceeds from an investment where a front-end sales charge, contingent
deferred sales charge or other sales charge has been assessed. Purchases of
Class A Shares may also be made at net asset value by bank employees who
provide services in connection with agreements between the bank and
unaffiliated brokers or dealers concerning sales of shares of Delaware Group
funds. Officers, directors and key employees of institutional clients of the
Manager or any of its affiliates, may purchase Class A Shares at net asset
value. Moreover, purchases may be effected at net asset value for the benefit
of the clients of brokers, dealers and registered investment advisers
affiliated with a broker or dealer, if such broker, dealer or investment
adviser has entered into an agreement with the Distributor providing
specifically for the purchase of Class A Shares in connection with special
investment products, such as wrap accounts or similar fee based programs. Such
purchasers are required to sign a letter stating that the purchase is for
investment only and that the securities may not be resold except to the
issuer. Such purchasers may also be required to sign or deliver such other
documents as the Trust may reasonably require to establish eligibility for
purchase at net asset value.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A
Shares of any of the funds in the Delaware Group at net asset value.
Purchases of Class A Shares at net asset value may also be made by
the following: financial institutions investing for the account of their trust
customers when they are not eligible to purchase shares of the institutional
class of a Portfolio; and any group retirement plan (excluding defined benefit
pension plans), or such plans of the same employer, that (i) has in excess of
$500,000 of plan assets invested in Class A Shares of Delaware Group funds and
in any stable value product available through the Delaware Group, or (ii) is
sponsored by an employer that has at any point after May 1, 1997 more than 100
employees while such plan has held Class A Shares of a Delaware Group fund and
such employer has properly represented to DIRSI in writing that it has the
requisite number of employees and has received written confirmation back from
DIRSI Investments in Class A Shares made by plan level and/or participant
retirement accounts that are for the purpose of repaying a loan taken from
such accounts will be made at net asset value. Loan repayments made to a
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Delaware Group account in connection with loans originated from accounts
previously maintained by another investment firm will also be invested at net
asset value.
The Portfolios must be notified in advance that the trade qualifies
for purchase at net asset value.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made
within a 13-month period pursuant to a written Letter of Intention provided by
the Distributor and signed by the purchaser, and not legally binding on the
signer or the Trust, which provides for the holding in escrow by the Transfer
Agent of 5% of the total amount of Class A Shares intended to be purchased
until such purchase is completed within the 13-month period. A Letter of
Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as
noted below, the purchaser will be asked to pay an amount equal to the
difference between the front-end sales charge on Class A Shares purchased at
the reduced rate and the front-end sales charge otherwise applicable to the
total shares purchased. If such payment is not made within 20 days following
the expiration of the 13-month period, the Transfer Agent will surrender an
appropriate number of the escrowed shares for redemption in order to realize
the difference. Such purchasers may include the value (at offering price at
the level designated in their Letter of Intention) of all their shares of the
Portfolios and of any class of any of the other mutual funds in the Delaware
Group (except shares of any Delaware Group fund which do not carry a front-end
sales charge, CDSC or Limited CDSC, other than shares of Delaware Group
Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange
from a Delaware Group fund which carried a front-end sales charge, CDSC or
Limited CDSC) previously purchased and still held as of the date of their
Letter of Intention toward the completion of such Letter.
Employers offering a Delaware Group retirement plan may also complete
a Letter of Intention to obtain a reduced front-end sales charge on
investments in Class A Shares made by the plan. The aggregate investment level
of the Letter of Intention will be determined and accepted by the Transfer
Agent at the point of plan establishment. The level and any reduction in
front-end sales charge will be based on actual plan participation and the
projected investments in Delaware Group funds that are offered with a
front-end sales charge, CDSC or Limited CDSC for a 13-month period. The
Transfer Agent reserves the right to adjust the signed Letter of Intention
based on this acceptance criteria. The 13-month period will begin on the date
this Letter of Intention is accepted by the Transfer Agent. If actual
investments exceed the anticipated level and equal an amount that would
qualify the plan for further discounts, any front-end sales charges will be
automatically adjusted. In the event this Letter of Intention is not fulfilled
within the 13-month period, the plan level will be adjusted (without
completing another Letter of Intention) and the employer will be billed for
the difference in front-end sales charges due, based on the plan's assets
under management at that time. Employers may also include the value (at
offering price at the level designated in their Letter of Intention) of all
their shares intended for purchase that are offered with a front-end sales
charge, CDSC or Limited CDSC of any class. Class B Shares and Class C Shares
of a Portfolio and other Delaware Group funds which offer corresponding
classes of shares may also be aggregated for this purpose.
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine
the total amount of any combination of Class A Shares, Class B Shares and/or
Class C Shares of the Portfolios, as well as shares of any other class of any
of the other Delaware Group funds (except shares of any Delaware Group fund
which do not carry a front-end sales charge, CDSC or
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Limited CDSC, other than shares of Delaware Group Premium Fund, Inc.
beneficially owned in connection with the ownership of variable insurance
products, unless they were acquired through an exchange from a Delaware Group
fund which carried a front-end sales charge, CDSC or Limited CDSC). In
addition, assets held by investment advisory clients of the Manager or its
affiliates in a stable value account may be combined with other Delaware Group
fund holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21;
or a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Portfolio,
as well as shares of any other class of any of the other Delaware Group funds
which offer such classes (except shares of any Delaware Group fund which do
not carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge,
CDSC or Limited CDSC). If, for example, any such purchaser has previously
purchased and still holds Class A Shares and/or shares of any other of the
classes described in the previous sentence with a value of $40,000 and
subsequently purchases $60,000 at offering price of additional shares of Class
A Shares, the charge applicable to the $60,000 purchase would currently be
3.75%. For the purpose of this calculation, the shares presently held shall be
valued at the public offering price that would have been in effect were the
shares purchased simultaneously with the current purchase. Investors should
refer to the table of sales charges for Class A Shares to determine the
applicability of the Right of Accumulation to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of a Portfolio (and of the Institutional
Classes holding shares which were acquired through an exchange from one of the
other mutual funds in the Delaware Group offered with a front-end sales
charge) who redeem such shares have one year from the date of redemption to
reinvest all or part of their redemption proceeds in Class A Shares of that
Portfolio or in Class A Shares of any of the other funds in the Delaware
Group, subject to applicable eligibility and minimum purchase requirements, in
states where shares of such other funds may be sold, at net asset value
without the payment of a front-end sales charge. This privilege does not
extend to Class A Shares where the redemption of the shares triggered the
payment of a Limited CDSC. Persons investing redemption proceeds from direct
investments in mutual funds in the Delaware Group offered without a front-end
sales charge will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at
the net asset value next determined after receipt of remittance. A redemption
and reinvestment could have income tax consequences. It is recommended that a
tax adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including
charges and expenses.
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Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Portfolios' shareholder servicing agent, about
the applicability of the Limited CDSC (see Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Fund Classes' Prospectuses) in connection with
the features described above.
Group Investment Plans
Group Investment Plans that are not eligible to purchase shares of
the Institutional Classes may also benefit from the reduced front-end sales
charges for investments in Class A Shares set forth in the table on page
43, based on total plan assets. If a company has more than one plan
investing in the Delaware Group of funds, then the total amount invested in
all plans would be used in determining the applicable front-end sales charge
reduction upon each purchase, both initial and subsequent, upon notification
to the Portfolio in which the investment is being made at the time of each
such purchase. Employees participating in such Group Investment Plans may also
combine the investments made in their plan account when determining the
applicable front-end sales charge on purchases to non-retirement Delaware
Group investment accounts if they so notify the Portfolio in connection with
each purchase. See Retirement Plans for the Fund Classes under Investment
Plans for information about Retirement Plans.
The Institutional Classes
The Institutional Class of each Portfolio is available for purchase
only by: (a) retirement plans introduced by persons not associated with
brokers or dealers that are primarily engaged in the retail securities
business and rollover individual retirement accounts from such plans; (b)
tax-exempt employee benefit plans of the Manager, or its affiliates and
securities dealer firms with a selling agreement with the Distributor; (c)
institutional advisory accounts of the Manager, or its affiliates and those
having client relationships with Delaware Investment Advisers, a division of
the Manager, or its affiliates and their corporate sponsors, as well as
subsidiaries and related employee benefit plans and rollover individual
retirement accounts from such institutional advisory accounts; (d) a bank,
trust company and similar financial institution investing for its own account
or for the account of its trust customers for whom such financial institution
is exercising investment discretion in purchasing shares of the Class, except
where the investment is part of a program that requires payment to the
financial institution of a Rule 12b-1 Plan fee; and (e) registered investment
advisers investing on behalf of clients that consist solely of institutions
and high net-worth individuals having at least $1,000,000 entrusted to the
adviser for investment purposes, but only if the adviser is not affiliated or
associated with a broker or dealer and derives compensation for its services
exclusively from its clients for such advisory services.
Shares of the Institutional Classes are available for purchase at net
asset value, without the imposition of a front-end or contingent deferred
sales charge and are not subject to Rule 12b-1 expenses.
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INVESTMENT PLANS
Reinvestment Plan/Open Account
Unless otherwise designated by shareholders in writing, dividends
from net investment income and distributions from realized securities profits,
if any, will be automatically reinvested in additional shares of the
respective Fund Classes in which an investor has an account (based on the net
asset value in effect on the reinvestment date) and will be credited to the
shareholder's account on that date. All dividends and distributions of the
Institutional Classes of each Portfolio are reinvested in the accounts of the
holders of such shares (based on the net asset value in effect on the
reinvestment date). A confirmation of each distribution from realized
securities profits, if any, will be mailed to shareholders in the first
quarter of the fiscal year.
Under the Reinvestment Plan/Open Account, shareholders may purchase
and add full and fractional shares to their plan accounts at any time either
through their investment dealers or by sending a check or money order to the
specific Portfolio and class in which shares are being purchased. Such
purchases, which must meet the minimum subsequent purchase requirements set
forth in the Prospectuses and this Part B, are made, for Class A Shares at the
public offering price, and for Class B Shares, Class C Shares and
Institutional Class shares at the net asset value, at the end of the day of
receipt. A reinvestment plan may be terminated at any time. This plan does not
assure a profit nor protect against depreciation in a declining market.
Reinvestment of Dividends in Other Delaware Group Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions
in any of the mutual funds in the Delaware Group, including the Portfolios, in
states where their shares may be sold. Such investments will be at net asset
value at the close of business on the reinvestment date without any front-end
sales charge or service fee. The shareholder must notify the Transfer Agent in
writing and must have established an account in the fund into which the
dividends and/or distributions are to be invested. Any reinvestment directed
to a fund in which the investor does not then have an account will be treated
like all other initial purchases of a fund's shares. Consequently, an investor
should obtain and read carefully the prospectus for the fund in which the
investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including
charges and expenses. See also Additional Methods of Adding to Your Investment
- - Dividend Reinvestment Plan under How to Buy Shares in the Prospectuses for
the Fund Classes.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the
Portfolios, provided an account has been established. Dividends from Class A
Shares may not be directed to Class B Shares or Class C Shares. Dividends from
Class B Shares may only be directed to other Class B Shares and dividends from
Class C Shares may only be directed to other Class C Shares.
Capital gains and/or dividend distributions to participants in the
following retirement plans are automatically reinvested into the same Delaware
Group fund in which their investments are held: SAR/SEP, SEP/IRA, SIMPLE IRA,
SIMPLE 401(k), Profit Sharing and Money Purchase Pension Plans, 401(k) Defined
Contribution Plans or 403(b)(7) or 457 Deferred Compensation Plans.
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Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for a Portfolio
to accept for investment in Class A, Class B or Class C Shares, through an
agent bank, preauthorized government or private recurring payments. This
method of investment assures the timely credit to the shareholder's account of
payments such as social security, veterans' pension or compensation benefits,
federal salaries, Railroad Retirement benefits, private payroll checks,
dividends, and disability or pension fund benefits. It also eliminates lost,
stolen and delayed checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and
Class C Shares may make automatic investments by authorizing, in advance,
monthly payments directly from their checking account for deposit into their
Portfolio account. This type of investment will be handled in either of the
following ways. (1) If the shareholder's bank is a member of the National
Automated Clearing House Association ("NACHA"), the amount of the investment
will be electronically deducted from his or her account by Electronic Fund
Transfer ("EFT"). The shareholder's checking account will reflect a debit each
month at a specified date although no check is required to initiate the
transaction. (2) If the shareholder's bank is not a member of NACHA,
deductions will be made by preauthorized checks, known as Depository Transfer
Checks. Should the shareholder's bank become a member of NACHA in the future,
his or her investments would be handled electronically through EFT.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) or 457 Deferred
Compensation Plans.
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take
advantage of either service must complete an authorization form. Either
service can be discontinued by the shareholder at any time without penalty by
giving written notice.
Payments to a Portfolio from the federal government or its agencies
on behalf of a shareholder may be credited to the shareholder's account after
such payments should have been terminated by reason of death or otherwise. Any
such payments are subject to reclamation by the federal government or its
agencies. Similarly, under certain circumstances, investments from private
sources may be subject to reclamation by the transmitting bank. In the event
of a reclamation, a Portfolio may liquidate sufficient shares from a
shareholder's account to reimburse the government or the private source. In
the event there are insufficient shares in the shareholder's account, the
shareholder is expected to reimburse the Portfolio.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Portfolio accounts. A Portfolio will
accept these investments, such as bank-by-phone, annuity payments and payroll
allotments, by mail directly from the third party. Investors should contact
their employers or financial institutions who in turn should contact the Trust
for proper instructions.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the Fund
Classes through regular liquidations of shares in their accounts in other
mutual funds in the Delaware Group. Shareholders of the Fund
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Classes may elect to invest in one or more of the other mutual funds in the
Delaware Group through the Wealth Builder Option. See Wealth Builder Option
and Redemption and Exchange in the Prospectuses for the Fund Classes.
Under this automatic exchange program, shareholders can authorize
regular monthly investments (minimum of $100 per fund) to be liquidated from
their account and invested automatically into other mutual funds in the
Delaware Group, subject to the conditions and limitations set forth in the
Fund Classes' Prospectuses. The investment will be made on the 20th day of
each month (or, if the fund selected is not open that day, the next business
day) at the public offering price or net asset value, as applicable, of the
fund selected on the date of investment. No investment will be made for any
month if the value of the shareholder's account is less than the amount
specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors
selecting this option should consider their financial ability to continue to
participate in the program through periods of low fund share prices. This
program involves automatic exchanges between two or more fund accounts and is
treated as a purchase of shares of the fund into which investments are made
through the program. See Exchange Privilege for a brief summary of the tax
consequences of exchanges. Shareholders can terminate their participation in
Wealth Builder at any time by written notice to the fund from which exchanges
are made.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) or 457 Deferred
Compensation Plans. This option also is not available to shareholders of the
Institutional Classes.
Delaware Group Asset Planner
To invest in Delaware Group funds using the Delaware Group Asset
Planner asset allocation service, you should complete a Delaware Group Asset
Planner Account Registration Form, which is available only from a financial
adviser or investment dealer. Effective September 1, 1997, the Delaware Group
Asset Planner Service is only available to financial advisers or investment
dealers who have previously used this service. The Delaware Group Asset
Planner service offers a choice of four predesigned asset allocation
strategies (each with a different risk/reward profile) in predetermined
percentages in Delaware Group funds. With the help of a financial adviser, you
may also design a customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service
is determined by the individual sales charges of the underlying funds and
their percentage allocation in the selected Strategy. Exchanges from existing
Delaware Group accounts into the Asset Planner service may be made at net
asset value under the circumstances described under Investing by Exchange in
the Prospectus. Also see Buying Class A Shares at Net Asset Value under
Classes of Shares. The minimum initial investment per Strategy is $2,000;
subsequent investments must be at least $100. Individual fund minimums do not
apply to investments made using the Asset Planner service. Class A, Class B
and Class C Shares are available through the Asset Planner service. Generally,
only shares within the same class may be used within the same Strategy.
However, Class A Shares of the Portfolio and of other funds in the Delaware
Group may be used in the same Strategy with consultant class shares that are
offered by certain other Delaware Group funds.
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An annual maintenance fee, currently $35 per Strategy, is due at the
time of initial investment and by September 30 of each subsequent year. The
fee, payable to Delaware Service Company, Inc. to defray extra costs
associated with administering the Asset Planner service, will be deducted
automatically from one of the funds within your Asset Planner account if not
paid by September 30. However, effective November 1, 1996, the annual
maintenance fee is waived until further notice. Investors who utilize the
Asset Planner for an IRA will continue to pay an annual IRA fee of $15 per
Social Security number.
Investors will receive a customized quarterly Strategy Report
summarizing all Delaware Group Asset Planner investment performance and
account activity during the prior period. Confirmation statements will be sent
following all transactions other than those involving a reinvestment of
distributions.
Certain shareholder services are not available to investors using the
Asset Planner service, due to its special design. These include Delaphone,
Checkwriting, Wealth Builder Option and Letter of Intention. Systematic
Withdrawal Plans are available after the account has been open for two years.
Retirement Plans for the Fund Classes
An investment in either Portfolio may be suitable for tax-deferred
retirement plans. Delaware Group offers a full spectrum of qualified and
non-qualified retirement plans , including the 401(k) deferred compensation
plan, Individual Retirement Account ("IRA"), and the new Roth IRA. See
Appendix A for additional information on IRAs.
The CDSC may be waived on certain redemptions of Class B Shares and
Class C Shares. See Waiver of Contingent Deferred Sales Charge - Class B and
Class C Shares under Redemption and Exchange in the Prospectuses for the Fund
Classes for a list of the instances in which the CDSC is waived.
Purchases of Class B Shares are subject to a maximum purchase
limitation of $250,000 for retirement plans. Purchases of Class C Shares must
be in an amount that is less than $1,000,000 for such plans. The maximum
purchase limitations apply only to the initial purchase of shares by the
retirement plan.
Minimum investment limitations generally applicable to other
investors do not apply to retirement plans, other than Individual Retirement
Accounts for which there is a minimum initial purchase of $250, and a minimum
subsequent purchase of $25, regardless of which class is selected. Retirement
plans may be subject to plan establishment fees, annual maintenance fees
and/or other administrative or trustee fees. Fees are based upon the number of
participants in the plan as well as the services selected. Additional
information about fees is included in retirement plan materials. Fees are
quoted upon request. Annual maintenance fees may be shared by Delaware
Management Trust Company, the Transfer Agent, other affiliates of the Manager
and others that provide services to such plans.
Certain shareholder investment services available to non-retirement
plan shareholders may not be available to retirement plan shareholders.
Certain retirement plans may qualify to purchase shares of the Institutional
Classes. See The Institutional Classes, above. For additional information on
any of the plans and Delaware's retirement services, call the Shareholder
Service Center telephone number.
It is advisable for an investor considering any one of the retirement
plans described below to consult with an attorney, accountant or a qualified
retirement plan consultant. For further details, including applications for
any of these plans, contact your investment dealer or the Distributor.
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Taxable distributions from the retirement plans may be subject to
withholding.
Please contact your investment dealer or the Distributor for the
special application forms required for the plans .
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Portfolio in which shares are being purchased
after receipt of the order by the Portfolio or its agent. Orders for purchases
of Class B Shares, Class C Shares and the Institutional Classes are effected
at the net asset value per share next calculated after receipt of the order by
the Portfolio in which shares are being purchased or its agent. Selling
dealers have the responsibility of transmitting orders promptly.
The offering price for Class A Shares consists of the net asset value
per share plus any applicable sales charges. Offering price and net asset
value are computed as of the close of regular trading on the New York Stock
Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is open.
The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year except for New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas. When the New York Stock Exchange is closed,
the Portfolios will generally be closed, pricing calculations will not be made
and purchase and redemption orders will not be processed.
An example showing how to calculate the net asset value per share
and, in the case of Class A Shares, the offering price per share, will be
included in each Portfolio's financial statements which will be incorporated
by reference into Part B.
Each Portfolio's net asset value per share is computed by adding the
value of all the securities and other assets in the portfolio, deducting any
liabilities and dividing by the number of shares outstanding. Expenses and
fees are accrued daily. In determining a Portfolio's total net assets,
portfolio securities listed or traded on a national securities exchange,
except for bonds, are valued at the last sale price on the exchange upon which
such securities are primarily traded. Securities not traded on a particular
day, over-the-counter securities and government and agency securities are
valued at the mean value between bid and asked prices. Money market
instruments having a maturity of less than 60 days are valued at amortized
cost. Debt securities (other than short-term obligations) are valued on the
basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Foreign currencies and
the prices of foreign securities denominated in foreign currencies are
translated to U.S. Dollars based on rates in effect as of 12 p.m., Eastern
time. Use of a pricing service has been approved by the Board of Trustees.
Prices provided by a pricing service take into account appropriate factors
such as institutional trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. If no quotations are available, all other securities and assets are
valued at fair value as determined in good faith and in a method approved by
the Board of Trustees.
The net asset values of all outstanding shares of each class of a
Portfolio will be computed on a pro-rata basis for each outstanding share
based on the proportionate participation in that Portfolio represented by the
value of shares of that class. All income earned and expenses incurred by a
Portfolio will be borne on a pro-rata basis by each outstanding share of a
class, based on each class' percentage in that Portfolio represented by the
value of shares of such classes, except that the Institutional Class will not
incur any of the expenses under the Trust's 12b-1 Plans and the Class A, Class
B and Class C Shares of each Portfolio alone will bear the 12b-1 Plan expenses
payable under their respective Plans. Due to the specific distribution
expenses and other costs that will be allocable to each class, the NAV of each
class of a Portfolio will vary.
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REDEMPTION AND REPURCHASE
Any shareholder may require a Portfolio to redeem shares by sending a
written request, signed by the record owner or owners exactly as the shares
are registered, to the Portfolio at 1818 Market Street, Philadelphia, PA
19103. In addition, certain expedited redemption methods described below are
available when stock certificates have not been issued. Certificates are
issued for Class A Shares and Institutional Class shares only if a shareholder
specifically requests them. Certificates are not issued for Class B Shares or
Class C Shares. If stock certificates have been issued for shares being
redeemed, they must accompany the written request. For redemptions of $50,000
or less paid to the shareholder at the address of record, the request must be
signed by all owners of the shares or the investment dealer of record, but a
signature guarantee is not required. When the redemption is for more than
$50,000, or if payment is made to someone else or to another address,
signatures of all record owners are required and a signature guarantee may be
required. Each signature guarantee must be supplied by an eligible guarantor
institution. Each Portfolio reserves the right to reject a signature guarantee
supplied by an eligible institution based on its creditworthiness. The
Portfolios may request further documentation from corporations, retirement
plans, executors, administrators, trustees or guardians.
In addition to redemption of Portfolio shares, the Distributor,
acting as agent of the Portfolios, offers to repurchase Portfolio shares from
broker/dealers acting on behalf of shareholders. The redemption or repurchase
price, which may be more or less than the shareholder's cost, is the net asset
value per share next determined after receipt of the request in good order by
the respective Portfolio or its agent, subject to any applicable CDSC or
Limited CDSC. This is computed and effective at the time the offering price
and net asset value are determined. See Determining Offering Price and Net
Asset Value. The Portfolios and the Distributor end their business days at 5
p.m., Eastern time. This offer is discretionary and may be completely
withdrawn without further notice by the Distributor.
Orders for the repurchase of Portfolio shares which are submitted to
the Distributor prior to the close of its business day will be executed at the
net asset value per share computed that day (subject to the applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then
settled as an ordinary transaction with the broker/dealer (who may make a
charge to the shareholder for this service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value
may result in the imposition of a Limited CDSC. See Contingent Deferred Sales
Charge for Certain Redemptions of Class A Shares Purchased at Net Asset Value
under Redemption and Exchange in the Prospectuses for the Fund Classes. Class
B Shares are subject to a CDSC of: (i) 4% if shares are redeemed within two
years of purchase; (ii) 3% if shares are redeemed during the third or fourth
year following purchase; (iii) 2% if shares are redeemed during the fifth year
following purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. Class C Shares are subject to a CDSC of 1% if shares are
redeemed within 12 months following purchase. See Contingent Deferred Sales
Charge - Class B Shares and Class C Shares under Classes of Shares in the
Prospectuses for the Fund Classes. Except for the applicable CDSC or Limited
CDSC and, with respect to the expedited payment by wire described below for
which, in the case of the Fund Classes, there is currently a $7.50 bank wiring
cost, neither the Portfolios nor the Portfolios' Distributor charges a fee for
redemptions or repurchases, but such fees could be charged at any time in the
future.
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Payment for shares redeemed will ordinarily be mailed the next
business day, but in no case later than seven days, after receipt of a
redemption request in good order; provided, however, that each commitment to
mail or wire redemption proceeds by a certain time, as described below, is
modified by the qualifications described in the next paragraph.
Each Portfolio will process written or telephone redemption requests
to the extent that the purchase orders for the shares being redeemed have
already settled. A Portfolio will honor redemption requests as to shares for
which a check was tendered as payment, but a Portfolio will not mail or wire
the proceeds until it is reasonably satisfied that the check has cleared. This
potential delay can be avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which
is subsequently returned unpaid for insufficient funds or for any other
reason, the Portfolio involved will automatically redeem from the
shareholder's account the shares purchased by the check plus any dividends
earned thereon. Shareholders may be responsible for any losses to the
Portfolio or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result
of which disposal by a Portfolio of securities owned by it is not reasonably
practical, or it is not reasonably practical for a Portfolio fairly to value
its assets, or in the event that the SEC has provided for such suspension for
the protection of shareholders, a Portfolio may postpone payment or suspend
the right of redemption or repurchase. In such case, the shareholder may
withdraw the request for redemption or leave it standing as a request for
redemption at the net asset value next determined after the suspension has
been terminated.
Payment for shares redeemed or repurchased may be made either in cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid
or distributed in kind would be valued as described in Determining Offering
Price and Net Asset Value. Subsequent sale by an investor receiving a
distribution in kind could result in the payment of brokerage commissions.
However, the Trust has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 pursuant to which each Portfolio is obligated
to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net
asset value of such Portfolio during any 90-day period for any one
shareholder.
The value of a Portfolio's investments is subject to changing market
prices. Thus, a shareholder reselling shares to a Portfolio may sustain either
a gain or loss, depending upon the price paid and the price received for such
shares.
Small Accounts
Before a Portfolio involuntarily redeems shares from an account that,
under the circumstances listed in the relevant Prospectus, has remained below
the minimum amounts required by the Portfolio's Prospectuses and sends the
proceeds to the shareholder, the shareholder will be notified in writing that
the value of the shares in the account is less than the minimum required and
will be allowed 60 days from the date of notice to make an additional
investment to meet the required minimum. See The Conditions of Your Purchase
under How to Buy Shares in the Prospectuses. Any redemption in an inactive
account established with a minimum investment
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may trigger mandatory redemption. No CDSC or Limited CDSC will apply to the
redemptions described in this paragraph.
* * *
Each Portfolio has made available certain redemption privileges, as
described below. The Portfolios reserve the right to suspend or terminate
these expedited payment procedures upon 60 days' written notice to
shareholders.
Expedited Telephone Redemptions
Shareholders of the Fund Classes or their investment dealers of
record wishing to redeem any amount of shares of $50,000 or less for which
certificates have not been issued may call the Shareholder Service Center at
800-523-1918 or, in the case of shareholders of the Institutional Classes,
their Client Services Representative at 800-828-5052 prior to the time the
offering price and net asset value are determined, as noted above, and have
the proceeds mailed to them at the address of record. Checks payable to the
shareholder(s) of record will normally be mailed the next business day, but no
later than seven days, after the receipt of the redemption request. This
option is only available to individual, joint and individual fiduciary-type
accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the relevant Portfolio before the request is
received. Payment will be made by wire or check to the bank account designated
on the authorization form as follows:
1. Payment by Wire: Request that Federal Funds be wired to the bank account
designated on the authorization form. Redemption proceeds will normally be
wired on the next business day following receipt of the redemption request.
There is a $7.50 wiring fee (subject to change) charged by CoreStates Bank,
N.A. which will be deducted from the withdrawal proceeds each time the
shareholder requests a redemption from Class A Shares, Class B Shares and
Class C Shares. If the proceeds are wired to the shareholder's account at a
bank which is not a member of the Federal Reserve System, there could be a
delay in the crediting of the funds to the shareholder's bank account.
2. Payment by Check: Request a check be mailed to the bank account designated
on the authorization form. Redemption proceeds will normally be mailed the
next business day, but no later than seven days, from the date of the
telephone request. This procedure will take longer than the Payment by Wire
option (1 above) because of the extra time necessary for the mailing and
clearing of the check after the bank receives it.
Redemption Requirements: In order to change the name of the bank and
the account number it will be necessary to send a written request to the
relevant Portfolio and a signature guarantee may be required. Each signature
guarantee must be supplied by an eligible guarantor institution. The
Portfolios reserve the right to reject a signature guarantee supplied by an
eligible institution based on its creditworthiness.
To reduce the shareholder's risk of attempted fraudulent use of the
telephone redemption procedure, payment will be made only to the bank account
designated on the authorization form.
If expedited payment under these procedures could adversely affect a
Portfolio, the Portfolio may take up to seven days to pay the shareholder.
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<PAGE>
Neither the Portfolios nor the Portfolios' Transfer Agent is
responsible for any shareholder loss incurred in acting upon written or
telephone instructions for redemption or exchange of Portfolio shares which
are reasonably believed to be genuine. With respect to such telephone
transactions, each Portfolio will follow reasonable procedures to confirm that
instructions communicated by telephone are genuine (including verification of
a form of personal identification) as, if it does not, such Portfolio or the
Transfer Agent may be liable for any losses due to unauthorized or fraudulent
transactions. Telephone instructions received by shareholders of the Fund
Classes are generally tape recorded. A written confirmation will be provided
for all purchase, exchange and redemption transactions initiated by telephone.
Systematic Withdrawal Plans
Shareholders of Class A, Class B and Class C Shares of who own or
purchase $5,000 or more of shares at the offering price, or net asset value,
as applicable, for which certificates have not been issued may establish a
Systematic Withdrawal Plan for monthly withdrawals of $25 or more, or
quarterly withdrawals of $75 or more, although the Portfolios do not recommend
any specific amount of withdrawal. This $5,000 minimum does not apply for a
Portfolio's prototype retirement plans. Shares purchased with the initial
investment and through reinvestment of cash dividends and realized securities
profits distributions will be credited to the shareholder's account and
sufficient full and fractional shares will be redeemed at the net asset value
calculated on the third business day preceding the mailing date.
Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the class at net asset value. This plan is not
recommended for all investors and should be started only after careful
consideration of its operation and effect upon the investor's savings and
investment program. To the extent that withdrawal payments from the plan
exceed any dividends and/or realized securities profits distributions paid on
shares held under the plan, the withdrawal payments will represent a return of
capital and the share balance may, in time, be depleted, particularly in a
declining market.
The sale of shares for withdrawal payments constitutes a taxable
event and a shareholder may incur a capital gain or loss for federal income
tax purposes. This gain or loss may be long-term or short-term depending on
the holding period for the specific shares liquidated. Premature withdrawals
from retirement plans may have adverse tax consequences.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of
Class A Shares through a periodic investment program in a fund managed by the
Manager must be terminated before a Systematic Withdrawal Plan with respect to
such shares can take effect, except if the shareholder is a participant in one
of our retirement plans or is investing in Delaware Group funds which do not
carry a sales charge. Redemptions of Class A Shares pursuant to a Systematic
Withdrawal Plan may be subject to a Limited CDSC if the purchase was made at
net asset value and a dealer's commission has been paid on that purchase.
Redemptions of Class B Shares or Class C Shares pursuant to a Systematic
Withdrawal Plan may be subject to a CDSC, unless the annual amount selected to
be withdrawn is less than 12% of the account balance on the date that the
Systematic Withdrawal Plan was established. See Waiver of Contingent Deferred
Sales Charge - Class B and Class C Shares and Waiver of Limited Contingent
Deferred Sales Charge - Class A Shares under Redemption and Exchange in the
Prospectuses for the Fund Classes. Shareholders should consult their financial
advisers to determine whether a Systematic Withdrawal Plan would be suitable
for them.
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<PAGE>
An investor wishing to start a Systematic Withdrawal Plan must
complete an authorization form. If the recipient of Systematic Withdrawal Plan
payments is other than the registered shareholder, the shareholder's signature
on this authorization must be guaranteed. Each signature guarantee must be
supplied by an eligible guarantor institution. The Portfolios reserve the
right to reject a signature guarantee supplied by an eligible institution
based on its creditworthiness. This plan may be terminated by the shareholder
or the Transfer Agent at any time by giving written notice.
The Systematic Withdrawal Plan is not available for the Institutional
Classes.
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<PAGE>
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
The Income and Balanced Portfolios will normally make payments from
net investment income, if any, on a quarterly basis. The Growth Portfolio will
normally make payments from net investment income, if any, on a annual basis.
Payments from net realized securities profits of a Portfolio, if any, will
normally be distributed annually in the quarter following the close of the
fiscal year.
Each Class of shares of a Portfolio will share proportionately in the
investment income and expenses of that Portfolio, except that Class A Shares,
Class B Shares and Class C Shares alone will incur distribution fees under
their respective 12b-1 Plans.
Dividends are automatically reinvested in additional shares of the
same Class of the respective Portfolio at net asset value, unless, in the case
of shareholders of the Fund Classes, an election to receive dividends in cash
has been made. Payment by check of cash dividends will ordinarily be mailed
within three business days after the payable date. Dividend payments of $1.00
or less will be automatically reinvested, notwithstanding a shareholder's
election to receive dividends in cash. If such a shareholder's dividends
increase to greater than $1.00, the shareholder would have to file a new
election in order to begin receiving dividends in cash again. If a shareholder
redeems an entire account, all dividends accrued to the time of the withdrawal
will be paid by separate check at the end of that particular monthly dividend
period, consistent with the payment and mailing schedule described above. Any
check in payment of dividends or other distributions which cannot be delivered
by the United States Post Office or which remains uncashed for a period of
more than one year may be reinvested in the shareholder's account at the
then-current net asset value and the dividend option may be changed from cash
to reinvest. A Portfolio may deduct from a shareholder's account the costs of
the Portfolio's effort to locate a shareholder if a shareholder's mail is
returned by the United States Post Office or the Portfolio is otherwise unable
to locate the shareholder or verify the shareholder's mailing address. These
costs may include a percentage of the account when a search company charges a
percentage fee in exchange for their location services.
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TAXES
Dividends from investment income and short-term capital gains
distributions are treated by shareholders as ordinary income for federal
income tax purposes. Distributions of long-term capital gains, if any, are
taxable to shareholders as long-term capital gains, regardless of the length
of time an investor has held such shares, and these gains are currently taxed
at long-term capital gain rates described below. The tax status of dividends
and distributions paid to shareholders will not be affected by whether they
are paid in cash or in additional shares. Persons not subject to tax will not
be required to pay taxes on distributions. Each Portfolio is treated as a
single tax entity and capital gains for each Portfolio will be calculated
separately.
Under the Taxpayer Relief act of 1997 (the "1997 Act"), a Portfolio
is required to track its sales of portfolio securities and to report its
capital gain distributions to you according to the following categories of
holding periods:
"Pre-Act long-term capital gains": securities sold by a Portfolio
before May 7, 1997, that were held for more than 12 months. These
gains will be taxable to individual investors at a maximum rate of
28%.
"Mid-term capital gains" or "28 percent rate gain": securities sold
by a Portfolio after July 28, 1997 that were held more than one year
but not more than 18 months. These gains will be taxable to
individual investors at a maximum rate of 28%.
"1997 Act long-term capital gains" or "20 percent rate gain":
securities sold between May 7, 1997 and July 28, 1997 that were
held for more than 12 months, and securities sold by the Portfolio
after July 28, 1997 that were held for more than 18 months.
These gains will be taxable to individual investors at a maximum rate
of 20% for investors in the 28% or higher federal income tax
brackets, and at a maximum rate of 10% for investors in the 15%
federal income tax bracket.
"Qualified 5-year gains": For individuals in the 15% bracket,
qualified 5-year gains are net gains on securities held for more than
5 years which are sold after December 31, 2000. For individual who
are subject to tax at higher rate brackets, qualified 5-year gains
are net gains on securities which are purchased after December 31,
2000 and are held for more than 5 years. Taxpayers subject to tax at
a higher rate brackets may also make an election for shares held on
January 1, 2001 to recognize gain on their shares in order to qualify
such shares as qualified 5-year property. These gains will be taxable
to individual investors at a maximum rate of 18% for investors in the
28% or higher federal income tax brackets, and at a maximum rate of
8% for investors in the 15% federal income tax bracket.
A portion of each Portfolio's dividends may qualify for the
dividends-received deduction for corporations provided in the federal income
tax law. The portion of dividends paid by a Portfolio that so qualifies will
be designated each year in a notice mailed to a Portfolio's shareholders,
and cannot exceed the gross amount of dividends received by a Portfolio from
domestic (U.S.) corporations that would have qualified for the
dividends-received deduction in the hands of a Portfolio if the Portfolio
was a regular
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<PAGE>
corporation. The availability of the dividends-received deduction is subject
to certain holding period and debt financing restrictions imposed under the
Code on the corporation claiming the deduction. Under the 1997 Act, the amount
that a Portfolio may designate as eligible for the dividends-received
deduction will be reduced or eliminated if the shares on which the dividends
earned by a Portfolio were debt-financed or held by a Portfolio for less than
a 46-day period during a 90-day period beginning 45 days before the
ex-dividend date and ending 45 days after the ex-dividend date. Similarly, if
your Portfolio shares are debt-financed or held by you for less than a 46-day
period during a 90-day period beginning 45 days before the ex-dividend date
and ending 45 days after the ex-dividend date, then the dividends-received
deduction for Portfolio dividends on your shares may also be reduced or
eliminated. Even if designated as dividends eligible for the
dividends-received deduction, all dividends (including any deducted portion)
must be included in your alternative minimum taxable income calculation.
Shareholders will be notified annually by the Trust as to the federal
income tax status of dividends and distributions paid by their Portfolio.
In addition to the federal taxes described above, shareholders may or
may not be subject to various state and local taxes . Because shareholders'
state and local taxes may be different than the federal taxes described above,
shareholders should consult their own tax advisers.
See also Other Tax Requirements under Accounting and Tax Issues in
this Part B.
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ASSET ALLOCATION AGREEMENTS
The Manager, located at One Commerce Square, Philadelphia, PA 19103,
furnishes investment management services to the Portfolios, subject to the
supervision and direction of the Trust's Board of Trustees.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On October 31, 1997, the Manager and its
affiliates within the Delaware Group, including Delaware International
Advisers Ltd., were managing in the aggregate more than $38 billion in
assets in the various institutional or separately managed (approximately
$22,496,609,000) and investment company (approximately $16,012,252,000)
accounts.
The Asset Allocation Agreement for each Portfolio is dated December 18,
1997 and was approved by the initial shareholder on December 31, 1997. Each
Agreement has an initial term of two years and may be renewed each year only so
long as such renewal and continuance are specifically approved at least annually
by the Board of Trustees or by vote of a majority of the outstanding voting
securities of the Portfolio to which the Agreement relates, and only if the
terms and the renewal thereof have been approved by the vote of a majority of
the trustees of the Trust who are not parties thereto or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. Each Agreement is terminable without penalty on 60 days' notice
by the trustees of the Trust or by the Manager. Each Agreement will terminate
automatically in the event of its assignment.
The Manager is paid an annual Asset Allocation Fee equal to 0.25%
(currently waived to 0.10%) of average daily net assets of each of the
Portfolios.
Except for those expenses borne by the Manager under the Asset
Allocation Agreements and the Distributor under the Distribution Agreements,
the Portfolios are responsible for all of their own expenses. Among others,
these include a Portfolio's proportionate share of rent and certain other
administrative expenses; the investment management fees; transfer and dividend
disbursing agent fees and costs; custodian expenses; federal and state
securities registration fees; proxy costs; and the costs of preparing
prospectuses and reports sent to shareholders. The ratios for Class A Shares,
Class B Shares and Class C Shares reflect the impact of their respective 12b-1
Plans.
The Manager has elected voluntarily to waive that portion, if any, of
the annual Asset Allocation Fees payable by the Portfolios and to pay the
Portfolios' expenses to the extent necessary to ensure that the "Total
Operating Expenses" of the Portfolios do not exceed 1.20% (exclusive of taxes,
interest, brokerage commissions, extraordinary expenses and applicable 12b-1
expenses) during the commencement of the public offering of the Portfolios
through June 30, 1998.
Distribution and Service
The Distributor, Delaware Distributors, L.P. (which formerly
conducted business as Delaware Distributors, Inc.), located at 1818 Market
Street, Philadelphia, PA 19103, serves as the national distributor of each
Portfolio's shares under separate Distribution Agreements. The Distributor is
an affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by each Portfolio on behalf of its Class A
Shares, Class B Shares and Class C Shares under the 12b-1 Plan for each such
class.
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<PAGE>
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves
as the Portfolios' shareholder servicing, dividend disbursing and transfer
agent pursuant to a Shareholders Services Agreement. The Transfer Agent also
provides accounting services to the Portfolios pursuant to the terms of a
separate Fund Accounting Agreement. The Transfer Agent is also an indirect,
wholly owned subsidiary of Delaware Management Holdings, Inc.
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OFFICERS AND TRUSTEES
The business and affairs of the Trust are managed under the direction
of its Board of Trustees.
DMH Corp., Delvoy, Inc., Delaware Management Company, Inc., Delaware
Distributors, L.P., Delaware Distributors, Inc., Delaware Service Company,
Inc., Delaware Management Trust Company, Delaware International Holdings Ltd.,
Founders Holdings, Inc., Delaware International Advisers Ltd., Delaware
Capital Management, Inc. and Delaware Investment & Retirement Services, Inc.
are direct or indirect, wholly owned subsidiaries of Delaware Management
Holdings, Inc. ("DMH"). On April 3, 1995, a merger between DMH and a wholly
owned subsidiary of Lincoln National Corporation ("Lincoln National") was
completed. DMH and the Manager are now indirect, wholly owned subsidiaries,
and subject to the ultimate control, of Lincoln National. Lincoln National,
with headquarters in Fort Wayne, Indiana, is a diversified organization with
operations in many aspects of the financial services industry, including
insurance and investment management.
Certain officers and trustees of the Trust hold identical positions
in each of the other funds in the Delaware Group. Trustees and principal
officers of the Trust are noted below along with their ages and their business
experience for the past five years. Unless otherwise noted, the address of
each officer and trustee is One Commerce Square, Philadelphia, PA 19103.
*Wayne A. Stork (60)
Chairman and Trustee and/or Director of the Trust and each of the
other 33 investment companies in the Delaware Group, Delaware
Management Holdings, Inc. and Delaware Capital Management, Inc.
Chairman, President, Chief Executive Officer and Director of DMH
Corp., Delaware Distributors, Inc. and Founders Holdings, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd. and Delaware International
Holdings Ltd.
Chairman of Delaware Distributors, L.P.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
Chief Executive Officer of Delvoy, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware organization.
- --------------------
*Trustee affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
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<PAGE>
*Jeffrey J. Nick (44)
President, Chief Executive Officer, Trustee and/or Director of the
Trust and each of the 33 other investment companies in the
Delaware Group.
President, Chief Executive Officer and Director of Delaware Management
Holdings, Inc.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc.
President of Lincoln Funds Corporation.
From 1992 to 1996, Mr. Nick was Managing Director of Lincoln
National UK plc and from 1989 to 1992, he was Senior Vice
President responsible for corporate planning and
development for Lincoln National Corporation.
Richard G. Unruh, Jr. (58)
Executive Vice President of the Trust, each of the other 33
investment companies in the Delaware Group, Delaware
Management Holdings, Inc. and Delaware Capital Management,
Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various
executive capacities at different times within the Delaware
organization.
Paul E. Suckow (50)
Executive Vice President/Chief Investment Officer, Fixed Income of
the Trust, each of the other 33 investment companies in the
Delaware Group, Delaware Management Company, Inc. and
Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985
to 1992. Prior to that, Mr. Suckow was a fixed-income
portfolio manager for the Delaware Group.
Walter P. Babich (70)
Trustee and/or Director of the Trust and each of the other 33
investment companies in the Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton
and from 1988 to 1991, he was a partner of I&L Investors.
- --------------------
*Trustee affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
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<PAGE>
Anthony D. Knerr (59)
Trustee and/or Director of the Trust and each of the other 33
investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance and
Treasurer of Columbia University, New York. From 1987 to 1989, he
was also a lecturer in English at the University. In addition,
Mr. Knerr was Chairman of The Publishing Group, Inc., New York,
from 1988 to 1990. Mr. Knerr founded The Publishing Group, Inc.
in 1988.
Ann R. Leven (57)
Trustee and/or Director of the Trust and each of the other 33
investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal
Officer of the Smithsonian Institution, Washington, DC, and from
1975 to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (77)
Trustee and/or Director of the Trust and each of the other 33
investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Thomas F. Madison (61)
Trustee and/or Director of the Trust and each of the other 33
investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996.
From February to September 1994, Mr. Madison served as Vice
Chairman--Office of the CEO of The Minnesota Mutual Life Insurance
Company and from 1988 to 1993, he was President of U.S. WEST
Communications--Markets.
Charles E. Peck (72)
Trustee and/or Director of the Trust and each of the other 32
investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive
Officer of The Ryland Group, Inc., Columbia, MD .
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*David K. Downes (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of the Trust and of each of the other 33 investment
companies in the Delaware Group, Delaware Management Holdings,
Inc, Founders CBO Corporation, Delaware Capital Management,
Inc. and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc.,
DMH Corp., Delaware Distributors, Inc., Founders
Holdings, Inc. and Delvoy, Inc.
President/Chief Executive Officer/Chief Financial Officer and Director
Company, Inc.
President/Chief Operating Officer/Chief Financial Officer and Director
of Delaware International of Delaware Service Holdings, Inc.
Vice President of Lincoln Funds Corporation.
Chairman, Chief Executive Officer and Director of Delaware Investment
& Retirement Services, Inc.
Chairman and Director of Delaware Management Trust Company .
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was
Chief Administrative Officer, Chief Financial Officer and
Treasurer of Equitable Capital Management Corporation, New
York, from December 1985 through August 1992, Executive Vice
President from December 1985 through March 1992, and Vice
Chairman from March 1992 through August 1992.
*George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of the Trust and
of each of the other 33 investment companies in the Delaware
Group, Delaware Distributors, L.P. and Delaware
Management Holdings, Inc.
Senior Vice President, Secretary, General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc. , Delaware Capital Management, Inc. and Delvoy, Inc.
Executive Vice President, Secretary, General Counsel and Director of
Delaware Management Trust Company.
Senior Vice President and Director of Delaware International
Holdings Ltd.
Director of Delaware International Advisers Ltd.
Secretary of Lincoln Funds Corporation.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
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Joseph H. Hastings (48)
Senior Vice President/Corporate Controller of the Trust, each
of the other 33 investment companies in the Delaware Group
and Founders Holdings, Inc.
Senior Vice President/Corporate Controller/Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc. and Delaware International Holdings
Ltd.
Senior Vice President/Controller and Treasurer of Delvoy, Inc.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/Assistant Treasurer of Founders CBO Corporation.
Treasurer of Lincoln Funds Corporation.
1818 Market Street, Philadelphia, PA 19103.
Before joining the Delaware Group in 1992, Mr. Hastings was Chief
Financial Officer for Prudential Residential Services, L.P.,
New York, NY from 1989 to 1992. Prior to that, Mr. Hastings
served as Controller and Treasurer for Fine Homes
International, L.P., Stamford, CT from 1987 to 1989.
Michael P. Bishof (35)
Senior Vice President/Treasurer of the Trust, each of the other 33
investment companies in the Delaware Group, Delaware Distributors, Inc.
and Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management
Company, Inc. and Delaware Service Company, Inc.
Senior Vice President and Treasurer/Manager , Investment Accounting
of Delaware Distributors, L.P.
Senior Vice President and Manager of Investment Accounting of Delaware
International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995,
a Vice President for CS First Boston Investment Management,
New York, NY from 1993 to 1994 and an Assistant Vice
President for Equitable Capital Management Corporation, New
York, NY from 1987 to 1993.
Paul J. Dokas (38)
Vice President/Portfolio Manager of the Trust.
Before joining the Delaware Group in 1997, Mr. Dokas was a Director
of Trust Investments for Bell Atlantic Corporation in Philadelphia,
where he held various positions from 1985
to 1997.
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The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation expected to be
received from the Trust during its fiscal year and the total compensation
expected to be received from all Delaware Group funds during the Trust's
fiscal year and an estimate of annual benefits to be received upon retirement
under the Delaware Group Retirement Plan for Directors/Trustees as of
December 31, 1997.
<TABLE>
<CAPTION>
Pension or Total
Aggregate Retirement Estimated Compensation
Compensation Benefits Annual from all 34
expected to be Accrued Benefits Delaware
received from as Part Upon Group Investment
the Trust of the Trust Retirement Companies
Name
<S> <C> <C> <C> <C>
W. Thacher Longstreth $1,174 None $38,500 $60,000
Ann R. Leven $1,176 None $38,500 $66,000
Walter P. Babich $1,175 None $38,500 $65,000
Anthony D. Knerr $1,175 None $38,500 $65,000
Charles E. Peck $1,174 None $38,500 $60,000
Thomas F. Madison $1,174 None $38,500 $60,000
</TABLE>
* Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director who, at the time of his or
her retirement from the Board, has attained the age of 70 and served on the
Board for at least five continuous years, is entitled to receive payments
from each fund in the Delaware Group for a period equal to the lesser of
the number of years that such person served as a director or the remainder
of such person's life. The amount of such payments will be equal, on an
annual basis, to the amount of the annual retainer that is paid to
directors of each fund at the time of such person's retirement. If an
eligible director retired as of December 31, 1997, he or she would be =
entitled to annual payments totaling $38,500, in the aggregate, from all of
the funds in the Delaware Group, based on the number of funds in the
Delaware Group as of that date.
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EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of the Classes and
for shareholders of classes of other funds in the Delaware Group are set forth
in the relevant prospectuses for such classes. The following supplements that
information. The Funds may modify, terminate or suspend the exchange privilege
upon 60 days' notice to shareholders.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and
carefully read that fund's prospectus before buying shares in an exchange. The
prospectus contains more complete information about the fund, including
charges and expenses. A shareholder requesting an exchange will be sent a
current prospectus and an authorization form for any of the other mutual funds
in the Delaware Group. Exchange instructions must be signed by the record
owner(s) exactly as the shares are registered.
An exchange constitutes, for tax purposes, the sale of one fund and
the purchase of another. The sale may involve either a capital gain or loss to
the shareholder for federal income tax purposes.
In addition, investment advisers and dealers may make exchanges
between funds in the Delaware Group on behalf of their clients by telephone or
other expedited means. This service may be discontinued or revised at any time
by the Transfer Agent. Such exchange requests may be rejected if it is
determined that a particular request or the total requests at any time could
have an adverse effect on any of the funds. Requests for expedited exchanges
may be submitted with a properly completed exchange authorization form, as
described above.
Telephone Exchange Privilege
Shareholders owning shares for which certificates have not been
issued or their investment dealers of record may exchange shares by telephone
for shares in other mutual funds in the Delaware Group. This service is
automatically provided unless the relevant Portfolio receives written notice
from the shareholder to the contrary.
Shareholders or their investment dealers of record may contact the
Shareholder Service Center at 800-523-1918 or, in the case of shareholders of
the Institutional Classes, their Client Services Representative at
800-828-5052, to effect an exchange. The shareholder's current Portfolio
account number must be identified, as well as the registration of the account,
the share or dollar amount to be exchanged and the fund into which the
exchange is to be made. Requests received on any day after the time the
offering price and net asset value are determined will be processed the
following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent or, as relevant, your Client Services
Representative.) Certain funds are not available for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of
the funds in the Delaware Group. Telephone exchanges may be subject to
limitations as to amounts or frequency. The Transfer Agent and the Portfolios
reserve the right to record exchange instructions received by telephone and to
reject exchange requests at any time in the future.
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As described in the Portfolios' Prospectuses, neither the Portfolios
nor the Transfer Agent is responsible for any shareholder loss incurred in
acting upon written or telephone instructions for redemption or exchange of
Portfolio shares which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing
services ("Timing Firms") to purchase or redeem shares based on changing
economic and market conditions ("Timing Accounts"), each Portfolio will refuse
any new timing arrangements, as well as any new purchases (as opposed to
exchanges) in Delaware Group funds from Timing Firms. Each Portfolio reserves
the right to temporarily or permanently terminate the exchange privilege or
reject any specific purchase order for any person whose transactions seem to
follow a timing pattern who: (i) makes an exchange request out of the
Portfolio within two weeks of an earlier exchange request out of the
Portfolio, or (ii) makes more than two exchanges out of the Portfolio per
calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1/4 of 1% of the Portfolio's net assets. Accounts under
common ownership or control, including accounts administered so as to redeem
or purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Group funds: (1)
Decatur Income Fund, (2) Decatur Total Return Fund, (3) Delaware Fund, (4)
Limited-Term Government Fund, (5) Tax-Free USA Fund, (6) Delaware Cash
Reserve, (7) Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other
Delaware Group funds are available for timed exchanges. Assets redeemed or
exchanged out of Timing Accounts in Delaware Group funds not listed above may
not be reinvested back into that Timing Account. Each Portfolio reserves the
right to apply these same restrictions to the account(s) of any person whose
transactions seem to follow a timing pattern (as described above).
Each Portfolio also reserves the right to refuse the purchase side of
an exchange request by any Timing Account, person, or group if, in the
Manager's judgment, the Portfolio would be unable to invest effectively in
accordance with its investment objectives and policies, or would otherwise
potentially be adversely affected. A shareholder's purchase exchanges may be
restricted or refused if a Portfolio receives or anticipates simultaneous
orders affecting significant portions of the Portfolio's assets. In
particular, a pattern of exchanges that coincide with a "market timing"
strategy may be disruptive to a Portfolio and therefore may be refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
* * *
Following is a summary of the investment objectives of the other
Delaware Group funds:
Delaware Fund seeks long-term growth by a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that
are believed to demonstrate potential for income and capital growth. Devon
Fund seeks current income and capital appreciation by investing primarily in
income-producing common stocks, with a focus on common stocks the Manager
believes have the potential for above average dividend increases over time.
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Trend Fund seeks long-term growth by investing in common stocks
issued by emerging growth companies exhibiting strong capital appreciation
potential.
Small Cap Value Fund seeks capital appreciation by investing
primarily in common stocks whose market values appear low relative to their
underlying value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return
Fund seeks long-term growth by investing primarily in securities that provide
the potential for income and capital appreciation without undue risk to
principal. Blue Chip Fund seeks to achieve long-term capital appreciation.
Current income is a secondary objective. It seeks to achieve these objectives
by investing primarily in equity securities and any securities that are
convertible into equity securities. Quantum Fund seeks to achieve long-term
capital appreciation. It seeks to achieve this objective by investing
primarily in equity securities of medium- to large-sized companies expected to
grow over time that meet the Fund's "Social Criteria" strategy.
U.S. Government Fund seeks high current income by investing primarily
in long-term debt obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Delchester Fund seeks as high a current income as possible by
investing principally in high yield, high risk corporate bonds, and also in
U.S. government securities and commercial paper. Strategic Income Fund seeks
to provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of
the fixed-income securities markets: high yield, higher risk securities,
investment grade fixed-income securities and foreign government and other
foreign fixed-income securities.
Limited-Term Government Fund seeks high, stable income by investing
primarily in a portfolio of short- and intermediate-term securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
instruments secured by such securities. U.S. Government Money Fund seeks
maximum current income with preservation of principal and maintenance of
liquidity by investing only in short-term securities issued or guaranteed as
to principal and interest by the U.S. government, its agencies or
instrumentalities, and repurchase agreements collateralized by such
securities, while maintaining a stable net asset value.
Delaware Cash Reserve seeks the highest level of income consistent
with the preservation of capital and liquidity through investments in
short-term money market instruments, while maintaining a stable net asset
value.
REIT Fund seeks to achieve maximum long-term total return with
capital appreciation as a secondary objective. It seeks to achieve its
objectives by investing in securities of companies primarily engaged in the
real estate industry.
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Tax-Free USA Fund seeks high current income exempt from federal
income tax by investing in municipal bonds of geographically-diverse issuers.
Tax-Free Insured Fund invests in these same types of securities but with an
emphasis on municipal bonds protected by insurance guaranteeing principal and
interest are paid when due. Tax-Free USA Intermediate Fund seeks a high level
of current interest income exempt from federal income tax, consistent with the
preservation of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while
maintaining a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital. Tax-Free
New Jersey Fund seeks a high level of current interest income exempt from
federal income tax and New Jersey state and local taxes, consistent with
preservation of capital. Tax-Free Ohio Fund seeks a high level of current
interest income exempt from federal income tax and Ohio state and local taxes,
consistent with preservation of capital.
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities
that provide the potential for capital appreciation and income. Global Bond
Fund seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may
also provide the potential for capital appreciation. Global Assets Fund seeks
to achieve long-term total return by investing in global securities which will
provide higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity
securities of issuers located or operating in emerging countries.
U.S. Growth Fund seeks to maximize capital appreciation by
investing in companies of all sizes which have low dividend yields, strong
balance sheets and high expected earnings growth rates relative to their
industry. Overseas Equity Fund seeks to maximize total return (capital
appreciation and income), principally through investments in an
internationally diversified portfolio of equity securities. New Pacific Fund
seeks long-term capital appreciation by investing primarily in companies which
are domiciled in or have their principal business activities in the Pacific
Basin.
Delaware Group Premium Fund, Inc. offers 15 funds available
exclusively as funding vehicles for certain insurance company separate
accounts. Decatur Total Return Series seeks the highest possible total rate of
return by selecting issues that exhibit the potential for capital appreciation
while providing higher than average dividend income. Delchester Series seeks
as high a current income as possible by investing in rated and unrated
corporate bonds, U.S. government securities and commercial paper. Capital
Reserves Series seeks a high stable level of current income while minimizing
fluctuations in principal by investing in a diversified portfolio of short-
and intermediate-term securities. Cash Reserve Series seeks the highest level
of income consistent with preservation of capital and liquidity through
investments in short-term money market instruments. DelCap Series seeks
long-term capital appreciation by investing its assets in a diversified
portfolio of securities exhibiting the potential for significant growth.
Delaware Series seeks a balance of capital appreciation, income and
preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. International Equity
Series seeks long-term growth without undue risk to principal by investing
primarily in equity securities of foreign issuers that provide the potential
for capital appreciation and income. Value Series seeks capital appreciation
by investing in small- to mid-cap common stocks whose market values
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appear low relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that may be
temporarily out of favor or whose value is not yet recognized by the market.
Trend Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may
also provide the potential for capital appreciation. Strategic Income Series
seeks high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks
that the investment manager believes have the potential for above-average
dividend increases over time. Emerging Markets Series seeks to achieve
long-term capital appreciation by investing primarily in equity securities of
issuers located or operating in emerging countries. Convertible Securities
Series seeks a high level of total return on its assets through a combination
of capital appreciation and current income by investing primarily in
convertible securities. Quantum Series seeks to achieve long-term capital
appreciation by investing primarily in equity securities of medium to
large-sized companies expected to grow over time that meet the Series' "Social
Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a
high level of current income consistent with the prudent investment risk by
investing in U.S. Treasury bills, notes, bonds, and other obligations issued
or unconditionally guaranteed by the full faith and credit of the U.S.
Treasury, and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Tax-Free Arizona Insured Fund seeks to provide a
high level of current income exempt from federal income tax and the Arizona
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Minnesota Insured Fund seeks to provide a high level of
current income exempt from federal income tax and the Minnesota personal
income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund seeks to
provide a high level of current income exempt from federal income tax and the
Minnesota personal income tax, consistent with preservation of capital. The
Fund seeks to reduce market risk by maintaining an average weighted maturity
from five to ten years.
Delaware-Voyageur Tax-Free California Insured Fund seeks to provide a
high level of current income exempt from federal income tax and the California
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Florida Insured Fund seeks to provide a high level
of current income exempt from federal income tax, consistent with the
preservation of capital. The Fund will seek to select investments that will
enable its shares to be exempt from the Florida intangible personal property
tax. Delaware-Voyageur Tax-Free Florida Fund seeks to provide a high level of
current income exempt from federal income tax, consistent with the
preservation of capital. The Fund will seek to select investments that will
enable its shares to be exempt from the Florida intangible personal property
tax. Delaware-Voyageur Tax-Free Kansas Fund seeks to provide a high level of
current income exempt from federal income tax, the Kansas personal income tax
and the Kansas Intangible personal property tax, consistent with the
preservation of capital. Delaware-Voyageur Tax-Free Missouri Insured Fund
seeks to provide a high level of current income exempt from federal income tax
and the Missouri personal income tax, consistent with the preservation
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of capital. Delaware-Voyageur Tax-Free New Mexico Fund seeks to provide a high
level of current income exempt from federal income tax and the New Mexico
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Oregon Insured Fund seeks to provide a high level
of current income exempt from federal income tax and the Oregon personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free Utah Fund seeks to provide a high level of current income exempt from
federal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Washington Insured Fund seeks to provide a high
level of current income exempt from federal income tax, consistent with the
preservation of capital.
Delaware-Voyageur Tax-Free Florida Intermediate Fund seeks to provide
a high level of current income exempt from federal income tax, consistent with
the preservation of capital. The Fund will seek to select investments that
will enable its shares to be exempt from the Florida intangible personal
property tax. The Fund seeks to reduce market risk by maintaining an average
weighted maturity from five to ten years.
Delaware-Voyageur Tax-Free Arizona Fund seeks to provide a high level
of current income exempt from federal income tax and the Arizona personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free California Fund seeks to provide a high level of current income
exempt from federal income tax and the California personal income tax,
consistent with the preservation of capital. Delaware-Voyageur Tax-Free Iowa
Fund seeks to provide a high level of current income exempt from federal
income tax and the Iowa personal income tax, consistent with the preservation
of capital. Delaware-Voyageur Tax-Free Idaho Fund seeks to provide a high
level of current income exempt from federal income tax and the Idaho personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Minnesota High Yield Municipal Bond Fund seeks to provide a high level of
current income exempt from federal income tax and the Minnesota personal
income tax primarily through investment in medium and lower grade municipal
obligations. National High Yield Municipal Fund seeks to provide a high level
of income exempt from federal income tax, primarily through investment in
medium and lower grade municipal obligations. Delaware-Voyageur Tax-Free New
York Fund seeks to provide a high level of current income exempt from federal
income tax and the personal income tax of the state of New York and the city
of New York, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free Wisconsin Fund seeks to provide a high level of current income exempt
from federal income tax and the Wisconsin personal income tax, consistent with
the preservation of capital.
Delaware-Voyageur Tax-Free Colorado Fund seeks to provide a high
level of current income exempt from federal income tax and the Colorado
personal income tax, consistent with the preservation of capital.
Aggressive Growth Fund seeks long-term capital appreciation, which
the Fund attempts to achieve by investing primarily in equity securities
believed to have the potential for high earnings growth. Although the Fund, in
seeking its objective, may receive current income from dividends and interest,
income is only an incidental consideration in the selection of the Fund's
investments. Growth Stock Fund has an objective of long-term capital
appreciation. The Fund seeks to achieve its objective from equity securities
diversified among individual companies and industries. Tax-Efficient Equity
Fund seeks to obtain for taxable investors a high total return on an after-tax
basis. The Fund will attempt to achieve this objective by seeking to provide a
high long-term after-tax total return through managing its portfolio in a
manner that will defer the realization of accrued capital gains and minimize
dividend income.
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Delaware-Voyageur Tax-Free Minnesota Fund seeks to provide a high
level of current income exempt from federal income tax and the Minnesota
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free North Dakota Fund seeks to provide a high level of
current income exempt from federal income tax and the North Dakota personal
income tax, consistent with the preservation of capital.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
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GENERAL INFORMATION
The Manager is the investment manager of the Portfolios. The Manager
also provides investment management services to certain of the other funds in
the Delaware Group. The Manager, through a separate division, also manages
private investment accounts. While investment decisions of the Portfolios are
made independently from those of the other funds and accounts, investment
decisions for such other funds and accounts may be made at the same time as
investment decisions for the Portfolios.
The Manager, or Delaware International Advisers Ltd., also manages
the investment options for Delaware Medallion[sm] III Variable Annuity.
Medallion is issued by Allmerica Financial Life Insurance and Annuity Company
(First Allmerica Financial Life Insurance Company in New York and Hawaii).
Delaware Medallion offers 15 different investment series ranging from domestic
equity funds, international equity and bond funds and domestic fixed income
funds. Each investment series available through Medallion utilizes an
investment strategy and discipline the same as or similar to one of the
Delaware Group mutual funds available outside the annuity. See Delaware Group
Premium Fund, Inc., above.
Access persons and advisory persons of the Delaware Group of funds,
as those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager or its affiliates, are permitted to engage in personal
securities transactions subject to the exceptions set forth in Rule 17j-1 and
the following general restrictions and procedures: (1) certain blackout
periods apply to personal securities transactions of those persons; (2)
transactions must receive advance clearance and must be completed on the same
day as the clearance is received; (3) certain persons are prohibited from
investing in initial public offerings of securities and other restrictions
apply to investments in private placements of securities; (4) opening
positions may only be closed-out at a profit after a 60-day holding period has
elapsed; and (5) the Compliance Officer must be informed periodically of all
securities transactions and duplicate copies of brokerage confirmations and
account statements must be supplied to the Compliance Officer.
The Distributor acts as national distributor for each Portfolio and
for the other mutual funds in the Delaware Group.
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for the Trust and for the
other mutual funds in the Delaware Group. The Transfer Agent is paid a fee by
the Portfolios for providing these services consisting of an annual per
account charge, in each case, of $11.00 plus, in each case, transaction
charges for particular services according to a schedule. Compensation is fixed
each year and approved by the Board of Trustees, including a majority of the
disinterested trustees. The Transfer Agent also provides accounting services
to the Portfolios. Those services include performing all functions related to
calculating each Portfolio's net asset value and providing all financial
reporting services, regulatory compliance testing and other related accounting
services. For its services, the Transfer Agent is paid a fee based on total
assets of all funds in the Delaware Group for which it provides such
accounting services. Such fee is equal to 0.25% multiplied by the total amount
of assets in the complex for which the Transfer Agent furnishes accounting
services, where such aggregate complex assets are $10 billion or less, and
0.20% of assets if such aggregate complex assets exceed $10 billion. The fees
are charged to each fund, including the Portfolios, on an aggregate pro-rata
basis. The asset-based fee payable to the Transfer Agent is subject to a
minimum fee calculated by determining the total number of investment
portfolios and associated classes.
The Manager and its affiliates own the names "Delaware Group" and
"Foundation Funds." Under certain circumstances, including the termination of
the Trust's advisory relationships with the Manager or its
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distribution relationships with the Distributor, the Manager and its
affiliates could cause the Trust to delete the words "Delaware Group" and
"Foundation Funds" from the Trust's name.
The Chase Manhattan Bank ("Chase"), 4 Chase Metrotech Center,
Brooklyn, NY 11245 is custodian of each Fund's securities and cash. As
custodian for a Portfolio, Chase maintains a separate account or accounts for
the Portfolio; receives, holds and releases portfolio securities on account of
the Fund; receives and disburses money on behalf of the Portfolio; and
collects and receives income and other payments and distributions on account
of the Portfolio's portfolio securities.
Shareholder and Trustee Liability
The Declaration of Trust provides that the trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a trustee against any liability to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Capitalization
The Trust currently offers three portfolios of shares. Each Portfolio
currently offers four classes of shares and has a present unlimited authorized
number of shares of beneficial interest with no par value allocated to each
Class. All shares have equal voting rights, except as noted below, no
preemptive rights, are fully transferable and, when issued, are fully paid and
nonassessable.
Class A Shares, Class B Shares, Class C Shares and Institutional
Class represent a proportionate interest in the assets of each Portfolio of
the Trust and have the same voting and other rights and preferences, except
that shares of Institutional Classes may not vote on matters affecting the
Portfolios' Distribution Plans under Rule 12b-1. Similarly, as a general
matter, shareholders of Class A Shares, Class B Shares and Class C Shares may
vote only on matters affecting the 12b-1 Plan that relates to the class of
shares that they hold. However, shareholders of Class B Shares must be given a
vote on any material increase in the 12b-1 fees payable by Class A Shares
under the Plans for the Portfolios. General expenses of each Portfolio will be
allocated on a pro-rata basis to the Classes according to asset size, except
that expenses of the 12b-1 Plans of Class A, Class B and Class C Shares will
be allocated solely to those classes.
Noncumulative Voting
The Trust's shares have noncumulative voting rights which means that
the holders of more than 50% of the shares of the Trust voting for the
election of trustees can elect all the trustees if they choose to do so, and,
in such event, the holders of the remaining shares will not be able to elect
any trustees.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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APPENDIX A--IRA INFORMATION
An individual can contribute up to $2,000 to his or her IRA each
year. Contributions may or may not be deductible depending upon the taxpayers
adjusted gross income and whether the taxpayer or his or her spouse is an
active participant in an employer-sponsored retirement plan. Even if a
taxpayer (or his or her spouse) is an active participant in an
employer-sponsored retirement plan, the full $2,000 deduction is still
available if the taxpayer's adjusted gross income is below $25,000 ($40,000
for taxpayers filing joint returns). A partial deduction is allowed for
married couples with incomes between $40,000 and $50,000, and for single
individuals with incomes between $25,000 and $35,000. No deductions are
available for contributions to IRAs by taxpayers whose adjusted gross income
before IRA deductions exceeds $50,000 ($35,000 for singles) and who are active
participants in an employer-sponsored retirement plan. Taxpayers who were not
allowed deductions on IRA contributions still can make nondeductible IRA
contributions of as much as $2,000 for each working spouse ($2,250 for
one-income couples for years prior to 1997), and defer taxes on interest or
other earnings from the IRAs. Special rules apply for determining the
deductibility of contributions made by married individuals filing separate
returns.
Effective for tax years beginning after 1996, one-income couples can
contribute up to $2,000 to each spouse's IRA provided the combined
compensation of both spouses is at least equal to the total contributions for
both spouses. If the working spouse is an active participant in an
employer-sponsored retirement plan and earns over $40,000, the maximum
deduction limit is reduced in the same way that the limit is reduced for
contributions to a non-spousal IRA.
As illustrated in the following tables, maintaining an IRA remains a
valuable opportunity.
For many, an IRA will continue to offer both an up-front tax break
with its tax deduction each year and the real benefit that comes with
tax-deferred compounding. For others, losing the tax deduction will impact
their taxable income status each year. Over the long term, however, being able
to defer taxes on earnings still provides an impressive investment
opportunity--a way to have money grow faster due to tax-deferred compounding.
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Even if your IRA contribution is no longer deductible, the benefits
of saving on a tax-deferred basis can be substantial. The following tables
illustrate the benefits of tax-deferred versus taxable compounding. Each
reflects a constant 10% rate of return, compounded annually, with the
reinvestment of all proceeds. The tables do not take into account any sales
charges or fees. Of course, earnings accumulated in your IRA will be subject
to tax upon withdrawal. If you choose a mutual fund with a fluctuating net
asset value, your bottom line at retirement could be lower or it could
also be much higher.
$2,000 Invested Annually Assuming a 10% Annualized Return
15% Tax Bracket Single -- $0 - $24,650
---------------
Joint -- $0 - $41,200
How Much How Much You
Cumulative You Have Have With
End of Investment Without Full IRA
Year Amount IRA Deduction
1 $ 2,000 $ 1,844 $ 2,200
5 10,000 10,929 13,431
10 20,000 27,363 35,062
15 30,000 52,074 69,899
20 40,000 89,231 126,005
25 50,000 145,103 216,364
30 60,000 229,114 361,887
35 70,000 355,438 596,254
40 80,000 545,386 973,704
[Without IRA--investment of $1,700 ($2,000 less 15%) earning 8.5% (10% less
15%)]
28% Tax Bracket Single -- $24,651 - $59,750
---------------
Joint -- $41,201 - $99,600
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
1 $ 2,000 $ 1,544 $ 1,584 $ 2,200
5 10,000 8,913 9,670 13,431
10 20,000 21,531 25,245 35,062
15 30,000 39,394 50,328 69,899
20 40,000 64,683 90,724 126,005
25 50,000 100,485 155,782 216,364
30 60,000 151,171 260,559 361,887
35 70,000 222,927 429,303 596,254
40 80,000 324,512 701,067 973,704
[Without IRA--investment of $1,440 ($2,000 less 28%) earning 7.2% (10% less
28%)]
[With IRA--No Deduction--investment of $1,440 ($2,000 less 28%) earning 10%]
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31% Tax Bracket Single -- $59,751 - $124,650
---------------
Joint -- $99,601 - $151,750
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
1 $ 2,000 $ 1,475 $ 1,518 $ 2,200
5 10,000 8,467 9,268 13,431
10 20,000 20,286 24,193 35,062
15 30,000 36,787 48,231 69,899
20 40,000 59,821 86,943 126,005
25 50,000 91,978 149,291 216,364
30 60,000 136,868 249,702 361,887
35 70,000 199,536 411,415 596,254
40 80,000 287,021 671,855 973,704
[Without IRA--investment of $1,380 ($2,000 less 31%) earning 6.9% (10% less
31%)]
[With IRA--No Deduction--investment of $1,380 ($2,000 less 31%) earning 10%]
36% Tax Bracket* Single -- $124,651 - $271,050
----------------
Joint -- $151,751 - $271,050
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
1 $ 2,000 $ 1,362 $ 1,408 $ 2,200
5 10,000 7,739 8,596 13,431
10 20,000 18,292 22,440 35,062
15 30,000 32,683 44,736 69,899
20 40,000 52,308 80,643 126,005
25 50,000 79,069 138,473 216,364
30 60,000 115,562 231,608 361,887
35 70,000 165,327 381,602 596,254
40 80,000 233,190 623,170 973,704
[Without IRA--investment of $1,280 ($2,000 less 36%) earning 6.4% (10% less
36%)]
With IRA--No Deduction--investment of $1,280 ($2,000 less 36%) earning 10%]
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39.6% Tax Bracket* Single -- over $271,050
------------------
Joint -- over $271,050
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
1 $ 2,000 $ 1,281 $ 1,329 $ 2,200
5 10,000 7,227 8,112 13,431
10 20,000 16,916 21,178 35,062
15 30,000 29,907 42,219 69,899
20 40,000 47,324 76,107 126,005
25 50,000 70,677 130,684 216,364
30 60,000 101,986 218,580 361,887
35 70,000 143,965 360,137 596,254
40 80,000 200,249 588,117 973,704
[Without IRA--investment of $1,208 ($2,000 less 39.6%) earning 6.04% (10% less
39.6%)]
[With IRA--No Deduction--investment of $1,208 ($2,000 less 39.6%) earning 10%]
- --------------------
* For tax years beginning after 1992, a 36% tax rate applies to all
taxable income in excess of the maximum dollar amounts subject to the
31% tax rate. In addition, a 10% surtax (not applicable to capital
gains) applies to certain high-income taxpayers. It is computed by
applying a 39.6% rate to taxable income in excess of $271,050. The
above tables do not reflect the personal exemption phaseout nor the
limitations of itemized deductions that may apply.
-85-
<PAGE>
THE VALUE OF STARTING YOUR IRA EARLY
The following illustrates how much more you would have contributing
$2,000 each January--the earliest opportunity--compared to contributing on
April 15th of the following year--the latest, for each tax year.
After 5 years $3,528 more
10 years $6,113
20 years $17,228
30 years $47,295
Compounded returns for the longest period of time is the key. The
above illustration assumes a 10% rate of return and the reinvestment of all
proceeds.
THE POWER OF TAX-DEFERRED COMPOUNDING
Over time, tax-deferred investing has the potential to double your
investment earnings. The following examples are based on a $2000 invested
on January 1 each year and assumes an 8% fixed rate of return, with no
fluctuation in the value of principal. The figures do not reflect the impact
of any fees or sales charges. These figures are for illustration only and are
not intended to represent any future investment results.
Accumulated Value
Over 10 years Tax Bracket
$26, 403 39.6%
$26,881 36%
$27,516 31%
$27,905 28%
$31,828 Tax-deferred
Over 20 years
$69,544 39.6%
$71, 986 36%
$75,540 31%
$77,767 28%
$102,476 Tax-deferred
Over 40 years
$254,528 39.6%
$274,662 36%
$305,626 31%
$326,046 28%
$607,355 Tax-deferred
-86-
<PAGE>
FINANCIAL STATEMENTS
Ernst & Young LLP will serve as the independent auditors for the Trust
and, in its capacity as such, will audit the annual financial statements of each
of the Portfolios. Each Portfolio's Statement of Net Assets and Liabilities,
including the Schedule of Investments and related notes, as of December 31, 1997
follows and have been audited by Ernst & Young LLP.
DELAWARE GROUP FOUNDATION FUNDS
Statements of Assets and Liabilities
December 31, 1997
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income Portfolio Balanced Portfolio Growth Portfolio
----------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments at market $ 45,000 $ 49,000 $ 49,000
Cash 50,026 50,026 50,026
Deferred organization costs 13,871 13,871 13,871
-------------------------------------------------------------
Total assets $ 108,897 $ 112,897 $ 112,897
-------------------------------------------------------------
Liabilities:
Payable for Investments Purchased $ 45,000 $ 49,000 $ 49,000
Due to Delaware Management Company, Inc. 13,871 13,871 13,871
-------------------------------------------------------------
Total liabilities $ 58,871 $ 62,871 $ 62,871
-------------------------------------------------------------
Total Net Assets, applicable to 1 A Class share, 1 B Class
share, 1 C Class share, and 5,882 Institutional Class
shares (unlimited authorization - no par value)
outstanding, with respect to each portfolio $ 50,026 $ 50,026 $ 50,026
=============================================================
Net Asset Value per share equivalent to ($50,026 / 5,885
outstanding shares of beneficial interest, respectively) $8.50 $8.50 $8.50
=============================================================
Maximum offering price per share applicable to A Class
shares ($8.50/0.9525, respectively), reflecting a front-end
sales charge of 4.75% $8.92 $8.92 $8.92
=============================================================
</TABLE>
See accompanying notes
-87-
<PAGE>
DELAWARE GROUP FOUNDATION FUNDS
Schedule of Investments
December 31, 1997
===============================================================================
Delaware Group Foundation Funds - Income Portfolio
Security Description Portfolio Shares Total Market
- -------------------------------------------------------------------------------
Decatur Total Return Fund 564.334 $ 10,000
Trend Fund 218.277 3,750
U.S. Growth Fund 461.255 5,000
Emerging Markets Fund 131.165 1,250
International Equity Fund 174.581 2,500
Delchester Fund 1,515.152 10,000
Global Bond Fund 471.698 5,000
U.S. Government Income Fund 966.495 7,500
----------
Total (cost $45,000) $ 45,000
==========
Delaware Group Foundation Funds - Balanced Portfolio
Security Description Portfolio Shares Total Market
- -------------------------------------------------------------------------------
Decatur Total Return Fund 564.334 $ 10,000
Small Cap Value Fund 132.462 3,750
Trend Fund 218.277 3,750
U.S. Growth Fund 691.882 7,500
Emerging Markets Fund 262.329 2,500
International Equity Fund 436.453 6,250
Delchester Fund 946.970 6,250
U.S. Government Income Fund 1,159.794 9,000
----------
Total (cost $49,000) $ 49,000
==========
Delaware Group Foundation Funds - Growth Portfolio
Security Description Portfolio Shares Total Market
- -------------------------------------------------------------------------------
Aggressive Growth Fund 219.298 $ 3,750
Decatur Total Return Fund 564.334 10,000
Small Cap Value Fund 132.462 3,750
U.S. Growth Fund 922.509 10,000
Emerging Markets Fund 393.494 3,750
International Equity Fund 611.034 8,750
Delchester Fund 757.576 5,000
U.S. Government Income Fund 515.464 4,000
----------
Total (cost $49,000) $ 49,000
==========
See accompanying notes
-88-
<PAGE>
DELAWARE GROUP FOUNDATION FUNDS
Notes to Financial Statements
December 31, 1997
1. Organization
The Delaware Group Foundation Funds (the "Trust") is registered as
an open-end management investment company under the Investment
Company Act of 1940, as amended. The Trust is organized as a
Delaware Business Trust under a Trust instrument dated October 24,
1997 and offers three portfolios: the Income Portfolio, the
Balanced Portfolio and the Growth Portfolio (individually a
"Portfolio" and collectively, the "Portfolios"). Each portfolio
offers four classes of shares. The individual Portfolios have not
commenced operations except those related to organizational
matters and the sale of 5,885 initial shares of beneficial
interest to the initial shareholder, Delaware Management Company,
Inc., on December 31, 1997.
The Portfolios will invest in open-end investment companies
(mutual funds) that are members of the Delaware Group of Funds
(collectively, the "Underlying Funds"). The Underlying Funds
include funds investing in U.S. and foreign stocks, bonds, and
money market instruments.
2. Significant Accounting Policies
The following accounting policies are in accordance with generally
accepted accounting principles and are consistently followed by
the Trust.
Security Valuation - The market value of the Portfolios
investments in the Underlying Funds is based on the published net
asset value of each share of an Underlying Fund computed as of the
close of regular trading on the New York Stock Exchange on days
when the Exchange is open.
Deferred Organization Costs - Organization costs have been
capitalized by the Portfolios and are being amortized over 60
months beginning with the commencement of operations. In the event
any of the initial shares are redeemed by the holder thereof
during the period that the Portfolios are amortizing their
organization costs, the redemption proceeds payable to the holder
thereof by the Portfolios will be reduced by the unamortized
organizational costs in the same ratio as the number of initial
shares being redeemed bears to the number of initial shares
outstanding at the time of the redemption.
-89-
<PAGE>
PART C
Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Part A - N/A
*Part B - Statement of Net Assets and Liabilities
Schedule of Investments
Notes to Financial Statements
Accountant's Report
* The financial statements and Accountant's Report listed above for
the Registrant's Income Portfolio, Balanced Portfolio and Growth
Portfolio as of December 31, 1997 are included in Part B.
(b) Exhibits:
(1) Declaration of Trust.
(a) Declaration of Trust incorporated into this filing
by reference to the initial registration statement
on Form N-1A filed on October 24, 1997.
(2) By-Laws.
(a) By-Laws incorporated into this filing by reference
to the initial registration statement on Form N-1A
filed on October 24, 1997.
(3) Voting Trust Agreement. Inapplicable.
(4) Copies of All Instruments Defining the Rights of
Holders.
(a) Declaration of Trust. Declaration of Trust
(October 1997) incorporated into this filing by
reference to the initial registration statement on
Form N-1A filed on October 24, 1997.
(b) By-Laws. By-Laws incorporated into this filing by
reference to the initial registration statement on
Form N-1A filed on October 24, 1997.
<PAGE>
PART C - Other Information
(Continued)
(5) Asset Allocation Agreement.
(a) Executed Asset Allocation Agreement (December 18,
1997) between Delaware Management Company, Inc.
and the Registrant on behalf of the Balanced
Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(b) Executed Asset Allocation Agreement (December 18,
1997) between Delaware Management Company, Inc.
and the Registrant on behalf of the Growth
Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(c) Executed Asset Allocation Agreement (December 18,
1997) between Delaware Management Company, Inc.
and the Registrant on behalf of the Income
Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(6) (a) Distribution Agreement. Executed Distribution
Agreement (December 18, 1997) between Delaware
Distributors, L.P. and the Registrant on behalf of
the Balanced Portfolio incorporated into this
filing by reference to Pre-Effective Amendment No.
1 filed on December 30, 1997.
(b) Executed Distribution Agreement (December 18,
1997) between Delaware Distributors, L.P. and the
Registrant on behalf of the Growth Portfolio
incorporated into this filing by reference to
Pre-Effective Amendment No. 1 filed on December
30, 1997.
(c) Executed Distribution Agreement (December 18,
1997) between Delaware Distributors, L.P. and the
Registrant on behalf of the Income Portfolio
incorporated into this filing by reference to
Pre-Effective Amendment No. 1 filed on December
30, 1997.
(d) Administration and Service Agreement. Form of
Administration and Service Agreement (as amended
November 1995) (Module) incorporated into this
filing by reference to the initial registration
statement on Form N-1A filed on October 24, 1997.
(e) Dealer's Agreement. Dealer's Agreement (as amended
November 1995)(Module) incorporated into this
filing by reference to the initial registration
statement on Form N-1A filed on October 24, 1997.
(f) Mutual Fund Agreement for the Delaware Group of
Funds (as amended November 1995) (Module)
incorporated into this filing by reference to the
initial registration statement on Form N-1A filed
on October 24, 1997.
<PAGE>
PART C - Other Information
(Continued)
(7) Bonus, Profit Sharing, Pension Contracts.
(a) Amended and Restated Profit Sharing Plan (November
17, 1994) (Module) incorporated into this filing
by reference to the initial registration statement
on Form N-1A filed on October 24, 1997.
(b) Amendment to Profit Sharing Plan (December 21,
1995) (Module) incorporated into this filing by
reference to the initial registration statement on
Form N-1A filed on October 24, 1997.
(8) Custodian Agreement.
(a) Custodian Agreement (Module) with The Chase
Manhattan Bank incorporated into this filing by
reference to the initial registration statement on
Form N-1A filed on October 24, 1997
(9) Other Material Contracts.
(a) Executed Shareholders Services Agreement (December
18, 1997) between Delaware Service Company, Inc.
and the Registrant on behalf of each Portfolio
incorporated into this filing by reference to
Pre-Effective Amendment No. 1 filed on December
30, 1997.
(b) Executed Fund Accounting Agreement (Module)
(August 19, 1996) with Delaware Service Company,
Inc. incorporated into this filing by reference to
the initial registration statement on Form N-1A
filed on October 24, 1997.
(10) Opinion of Counsel. Opinion of Counsel incorporated into
this filing by reference to Pre-Effective Amendment No.
1 filed on December 30, 1997.
(11) Consent of Auditors. Attached as Exhibit.
(12) Inapplicable.
(13) Subscription Agreement. Attached as Exhibit.
(14) Inapplicable.
(15) Plans under Rule 12b-1.
(a) Executed Plan under Rule 12b-1 for Class A of
Balanced Portfolio incorporated into this filing
by reference to Pre-Effective Amendment No. 1
filed on December 30, 1997.
(b) Executed Plan under Rule 12b-1 for Class B of
Balanced Portfolio incorporated into this filing
by reference to Pre-Effective Amendment No. 1
filed on December 30, 1997.
(c) Executed Plan under Rule 12b-1 for Class C of
Balanced Portfolio incorporated into this filing
by reference to Pre-Effective Amendment No. 1
filed on December 30, 1997.
(d) Executed Plan under Rule 12b-1 for Class A of
Growth Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
<PAGE>
PART C - Other Information
(Continued)
(e) Executed Plan under Rule 12b-1 for Class B of
Growth Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(f) Executed Plan under Rule 12b-1 for Class C of
Growth Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(g) Executed Plan under Rule 12b-1 for Class A of
Income Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(h) Executed Plan under Rule 12b-1 for Class B of
Income Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(i) Executed Plan under Rule 12b-1 for Class C of
Income Portfolio incorporated into this filing by
reference to Pre-Effective Amendment No. 1 filed
on December 30, 1997.
(16) Schedules of Computation for each Performance Quotation.
Inapplicable.
(17) Financial Data Schedules. Attached as Exhibit.
(18) Plan Under Rule 18f-3. Incorporated into this filing by
reference to the initial registration statement on Form
N-1A filed on October 24, 1997.
(a) Amended Appendix A to Plan under Rule 18f-3
incorporated into this filing by reference to
Pre-Effective Amendment No. 1 filed on December
30, 1997.
(19) Other: Trustees' Power of Attorney. Powers of Attorney
incorporated into this filing by reference to
Pre-Effective Amendment No. 1 filed on December
30, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant. None.
Item 26. Number of Holders of Securities. None.
Item 27. Indemnification. Incorporated into this filing by reference to the
initial registration statement on Form N-1A filed on October 24, 1997.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Delaware Management Company, Inc. (the "Manager") serves as investment manager
to the Registrant and also serves as investment manager or sub-adviser to
certain of the other funds in the Delaware Group (Delaware Group Equity Funds I,
Inc., Delaware Group Equity Funds II, Inc., Delaware Group Equity Funds III,
Inc., Delaware Group Equity Funds IV, Inc., Delaware Group Equity Funds V, Inc.,
Delaware Group Income Funds, Inc., Delaware Group Government Fund, Inc.,
Delaware Group Limited-Term Government Funds, Inc., Delaware Group Cash Reserve,
Inc., Delaware Group Tax-Free Fund, Inc., Delaware Group State Tax-Free Income
Trust, Delaware Group Tax-Free Money Fund, Inc., Delaware Group Premium Fund,
Inc., Delaware Group Global & International Funds, Inc., Delaware Pooled Trust,
Inc., Delaware Group Adviser Funds, Inc., Delaware Group Dividend and Income
Fund, Inc., Delaware Group Global Dividend and Income Fund, Inc., Voyageur
Tax-Free Funds, Inc., Voyageur Intermediate Tax-Free Funds, Inc., Voyageur
Insured Funds, Inc., Voyageur Funds, Inc., Voyageur Investment Trust, Voyageur
Investment Trust II, Voyageur Mutual Funds, Inc., Voyageur Mutual Funds II,
Inc., Voyageur Mutual Funds III, Inc., Voyageur Arizona Municipal Income Fund,
Inc., Voyageur Colorado Insured Municipal Income Fund, Inc., Voyageur Florida
Insured Municipal Income Fund, Voyageur Minnesota Municipal Fund, Inc., Voyageur
Minnesota Municipal Fund II, Inc. and Voyageur Minnesota Municipal Fund III,
Inc.) and provides investment advisory services to institutional accounts,
primarily retirement plans and endowment funds. In addition, certain directors
of the Manager also serve as directors/trustees of the other Delaware Group
funds, and certain officers are also officers of these other funds. A company
owned by the Manager's parent company acts as principal underwriter to the
mutual funds in the Delaware Group (see Item 29 below) and another such company
acts as the shareholder services, dividend disbursing, accounting servicing and
transfer agent for all of the mutual funds in the Delaware Group.
<PAGE>
PART C - Other Information
(Continued)
The following persons serving as directors or officers of the Manager have held
the following positions during the past two years:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Wayne A. Stork Chairman of the Board, President, Chief Executive Officer, Chief Investment Officer and
Director of Delaware Management Company, Inc.; Chairman of the Board, President,
Chief Executive Officer and Director of DMH Corp., Delaware Distributors, Inc. and
Founders Holdings, Inc.; Chairman, Chief Executive Officer and Director of Delaware
International Holdings Ltd. and Delaware International Advisers Ltd.; Chairman of the
Board and Director of the Registrant, each of the other funds in the Delaware Group,
Delaware Management Holdings, Inc., and Delaware Capital Management, Inc.;
Chairman of Delaware Distributors, L.P.; President and Chief Executive Officer of
Delvoy, Inc.; and Director of Delaware Service Company, Inc. and Delaware Investment
& Retirement Services, Inc.
Richard G. Unruh, Jr. Executive Vice President and Director of Delaware Management Company, Inc.;
Executive Vice President of the Registrant, each of the other funds in the Delaware
Group, Delaware Management Holdings, Inc. and Delaware Capital Management, Inc;
and Director of Delaware International Advisers Ltd.
Board of Directors, Chairman of Finance Committee, Keystone Insurance Company since 1989,
2040 Market Street, Philadelphia, PA; Board of Directors, Chairman of Finance Committee,
AAA Mid Atlantic, Inc. since 1989, 2040 Market Street, Philadelphia, PA; Board of
Directors, Metron, Inc. since 1995, 11911 Freedom Drive, Reston, VA
Paul E. Suckow Executive Vice President/Chief Investment Officer, Fixed Income of Delaware Management
Company, Inc., the Registrant, each of the other funds in the Delaware Group and Delaware
Management Holdings, Inc.; Executive Vice President and Director of Founders Holdings,
Inc.; Executive Vice President of Delaware Capital Management, Inc.; and Director of
Founders CBO Corporation
Director, HYPPCO Finance Company Ltd.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
David K. Downes Executive Vice President, Chief Operating Officer, Chief Financial Officer and Director
of Delaware Management Company, Inc., DMH Corp, Delaware Distributors, Inc., Founders
Holdings, Inc. and Delvoy, Inc.; Executive Vice President, Chief Operating Officer and
Chief Financial Officer of the Registrant and each of the other funds in the Delaware
Group, Delaware Management Holdings, Inc., Founders CBO Corporation, Delaware Capital
Management, Inc. and Delaware Distributors, L.P.; President, Chief Executive Officer,
Chief Financial Officer and Director of Delaware Service Company, Inc.; President, Chief
Operating Officer, Chief Financial Officer and Director of Delaware International
Holdings Ltd.; Chairman, Chief Executive Officer and Director of Delaware Investment &
Retirement Services, Inc.; Chairman and Director of Delaware Management Trust Company;
Director of Delaware International Advisers Ltd.; and Vice President of Lincoln Funds
Corporation
Chief Executive Officer and Director of Forewarn, Inc. since 1993, 8 Clayton Place,
Newtown Square, PA
George M. Chamberlain, Jr. Senior Vice President, General Counsel, Secretary and Director of Delaware
Management Company, Inc., DMH Corp., Delaware Distributors, Inc., Delaware Service
Company, Inc., Founders Holdings, Inc., Delaware Capital Management, Inc., Delaware
Investment & Retirement Services, Inc. and Delvoy, Inc.; Senior Vice President,
Secretary and General Counsel of the Registrant, each of the other funds in the Delaware
Group, Delaware Distributors, L.P. and Delaware Management Holdings, Inc.; Senior
Vice President and Director of Delaware International Holdings Ltd.; Executive Vice
President, Secretary, General Counsel and Director of Delaware Management Trust
Company; Director of Delaware International Advisers Ltd.; Secretary of Lincoln Funds
Corporation
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Richard J. Flannery Senior Vice President/Corporate and International Affairs of the Registrant, each of the
other funds in the Delaware Group, Delaware Management Holdings, Inc., DMH
Corp., Delaware Management Company, Inc., Delaware Distributors, Inc., Delaware
Distributors, L.P., Delaware Management Trust Company, Delaware Capital
Management, Inc., Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.; Executive Vice President/Corporate & International Affairs
and Director of Delaware International Holdings Ltd.; Senior Vice President/
Corporate and International Affairs and Director of Founders Holdings, Inc. and
Delvoy, Inc.; Senior Vice President of Founders CBO Corporation; and Director of
Delaware International Advisers Ltd.
Director, HYPPCO Finance Company Ltd.
Limited Partner of Stonewall Links, L.P. since 1991, Bulltown Rd., Elverton, PA;
Director and Member of Executive Committee of Stonewall Links, Inc. since 1991,
Bulltown Rd., Elverton, PA
Michael P. Bishof Senior Vice President and Treasurer of the Registrant, each of the other funds in the
Delaware Group and Founders Holdings, Inc.; Senior Vice President/Investment
Accounting of Delaware Management Company, Inc. and Delaware Service Company,
Inc.; Senior Vice President and Treasurer/ Manager, Investment Accounting of
Delaware Distributors, L.P.; Assistant Treasurer of Founders CBO Corporation; and
Senior Vice President and Manager of Investment Accounting of Delaware
International Holdings Ltd.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Joseph H. Hastings Senior Vice President/Corporate Controller and Treasurer of Delaware Management
Holdings, Inc., DMH Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Capital Management, Inc., Delaware Distributors, L.P.,
Delaware Service Company, Inc., Delaware International Holdings Ltd. and Delvoy,
Inc.; Senior Vice President/Corporate Controller of the Registrant, each of the other
funds in the Delaware Group and Founders Holdings, Inc.; Executive Vice President,
Chief Financial Officer and Treasurer of Delaware Management Trust Company; Chief
Financial Officer and Treasurer of Delaware Investment & Retirement Services, Inc.;
Senior Vice President/Assistant Treasurer of Founders CBO Corporation; and
Treasurer of Lincoln Funds Corporation.
Michael T. Taggart Senior Vice President/Facilities Management and Administrative Services of Delaware
Management Company, Inc.
Douglas L. Anderson Senior Vice President/Operations of Delaware Management Company, Inc., Delaware
Investment and Retirement Services, Inc. and Delaware Service Company, Inc.; Senior
Vice President/ Operations and Director of Delaware Management Trust Company
James L. Shields Senior Vice President/Chief Information Officer of Delaware Management Company,
Inc., Delaware Service Company, Inc. and Delaware Investment & Retirement
Services, Inc.
Eric E. Miller Vice President, Assistant Secretary and Deputy General Counsel of the Registrant and
each of the other funds in the Delaware Group, Delaware Management Company, Inc.,
Delaware Management Holdings, Inc., DMH Corp., Delaware Distributors, L.P.,
Delaware Distributors Inc., Delaware Service Company, Inc., Delaware Management
Trust Company, Founders Holdings, Inc., Delaware Capital Management, Inc. and
Delaware Investment & Retirement Services, Inc.; and Vice President and Assistant
Secretary of Delvoy, Inc.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Richelle S. Maestro Vice President and Assistant Secretary of Delaware Management Company, Inc., the
Registrant, each of the other funds in the Delaware Group, Delaware Management
Holdings, Inc., Delaware Distributors, L.P., Delaware Distributors, Inc., Delaware
Service Company, Inc., DMH Corp., Delaware Management Trust Company,
Delaware Capital Management, Inc., Delaware Investment & Retirement Services,
Inc., Founders Holdings, Inc. and Delvoy, Inc.; Vice President and Secretary of
Delaware International Holdings Ltd.; and Secretary of Founders CBO Corporation;
Partner of Tri-R Associates since 1989, 10001 Sandmeyer Lane, Philadelphia, PA
Richard Salus(1) Vice President/Assistant Controller of Delaware Management Company, Inc. and
Delaware Management Trust Company
Bruce A. Ulmer Vice President/Director of LNC Internal Audit of Delaware Management Company, Inc., the
Registrant, each of the other funds in the Delaware Group, Delaware Management Holdings,
Inc., DMH Corp., Delaware Management Trust Company and Delaware Investment & Retirement
Services, Inc.; Vice President/Director of Internal Audit of Delvoy, Inc.
Steven T. Lampe Vice President/Taxation of Delaware Management Company, Inc., the Registrant, each
of the other funds in the Delaware Group, Delaware Management Holdings, Inc.,
DMH Corp., Delaware Distributors, L.P., Delaware Distributors, Inc., Delaware
Service Company, Inc., Delaware Management Trust Company, Founders Holdings,
Inc., Founders CBO Corporation, Delaware Capital Management, Inc., Delaware
Investment & Retirement Services, Inc. and Delvoy, Inc.
Christopher Adams Vice President/Strategic Planning of Delaware Management Company, Inc. and
Delaware Service Company, Inc.
Susan L. Hanson Vice President/Strategic Planning of Delaware Management Company, Inc. and
Delaware Service Company, Inc.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Dennis J. Mara(4) Vice President/Acquisitions of Delaware Management Company, Inc.
Scott Metzger Vice President/Business Development of Delaware Management Company, Inc. and
Delaware Service Company, Inc.
Lisa O. Brinkley Vice President/Compliance of Delaware Management Company, Inc., the Registrant, each of
the other funds in the Delaware Group, DMH Corp., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware Management Trust Company,
Delaware Capital Management, Inc. and Delaware Investment & Retirement Services, Inc.;
Vice President of Delvoy, Inc.
Rosemary E. Milner Vice President/Legal Registrations of Delaware Management Company, Inc., the Registrant,
each of the other funds in the Delaware Group, Delaware Distributors, L.P. and Delaware
Distributors, Inc.
Mary Ellen Carrozza Vice President/Client Services of Delaware Management Company, Inc. and the Registrant
Gerald T. Nichols Vice President/Senior Portfolio Manager of Delaware Management Company, Inc., each of the
tax-exempt funds, the fixed income funds and the closed-end funds in the Delaware Group;
Vice President of Founders Holdings, Inc.; and Treasurer, Assistant Secretary and
Director of Founders CBO Corporation
Paul A. Matlack Vice President/Senior Portfolio Manager of Delaware Management Company, Inc., each of the
tax-exempt funds, the fixed income funds and the closed-end funds in the Delaware Group;
Vice President of Founders Holdings, Inc.; and President and Director of Founders CBO
Corporation.
Gary A. Reed Vice President/Senior Portfolio Manager of Delaware Management Company, Inc., each of the
tax-exempt funds and the fixed income funds in the Delaware Group and Delaware Capital
Management, Inc.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Patrick P. Coyne Vice President/Senior Portfolio Manager of Delaware Management Company, Inc., each of the
tax-exempt funds and the fixed income funds in the Delaware Group and Delaware Capital
Management, Inc.
Roger A. Early Vice President/Senior Portfolio Manager of Delaware Management Company, Inc., each of the
tax-exempt funds and the fixed income funds in the Delaware Group
Mitchell L. Conery(3) Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
and each of the tax-exempt and fixed income funds in the Delaware Group
George H. Burwell Vice President/Senior Portfolio Manager of Delaware Management Company, Inc. and
each of the equity funds in the Delaware Group
John B. Fields Vice President/Senior Portfolio Manager of Delaware Management Company, Inc. and
each of the equity funds in the Delaware Group and Delaware Capital Management,
Inc.
Gerald S. Frey(4) Vice President/Senior Portfolio Manager of Delaware Management Company, Inc. and
each of the equity funds in the Delaware Group
Christopher Beck(5) Vice President/Senior Portfolio Manager of Delaware Management Company, Inc. and
each of the equity funds in the Delaware Group
Elizabeth H. Howell(6) Vice President/Senior Portfolio Manager of Delaware Management Company, Inc. and
the Delaware-Voyageur Tax-Free Minnesota Intermediate, Delaware-Voyageur
Minnesota Insured, Delaware-Voyageur Tax-Free Minnesota, Delaware-Voyageur
Tax-Free Idaho, Delaware-Voyageur Tax-Free Kansas, Delaware-Voyageur Tax-Free
Missouri, Delaware-Voyageur Tax-Free Oregon, Delaware-Voyageur Tax-Free
Washington, Delaware-Voyageur Tax-Free Iowa and Delaware-Voyageur Tax-Free
Wisconsin Funds.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Andrew M. McCullagh(7) Vice President/Senior Portfolio Manager of Delaware Management Company, Inc. and the
Delaware-Voyageur Tax-Free Arizona Insured, Delaware-Voyageur Tax-Free Arizona,
Delaware-Voyageur Tax-Free California Insured, Delaware-Voyageur Tax-Free Colorado,
Delaware-Voyageur Tax-Free New Mexico, Delaware-Voyageur Tax-Free North Dakota and
Delaware-Voyageur Tax-Free Utah Funds.
Babak Zenouzi Vice President/Senior Portfolio Manager of Delaware Management Company, Inc. and
each of the equity funds and the closed-end funds in the Delaware Group
Paul Grillo Vice President/Portfolio Manager of Delaware Management Company, Inc. and each
of the tax-exempt and fixed income funds in the Delaware Group
Marshall T. Bassett Vice President/Portfolio Manager of Delaware Management Company, Inc. and each
of the equity funds in the Delaware Group.
John Heffern Vice President/Portfolio Manager of Delaware Management Company, Inc. and each
of the equity funds in the Delaware Group.
(1) SENIOR MANAGER, Ernst & Young LLP prior to December 1996.
(2) CORPORATE CONTROLLER, IIS prior to July 1997 and DIRECTOR, FINANCIAL PLANNING, Decision One prior
to March 1996.
(3) INVESTMENT OFFICER, Travelers Insurance prior to January 1997.
(4) SENIOR DIRECTOR, Morgan Grenfell Capital Management prior to June 1996.
(5) SENIOR PORTFOLIO MANAGER, Pitcairn Trust Company prior to May 1997.
(6) SENIOR PORTFOLIO MANAGER, Voyageur Fund Managers, Inc. prior to May 1997.
(7) SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER, Voyageur Asset Management LLC prior to May
1997.
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Item 29. Principal Underwriters.
(a) Delaware Distributors, L.P. serves as principal underwriter
for all the mutual funds in the Delaware Group.
(b) Information with respect to each director, officer or partner
of principal underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ ---------------- ---------------
<S> <C> <C>
Delaware Distributors, Inc. General Partner None
Delaware Management
Company, Inc. Limited Partner Investment Manager
Delaware Capital
Management, Inc. Limited Partner None
Wayne A. Stork Chairman Chairman
Bruce D. Barton President and Chief Executive None
Officer
David K. Downes Executive Vice President, Executive Vice
Chief Operating Officer President/Chief
and Chief Financial Officer Operating Officer/
Chief Financial Officer
George M. Chamberlain, Jr. Senior Vice President/Secretary/ Senior Vice President/
General Counsel Secretary/General Counsel
Terrence P. Cunningham Senior Vice President/ Financial None
Institutions
Thomas E. Sawyer Senior Vice President/ None
National Sales Director
Dana B. Hall Senior Vice President/ None
Key Accounts
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ ---------------- ---------------
<S> <C> <C>
Mac McAuliffe Senior Vice President/Sales None
Manager, Western Division
William F. Hostler Senior Vice President/ None
Marketing Services
J. Chris Meyer Senior Vice President/ None
Director Product Management
Stephen H. Slack Senior Vice President/Wholesaler None
William M. Kimbrough Senior Vice President/Wholesaler None
Daniel J. Brooks Senior Vice President/Wholesaler None
Richard J. Flannery Senior Vice President/Corporate Senior Vice President/
and International Affairs Corporate and
International Affairs
Bradley L. Kolstoe Senior Vice President/Western None
Division Sales Manager
Henry W. Orvin Senior Vice President/Eastern None
Division Sales Manager - Wire/
Regional Channel
Michael P. Bishof Senior Vice President and Treasurer/ Senior Vice
Manager, Investment Accounting President/Treasurer
Eric E. Miller Vice President/Assistant Secretary/ Vice President/
Deputy General Counsel Assistant Secretary/
Deputy General Counsel
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ ---------------- ---------------
<S> <C> <C>
Richelle S. Maestro Vice President/ Vice President/
Assistant Secretary Assistant Secretary
Steven T. Lampe Vice President/Taxation Vice President/Taxation
Joseph H. Hastings Vice President/Corporate Senior Vice President/
Controller & Treasurer Corporate Controller
Lisa O. Brinkley Vice President/Compliance Vice President/
Compliance
Rosemary E. Milner Vice President/Legal Registrations Vice President/Legal
Registrations
Daniel H. Carlson Vice President/Strategic Marketing None
Diane M. Anderson Vice President/Plan Record Keeping None
and Administration
Anthony J. Scalia Vice President/Defined Contribution None
Sales, SW Territory
Courtney S. West Vice President/Defined Contribution None
Sales, NE Territory
Denise F. Guerriere Vice President/Client Services None
Gordon E. Searles Vice President/Client Services None
Julia R. Vander Els Vice President/Participant Services None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ ---------------- ---------------
<S> <C> <C>
Jerome J. Alrutz Vice President/Retail Sales None
Joanne A. Mettenheimer Vice President/New Business None
Development
Scott Metzger Vice President/Business Development None
Stephen C. Hall Vice President/Institutional Sales None
Gregory J. McMillan Vice President/ National Accounts None
Christopher H. Price Vice President/Manager, None
Insurance
Stephen J. DeAngelis Vice President/Product None
Development
Zina DeVassal Vice President/Financial Institutions None
Andrew W. Whitaker Vice President/Financial Institutions None
Jesse Emery Vice President/ Marketing None
Communications
Darryl S. Grayson Vice President, Broker/Dealer None
Internal Sales
Susan T. Friestedt Vice President/Client Service None
Dinah J. Huntoon Vice President/Product None
Manager Equity
Soohee Lee Vice President/Fixed Income None
Product Management
Michael J. Woods Vice President/ UIT Product None
Management
Ellen M. Krott Vice President/Marketing None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ ---------------- ---------------
<S> <C> <C>
Dale L. Kurtz Vice President/Marketing Support None
Holly W. Reimel Vice President/Manager, Key Accounts None
David P. Anderson Vice President/Wholesaler None
Lee D. Beck Vice President/Wholesaler None
Gabriella Bercze Vice President/Wholesaler None
Terrence L. Bussard Vice President/Wholesaler None
William S. Carroll Vice President/Wholesaler None
William L. Castetter Vice President/Wholesaler None
Thomas J. Chadie Vice President/Wholesaler None
Thomas C. Gallagher Vice President/Wholesaler None
Douglas R. Glennon Vice President/Wholesaler None
Ronald A. Haimowitz Vice President/Wholesaler None
Christopher L. Johnston Vice President/Wholesaler None
Michael P. Jordan Vice President/Wholesaler None
Jeffrey A. Keinert Vice President/Wholesaler None
Thomas P. Kennett Vice President/ Wholesaler None
Debbie A. Marler Vice President/Wholesaler None
Nathan W. Medin Vice President/Wholesaler None
Roger J. Miller Vice President/Wholesaler None
Patrick L. Murphy Vice President/Wholesaler None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ ---------------- ---------------
<S> <C> <C>
Stephen C. Nell Vice President/Wholesaler None
Julia A. Nye Vice President/Wholesaler None
Joseph T. Owczarek Vice President/Wholesaler None
Mary Ellen Pernice-Fadden Vice President/Wholesaler None
Mark A. Pletts Vice President/Wholesaler None
Philip G. Rickards Vice President/Wholesaler None
Laura E. Roman Vice President/Wholesaler None
Linda Schulz Vice President/Wholesaler None
Edward B. Sheridan Vice President/Wholesaler None
Robert E. Stansbury Vice President/Wholesaler None
Julia A. Stanton Vice President/Wholesaler None
Larry D. Stone Vice President/Wholesaler None
Edward J. Wagner Vice President/Wholesaler None
Wayne W. Wagner Vice President/Wholesaler None
John A. Wells Vice President/Marketing Technology None
Scott Whitehouse Vice President/Wholesaler None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
(c) Not Applicable.
<PAGE>
PART C - Other Information
(Continued)
Item 30. Location of Accounts and Records.
All accounts and records are maintained in
Philadelphia at 1818 Market Street, Philadelphia,
PA 19103 or One Commerce Square, Philadelphia, PA
19103.
Item 31. Management Services. None.
Item 32. Undertakings.
(a) Not Applicable.
(b) The Registrant hereby undertakes to file
a post-effective amendment, using
financial statements which need not be
certified, within four to six months
from the initial public offering of
shares of the Income Portfolio, the
Balanced Portfolio and the Growth
Portfolio.
(c) The Registrant hereby undertakes to
furnish each person to whom a prospectus
is delivered with a copy of the
Registrant's annual report to
shareholders, upon request and without
charge.
(d) The Registrant hereby undertakes to
promptly call a meeting of shareholders
for the purpose of voting upon the
question of removal of any trustee when
requested in writing to do so by the
record holders of not less than 10% of
the outstanding shares.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, this Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
this City of Philadelphia and Commonwealth of Pennsylvania on this 15th day of
January, 1998. .
DELAWARE GROUP FOUNDATION FUNDS
By /s/ Wayne A. Stork
----------------------------
Wayne A. Stork
Chairman
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Wayne A. Stork Chairman of the Board and Trustee January 15, 1998
- ---------------------------------------
Wayne A. Stork
/s/David K. Downes Executive Vice President/Chief Operating January 15, 1998
- -------------------------------------- Officer/Chief Financial Officer and Trustee
David K. Downes (Principal Financial Officer and
Principal Accounting Officer)
/s/Walter P. Babich * Trustee January 15, 1998
- -----------------------------------------
Walter P. Babich
/s/Anthony D. Knerr * Trustee January 15, 1998
- ---------------------------------------
Anthony D. Knerr
/s/Ann R. Leven * Trustee January 15, 1998
- -----------------------------------------
Ann R. Leven
/s/W. Thacher Longstreth * Trustee January 15, 1998
- ------------------------------------
W. Thacher Longstreth
/s/Thomas F. Madison * Trustee January 15, 1998
- -------------------------------------
Thomas F. Madison
/s/Jeffrey J. Nick * Trustee January 15, 1998
- -------------------------------------------
Jeffrey J. Nick
/s/Charles E. Peck * Trustee January 15, 1998
- ------------------------------------------
Charles E. Peck
*By /s/ Wayne A. Stork
----------------------------------
Wayne A. Stork
as Attorney-in-Fact for
each of the persons indicated
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Exhibits
to
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
EX-99.B11 Consent of Independent Auditors
EX-99.B13 Subscription Agreement
EX-27 Financial Data Schedules
(Exhibit 17)
<PAGE>
EXHIBIT 99.B11
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Financial Statements"
in the Statement of Additional Information and to the use of our report dated
January 19, 1998, in Post-Effective Amendment No. 1 to the Registration
Statement (Form N-1A) (No. 333-38801) of Delaware Group Foundation Funds.
Philadelphia, Pennsylvania
January 19, 1998
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Directors
Delaware Group Foundation Funds
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Delaware Group Foundation Funds (comprised of,
respectively, the Income Portfolio, Growth Portfolio, and Balanced Portfolio) as
of December 31, 1997. These statements of assets and liabilities are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these statements of assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of assets and liabilities are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of each of the
respective portfolios of Delaware Group Foundation Funds at December 31, 1997,
in conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
January 19, 1998
<PAGE>
EX-99.B13
EXHIBIT 24B13
SUBSCRIPTION AGREEMENT
Delaware Group Foundation Funds, a Delaware Business Trust ("Trust"),
and Delaware Management Company, Inc., a Delaware Corporation ("Subscriber"),
for the consideration set forth herein, the sufficiency of which is hereby
acknowledged, and intending to be legally bound, hereby agree with each other as
follows:
1. Trust hereby offers to Subscriber and Subscriber hereby purchases from
Trust:
(a) 5882.353 shares of beneficial interest of the Institutional Class of
the Income Portfolio series of the Trust, and 1 share of beneficial
interest of each of the Class A, Class B and Class C shares of said
series, each such share with no par value, for $8.50 per share, at an
aggregate cost of $50,025.50;
(b) 5882.353 shares of beneficial interest of the Institutional Class of
the Balanced Portfolio series of the Trust, and 1 share of beneficial
interest of each of the Class A, Class B and Class C shares of said
series, each such share with no par value, for $8.50 per share, at an
aggregate cost of $50,025.50; and
(c) 5882.353 shares of beneficial interest of the Institutional Class of
the Growth Portfolio series of the Trust, and 1 share of beneficial
interest of each of the Class A, Class B and Class C shares of said
series, each such share with no par value, for $8.50 per share, at an
aggregate cost of $50,025.50.
2. Trust hereby acknowledges the receipt from Subscriber of funds in the
amount of $150,076.50 in full payment for the shares described in section
1 hereof.
3. Subscriber agrees that the shares described in section 1 hereof are being
purchased for investment purposes and not with a view to the distribution
thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement this
31st day of December, 1997.
Delaware Management Company, Inc. Delaware Group Foundation Funds
By: /s/ Wayne A. Stork By: /s/ David K. Downes
---------------------- -------------------------------------
Wayne A. Stork David K. Downes
President Executive Vice President/Chief
Operating Officer/Chief Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001048133
<NAME> DELAWARE GROUP FOUNDATION FUNDS
<SERIES>
<NUMBER> 01
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<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 63,897
<TOTAL-ASSETS> 108,897
<PAYABLE-FOR-SECURITIES> 45,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,871
<TOTAL-LIABILITIES> 58,871
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 9
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 50,026
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 9
<PER-SHARE-NAV-BEGIN> 8.50
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.50
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001048133
<NAME> DELAWARE GROUP FOUNDATION FUNDS
<SERIES>
<NUMBER> 02
<NAME> FOUNDATION INCOME PORTFOLIO B CLASS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 45,000
<INVESTMENTS-AT-VALUE> 45,000
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 63,897
<TOTAL-ASSETS> 108,897
<PAYABLE-FOR-SECURITIES> 45,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,871
<TOTAL-LIABILITIES> 58,871
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 9
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 50,026
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 9
<PER-SHARE-NAV-BEGIN> 8.50
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.50
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001048133
<NAME> DELAWARE GROUP FOUNDATION FUNDS
<SERIES>
<NUMBER> 03
<NAME> FOUNDATION INCOME PORTFOLIO C CLASS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 45,000
<INVESTMENTS-AT-VALUE> 45,000
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 63,897
<TOTAL-ASSETS> 108,897
<PAYABLE-FOR-SECURITIES> 45,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,871
<TOTAL-LIABILITIES> 58,871
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 8
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 50,026
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 8
<PER-SHARE-NAV-BEGIN> 8.50
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.50
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001048133
<NAME> DELAWARE GROUP FOUNDATION FUNDS
<SERIES>
<NUMBER> 04
<NAME> FOUNDATION INCOME PORTFOLIO INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 45,000
<INVESTMENTS-AT-VALUE> 45,000
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 63,897
<TOTAL-ASSETS> 108,897
<PAYABLE-FOR-SECURITIES> 45,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13,871
<TOTAL-LIABILITIES> 58,871
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 5,882
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 50,000
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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