<PAGE>
DELAWARE
INVESTMENTS
-----------
Philadelphia * London
Tax-Free Pennsylvania Fund
Tax-Free New Jersey Fund
Tax-Free Ohio Fund
Class A o Class B o Class C
Prospectus
April 29, 1999
Tax-Exempt Current Income Funds
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy of this prospectus, and any
representation to the contrary is a criminal offense.
<PAGE>
Table of contents
Fund profiles page 2
Tax-Free Pennsylvania Fund 2
Tax-Free New Jersey Fund 4
Tax-Free Ohio Fund 6
How we manage the Funds page 8
Our investment strategies 8
The securities we typically invest in 10
The risks of investing in the Funds 12
Who manages the Funds page 14
Investment manager 14
Portfolio managers 14
Fund administration (Who's who) 15
About your account page 16
Investing in the Funds 16
Choosing a share class 16
How to reduce your sales charge 18
How to buy shares 18
How to redeem shares 20
Account minimums 21
Special services 21
Dividends, distributions and taxes 23
Certain management considerations page 25
Financial highlights page 26
1
<PAGE>
Profile: Tax-Free Pennsylvania Fund
What are the Fund's goals?
Tax-Free Pennsylvania Fund seeks a high level of current interest income exempt
from federal income tax and Pennsylvania state and local taxes, consistent with
preservation of capital. Although the Fund will strive to achieve its goal,
there is no assurance that it will.
What are the Fund's main investment strategies?
The Fund will invest primarily in municipal bonds and notes that are exempt from
federal and Pennsylvania state income taxes. Municipal securities are debt
obligations issued by state and local governments to raise funds for various
public purposes such as hospitals, schools and general operating expenses. The
Fund will invest its assets in securities with maturities of various lengths,
depending on market conditions. We will attempt to adjust the average maturity
of the bonds in the portfolio to provide a high level of tax-exempt income
consistent with preservation of capital. The Fund's income level will vary
depending on current interest rates and the specific securities in the
portfolio.
What are the main risks of investing in the Fund?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The price of Fund shares will increase and
decrease according to changes in the value of the securities held by the Fund.
This Fund will be affected primarily by adverse changes in interest rates. When
interest rates rise, the value of bonds in the portfolio will likely decline.
The Fund may also be affected by the ability of individual municipalities to pay
interest and repay principal on the bonds they issue. That ability may be
impacted by weak economic conditions in the Commonwealth of Pennsylvania. The
Fund is a non-diversified investment company under the Investment Company Act of
1940 and may be subject to greater risk than if it were diversified. For a more
complete discussion of risk, please turn to page 12.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Fund is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Fund with your financial adviser to
determine whether it is an appropriate choice for you.
Who should invest in the Fund
o Investors seeking monthly income, free from federal and Pennsylvania state and
local taxes.
o Investors with long-term financial goals.
Who should not invest in the Fund
o Investors with very short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
especially, over the short term.
o Investors who are concerned about the special risks associated with
concentrating investments in a particular state or region of the country.
2
<PAGE>
How has Tax-Free Pennsylvania Fund performed?
This bar chart and table can help you evaluate the potential risks of investing
in the Fund. We show how returns for the Fund's Class A shares have varied over
the past ten calendar years, as well as the average annual returns of all shares
for one, five, and ten years. The Fund's past performance does not necessarily
indicate how it will perform in the future.
Year-by-year total return (Class A)
- ---------------- --------------------------------
Tax-Free Pennsylvania Fund
- ---------------- --------------------------------
1998 5.03%
- ---------------- --------------------------------
1997 7.59%
- ---------------- --------------------------------
1996 3.41%
- ---------------- --------------------------------
1995 14.72%
- ---------------- --------------------------------
1994 -3.92%
- ---------------- --------------------------------
1993 10.98%
- ---------------- --------------------------------
1992 9.09%
- ---------------- --------------------------------
1991 12.85%
- ---------------- --------------------------------
1990 4.57%
- ---------------- --------------------------------
1989 9.79%
- ---------------- --------------------------------
As of February 28, 1999, the Fund's Class A shares had a fiscal year-to-date
return of 4.64%. During the ten years illustrated in this bar chart, Class A's
highest return was 5.49% for the quarter ended June 30, 1989 and its lowest
return was -3.32% for the quarter ended March 31, 1994.
The maximum Class A sales charge of 3.75%, which is normally deducted when you
purchase shares, is not reflected in the year-by-year total returns above. If
this fee were included, the returns would be less than those shown. The average
annual returns shown in the table below do include the sales charge.
3
<PAGE>
How has Tax-Free Pennsylvania Fund performed? (continued)
<TABLE>
<CAPTION>
Average annual returns for periods ending 12/31/98
CLASS A B C Lehman
Brothers
Municipal
Bond Index
(if redeemed)* (if redeemed)*
(Inception 3/23/77) (Inception 5/2/94) (Inception 11/29/95)
<S> <C> <C> <C> <C>
1 year 5.03% 0.25% 3.21% 6.48%
5 years 5.19% N/A N/A 6.22%
10 years or lifetime** 6.63% N/A N/A 8.22%
</TABLE>
The table above shows the Fund's average annual returns compared to the
performance of the Lehman Brothers Municipal Bond Index. You should remember
that unlike the Fund, the index is unmanaged and doesn't reflect the actual
costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities.
* If redeemed at end of period shown. If shares were not redeemed, the returns
for Class B would be 4.20% and 5.51% for the one-year and lifetime periods,
respectively. Returns for Class C would be 4.20% and 4.86% for the one-year and
lifetime periods, respectively.
** Lifetime returns are shown if the Fund or Class existed for less than 10
years. Lehman Brothers Municipal Bond Index returns are for 10 years. Lehman
Brothers Municipal Bond Index returns for Class B and Class C lifetimes were
7.73% and 6.83%, respectively. Maximum sales charges are included in the Fund
returns above.
What are the Fund's fees and expenses?
Sales charges are fees paid directly from your investments when you buy or sell
shares of the Fund. The Fund may waive or reduce sales charges; please see the
Statement of Additional Information for details.
- --------------------------------------------------------------------------------
CLASS A B C
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
Purchases as a percentage of offering price 3.75% none none
- --------------------------------------------------------------------------------
Maximum contingent deferred sales charge (load)
as a percentage of original purchase price or
redemption price, whichever is lower none(1) 4%(2) 1%(3)
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
Reinvested dividends none none none
- --------------------------------------------------------------------------------
Redemption fees none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses are deducted from the Fund's assets before it
pays dividends and before its net asset value and total return are calculated.
We will not charge you separately for these expenses. These expenses are based
on amounts incurred during the Fund's most recent fiscal year.
- --------------------------------------------------------------------------------
Management fees 0.58% 0.58% 0.58%
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees(4) 0.20% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.17% 0.17% 0.17%
- --------------------------------------------------------------------------------
Total operating expenses 0.95% 1.75% 1.75%
- --------------------------------------------------------------------------------
4
<PAGE>
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds with similar investment
objectives. We show the cumulative amount of Fund expenses on a hypothetical
investment of $10,000 with an annual 5% return over the time shown.(5) This is
an example only, and does not represent future expenses, which may be greater or
less than those shown here.
- --------------------------------------------------------------------------------
CLASS(6) A B B C C
(if redeemed) (if redeemed)
- --------------------------------------------------------------------------------
1 year $468 $178 $578 $178 $278
- --------------------------------------------------------------------------------
3 years $666 $551 $851 $551 $551
- --------------------------------------------------------------------------------
5 years $881 $949 $1,149 $949 $949
- --------------------------------------------------------------------------------
10 years $1,498 $1,851 $1,851 $2,062 $2,062
- --------------------------------------------------------------------------------
(1) A purchase of Class A shares of $1 million or more may be made at net asset
value. However, if you buy the shares through a financial adviser who is paid a
commission, a contingent deferred sales charge will apply to certain
redemptions. Additional Class A purchase options that involve a contingent
deferred sales charge may be permitted from time to time and will be disclosed
in the prospectus if they are available.
(2) If you redeem Class B shares during the first two years after you buy them,
you will pay a contingent deferred sales charge of 4%, which declines to 3%
during the third and fourth years, 2% during the fifth year, 1% during the sixth
year, and 0% thereafter.
(3) Class C shares redeemed within one year of purchase are subject to a 1%
contingent deferred sales charge.
(4) The Board of Trustees adopted a formula for calculating 12b-1 plan expenses
for Tax-Free Pennsylvania Fund's Class A shares that went into effect on June 1,
1992. Under this formula, 12b-1 plan expenses will not be more than 0.30% or
less than 0.10%.
(5) The Fund's actual rate of return may be greater or less than the
hypothetical 5% return we use here. Also, this example assumes that the Fund's
total operating expenses remain unchanged in each of the periods we show.
(6) The Class B example reflects the conversion of Class B shares to Class A
shares after approximately eight years. Information for the ninth and tenth
years reflects expenses of the Class A shares.
5
<PAGE>
Profile: Tax-Free New Jersey Fund
What are the Fund's goals?
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. Although the Fund will strive to achieve its goal,
there is no assurance that it will.
What are the Fund's main investment strategies?
The Fund will invest primarily in municipal bonds and notes that are exempt from
federal and New Jersey state income taxes. Municipal securities are debt
obligations issued by state and local governments to raise funds for various
public purposes such as hospitals, schools and general operating expenses. The
Fund will invest its assets in securities with maturities of various lengths,
depending on market conditions. We will attempt to adjust the average maturity
of the bonds in the portfolio to provide a high level of tax-exempt income
consistent with preservation of capital. The Fund's income level will vary
depending on current interest rates and the specific securities in the
portfolio.
What are the main risks of investing in the Fund?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The price of Fund shares will increase and
decrease according to changes in the value of the securities held by the Fund.
This Fund will be affected primarily by adverse changes in interest rates. When
interest rates rise, the value of bonds in the portfolio will likely decline.
The Fund may also be affected by the ability of individual municipalities to pay
interest and repay principal on the bonds they issue. That ability may be
impacted by weak economic conditions in the state of New Jersey. The Fund is a
non-diversified investment company under the Investment Company Act of 1940 and
may be subject to greater risk than if it were diversified. For a more complete
discussion of risk, please turn to page 20.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Fund is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Fund with your financial adviser to
determine whether it is an appropriate choice for you.
Who should invest in the Fund
o Investors seeking monthly income, free from federal, New Jersey state and
local taxes.
o Investors with long-term financial goals.
Who should not invest in the Fund
o Investors with very short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
especially, over the short term.
o Investors who are concerned about the special risks associated with
concentrating investments in a particular state or region of the country.
6
<PAGE>
How has Tax-Free New Jersey Fund performed?
This bar chart and table can help you evaluate the potential risks of investing
in the Fund. We show returns for the Fund's Class A shares for the past calendar
year, as well as the average annual returns of all shares for one year and since
inception. The Fund's past performance does not necessarily indicate how it will
perform in the future. The returns reflect voluntary expense caps. The returns
would be lower without the voluntary caps.
Total return (Class A)
1998 5.77%
As of February 28, 1999, the Fund's Class A shares had a fiscal year-to-date
return of 5.93%. During the period illustrated in this bar chart, Class A's
highest return was 3.35% for the quarter ended September 30, 1998 and its lowest
return was 0.20% for the quarter ended December 31, 1998.
The maximum Class A sales charge of 3.75%, which is normally assessed when you
purchase shares, is not reflected in the year-by-year total returns above. If
this fee were included, the returns would be less than those shown. The average
annual returns shown in the table on page 10 do include the sales charge.
<TABLE>
<CAPTION>
Average annual returns for periods ending 12/31/98
CLASS A B C Lehman
Brothers
Municipal
Bond Index
(if redeemed)* (if redeemed)*
(Inception 9/2/97) (Inception 9/2/97) (Inception 9/2/97)
<S> <C> <C> <C> <C>
1 year 2.55% 1.71% 4.71% 6.48%
Lifetime 5.74% 4.63% 7.58% 7.43%
</TABLE>
The table above shows the Fund's average annual returns compared to the
performance of the Lehman Brothers Municipal Bond Index. You should remember
that unlike the Fund, the index is unmanaged and doesn't reflect the actual
costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities.
* If redeemed at end of period shown. If shares were not redeemed, the returns
for Class B would be 5.71% and 7.58% for the one-year and lifetime periods,
respectively. Returns for Class C would be 5.71% and 7.58% for the one-year and
lifetime periods, respectively.
7
<PAGE>
What are the Fund's fees and expenses?
Sales charges are fees paid directly from your investments when you buy or sell
shares of the Fund. The Fund may waive or reduce sales charges; please see the
Statement of Additional Information for details.
- --------------------------------------------------------------------------------
CLASS A B C
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
Purchases as a percentage of offering price 3.75% none none
- --------------------------------------------------------------------------------
Maximum contingent deferred sales charge (load)
As a percentage of original purchase price or
Redemption price, whichever is lower none(1) 4%(2) 1%(3)
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
Reinvested dividends none none none
- --------------------------------------------------------------------------------
Redemption fees none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses are deducted from the Fund's assets before it
pays dividends and before its net asset value and total return are calculated.
We will not charge you separately for these expenses. These expenses are based
on amounts incurred during the Fund's most recent fiscal year.
- --------------------------------------------------------------------------------
Management fees 0.55% 0.55% 0.55%
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.95% 0.95% 0.95%
- --------------------------------------------------------------------------------
Total operating expenses (4) 1.75% 2.50% 2.50%
- --------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds with similar investment
objectives. We show the cumulative amount of Fund expenses on a hypothetical
investment of $10,000 with an annual 5% return over the time shown.(5) This is
an example only, and does not represent future expenses, which may be greater or
less than those shown here.
CLASS(6) A B B C C
(if redeemed) (if redeemed)
- --------------------------------------------------------------------------------
1 year $546 $253 $653 $253 $353
- --------------------------------------------------------------------------------
3 years $905 $779 $1,079 $779 $779
- --------------------------------------------------------------------------------
5 years $1,288 $1,331 $1,531 $1,331 $1,331
- --------------------------------------------------------------------------------
10 years $2,360 $2,652 $2,652 $2,836 $2,836
- --------------------------------------------------------------------------------
(1) A purchase of Class A shares of $1 million or more may be made at net asset
value. However, if you buy the shares through a financial adviser who is paid a
commission, a contingent deferred sales charge will apply to certain
redemptions. Additional Class A purchase options that involve a contingent
deferred sales charge may be permitted from time to time and will be disclosed
in the prospectus if they are available.
(2) If you redeem Class B shares during the first two years after you buy them,
you will pay a contingent deferred sales charge of 4%, which declines to 3%
during the third and fourth years, 2% during the fifth year, 1% during the sixth
year, and 0% thereafter.
(3) Class C shares redeemed within one year of purchase are subject to a 1%
contingent deferred sales charge.
8
<PAGE>
(4) The investment manager has agreed to waive fees and pay expenses from
January 22, 1998 through July 31, 1999, in order to prevent total operating
expenses (excluding any taxes, interest, brokerage fees, extraordinary expenses
and 12b-1 fees) from exceeding 0.25% of average daily net assets. The fees and
expenses shown in the table above do not reflect this voluntary expense cap. The
following table shows actual operating expenses which are based on the most
recently completed fiscal year and reflect the manager's current fee waivers
and payments.
- --------------------------------------------------------------------------------
ACTUAL FUND OPERATING EXPENSES INCLUDING VOLUNTARY EXPENSE CAPS
- --------------------------------------------------------------------------------
CLASS A B C
- --------------------------------------------------------------------------------
Management fees 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.25% 0.25% 0.25%
- --------------------------------------------------------------------------------
Total operating expenses 0.50% 1.25% 1.25%
- --------------------------------------------------------------------------------
(5) The Fund's actual rate of return may be greater or less than the
hypothetical 5% return we use here. Also, this example assumes that the Fund's
total operating expenses remain unchanged in each of the periods we show. This
example does not reflect the voluntary expense cap described in footnote 4.
(6) The Class B example reflects the conversion of Class B shares to Class A
shares after approximately eight years. Information for the ninth and tenth
years reflects expenses of the Class A shares.
9
<PAGE>
Profile: Tax-Free Ohio Fund
What are the Fund's goals?
Tax-Free Ohio Fund seeks a high level of current interest income exempt from
federal income tax and Ohio state and local income taxes, consistent with
preservation of capital. Although the Fund will strive to achieve its goal,
there is no assurance that it will.
What are the Fund's main investment strategies?
The Fund will invest primarily in municipal bonds and notes that are exempt from
federal and Ohio income taxes. Municipal securities are debt obligations issued
by state and local governments to raise funds for various public purposes such
as hospitals, schools and general operating expenses. The Fund will invest its
assets in securities with maturities of various lengths, depending on market
conditions. We will attempt to adjust the average maturity of the bonds in the
portfolio to provide a high level of tax-exempt income consistent with
preservation of capital. The Fund's income level will vary depending on current
interest rates and the specific securities in the portfolio.
What are the main risks of investing in the Fund?
Investing in any mutual fund involves risk, including the risk that you may lose
part or all of the money you invest. The price of Fund shares will increase and
decrease according to changes in the value of the securities held by the Fund.
This Fund will be affected primarily by adverse changes in interest rates. When
interest rates rise, the value of bonds in the portfolio will likely decline.
The Fund may also be affected by the ability of individual municipalities to pay
interest and repay principal on the bonds they issue. That ability may be
impacted by weak economic conditions in the state of Ohio. The Fund is a
non-diversified investment company under the Investment Company Act of 1940 and
may be subject to greater risk than if it were diversified. For a more complete
discussion of risk, please turn to page 20.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
You should keep in mind that an investment in the Fund is not a complete
investment program; it should be considered just one part of your total
financial plan. Be sure to discuss this Fund with your financial adviser to
determine whether it is an appropriate choice for you.
Who should invest in the Fund
o Investors seeking monthly income, free from federal and Ohio state and local
taxes.
o Investors with long-term financial goals.
Who should not invest in the Fund
o Investors with very short-term financial goals.
o Investors who are unwilling to accept share prices that may fluctuate,
especially, over the short term.
o Investors who are concerned about the special risks associated with
concentrating investments in a particular state or region of the country.
10
<PAGE>
How has Tax-Free Ohio Fund performed?
This bar chart and table can help you evaluate the potential risks of investing
in the Fund. We show returns for the Fund's Class A shares for the past calendar
year, as well as the average annual returns of all shares for one year and since
inception. The Fund's past performance does not necessarily indicate how it will
perform in the future. The returns reflect voluntary expense caps. The returns
would be lower without the voluntary caps.
Total return (Class A)
Tax-Free Ohio Fund
1998 6.41%
As of February 28, 1999, the Fund's Class A shares had a fiscal year-to-date
return of 5.12%. During the period illustrated in this bar chart, Class A's
highest return was 2.89% for the quarter ended September 30, 1998 and its lowest
return was -0.22% for the quarter ended December 31, 1998.
The maximum Class A sales charge of 3.75%, which is normally assessed when you
purchase shares, is not reflected in the year-by-year total returns above. If
this fee were included, the returns would be less than those shown. The average
annual returns shown in the table on page 15 do include the sales charge.
<TABLE>
<CAPTION>
Average annual returns for periods ending 12/31/98
CLASS A B C Lehman
Brothers
Municipal
Bond Index
(if redeemed)* (if redeemed)*
(Inception 9/2/97) (Inception 9/2/97) (Inception 9/2/97)
<S> <C> <C> <C> <C>
1 year 1.57% 0.73% 3.73% 6.48%
Lifetime 5.16% 1.19% 5.19% 7.43%
</TABLE>
The table above shows the Fund's average annual returns compared to the
performance of the Lehman Brothers Municipal Bond Index. You should remember
that unlike the Fund, the index is unmanaged and doesn't reflect the actual
costs of operating a mutual fund, such as the costs of buying, selling, and
holding securities.
* If redeemed at end of period shown. If shares were not redeemed, the returns
for Class B would be 4.73% and 6.19% for the one-year and lifetime periods,
respectively. Returns for Class C would be 4.73% and 6.19% for the one-year and
lifetime periods, respectively.
11
<PAGE>
What are the Fund's fees and expenses?
Sales charges are fees paid directly from your investments when you buy or sell
shares of the Fund. The Fund may waive or reduce sales charges; please see the
Statement of Additional Information for details.
- --------------------------------------------------------------------------------
CLASS A B C
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
Purchases as a percentage of offering price 3.75% none none
- --------------------------------------------------------------------------------
Maximum contingent deferred sales charge (load)
As a percentage of original purchase price or
Redemption price, whichever is lower none(1) 4%(2) 1%(3)
- --------------------------------------------------------------------------------
Maximum sales charge (load) imposed on
Reinvested dividends none none none
- --------------------------------------------------------------------------------
Redemption fees none none none
- --------------------------------------------------------------------------------
Annual fund operating expenses are deducted from the Fund's assets before it
pays dividends and before its net asset value and total return are calculated.
We will not charge you separately for these expenses. These expenses are based
on amounts incurred during the Fund's most recent fiscal year.
- --------------------------------------------------------------------------------
Management fees 0.55% 0.55% 0.55%
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 1.06% 1.06% 1.06%
- --------------------------------------------------------------------------------
Total operating expenses (4) 1.86% 2.61% 2.61%
- --------------------------------------------------------------------------------
12
<PAGE>
This example is intended to help you compare the cost of investing in the Fund
to the cost of investing in other mutual funds with similar investment
objectives. We show the cumulative amount of Fund expenses on a hypothetical
investment of $10,000 with an annual 5% return over the time shown.(5) This is
an example only, and does not represent future expenses, which may be greater or
less than those shown here.
- --------------------------------------------------------------------------------
CLASS(6) A B B C C
(if redeemed) (if redeemed)
- --------------------------------------------------------------------------------
1 year $557 $264 $664 $264 $364
- --------------------------------------------------------------------------------
3 years $938 $811 $1,111 $811 $811
- --------------------------------------------------------------------------------
5 years $1,343 $1,385 $1,585 $1,385 $1,385
- --------------------------------------------------------------------------------
10 years $2,473 $2,762 $2,762 $2,944 $2,944
- --------------------------------------------------------------------------------
(1) A purchase of Class A shares of $1 million or more may be made at net asset
value. However, if you buy the shares through a financial adviser who is paid a
commission, a contingent deferred sales charge will apply to certain
redemptions. Additional Class A purchase options that involve a contingent
deferred sales charge may be permitted from time to time and will be disclosed
in the prospectus if they are available.
(2) If you redeem Class B shares during the first two years after you buy them,
you will pay a contingent deferred sales charge of 4%, which declines to 3%
during the third and fourth years, 2% during the fifth year, 1% during the sixth
year, and 0% thereafter.
(3) Class C shares redeemed within one year of purchase are subject to a 1%
contingent deferred sales charge.
(4) The investment manager has agreed to waive fees and pay expenses from
January 22, 1998 through July 31, 1999, in order to prevent total operating
expenses (excluding any taxes, interest, brokerage fees, extraordinary expenses
and 12b-1 fees) from exceeding 0.25% of average daily net assets. The fees and
expenses shown in the table above do not reflect this voluntary expense cap. The
following table shows actual operating expenses which are based on the most
recently completed fiscal year and reflect the manager's current fee waivers
and payments.
- --------------------------------------------------------------------------------
ACTUAL FUND OPERATING EXPENSES INCLUDING VOLUNTARY EXPENSE CAPS
- --------------------------------------------------------------------------------
CLASS A B C
- --------------------------------------------------------------------------------
Management fees 0.00% 0.00% 0.00%
- --------------------------------------------------------------------------------
Distribution and service (12b-1) fees 0.25% 1.00% 1.00%
- --------------------------------------------------------------------------------
Other expenses 0.25% 0.25% 0.25%
- --------------------------------------------------------------------------------
Total operating expenses 0.50% 1.25% 1.25%
- --------------------------------------------------------------------------------
(5) The Fund's actual rate of return may be greater or less than the
hypothetical 5% return we use here. Also, this example assumes that the Fund's
total operating expenses remain unchanged in each of the periods we show. This
example does not reflect the voluntary expense cap described in footnote 4.
(6) The Class B example reflects the conversion of Class B shares to Class A
shares after approximately eight years. Information for the ninth and tenth
years reflects expenses of the Class A shares.
13
<PAGE>
How we manage the Funds
We take a disciplined approach to investing, combining investment strategies and
risk management techniques that can help shareholders meet their goals.
Our investment strategies
We analyze economic and market conditions, seeking to identify the securities or
market sectors that we think are the best investments for a particular fund.
Following are descriptions of how the portfolio managers pursue the Funds'
investment goals.
Each Fund will invest at least 80% of its net assets in tax-exempt securities
that are described below. We will generally invest in securities for income
rather than seeking capital appreciation through active trading. However, we may
sell securities for a variety of reasons such as: to reinvest the proceeds in
higher yielding securities, to eliminate investments not consistent with the
preservation of the capital or to honor redemption requests. As a result we may
realize losses or capital gains which could be taxable to shareholders.
Each Fund intends to invest at least 80% of its net assets in debt obligations
that are rated in the top four quality grades, that is BBB or better, by a
nationally recognized statistical ratings organization (NRSRO) at the time of
purchase. Each Fund may buy securities that have not been rated if we believe
they are comparable in quality to the top four rating categories. The fourth
grade is considered medium grade and may have speculative characteristics. Each
Fund may invest up to 20% of its net assets in securities with ratings lower
than the top four grades and in comparable unrated securities. These securities
(commonly known as "junk bonds") are speculative and may involve greater risks
and have higher yields.
Each Fund may invest up to 20% of its net assets in bonds whose income is
subject to the federal alternative minimum tax.
Each Fund may invest more than 25% of its assets in municipal obligations
relating to similar types of projects or with other similar economic, business
or political characteristics (such as bonds of housing finance agencies or
health care facilities). In addition, New Jersey Fund and Ohio Fund may invest
more than 25% of their assets in industrial development bonds or pollution
control bonds, which may be backed only by the assets and revenues of a
non-governmental issuer. Neither Fund will, however, invest more than 25% of
its total assets in bonds issued for companies in the same industry. Percentage
limitations outlined above are determined at the time an investment is made.
Tax-Free Pennsylvania Fund
We invest primarily in municipal securities paying interest income that is
exempt from federal and Pennsylvania income taxes. Determination of whether a
bond's income qualifies for tax-exemption is based on the opinion of the bond
issuer's legal counsel. The securities we invest in include debt obligations of
the Commonwealth of Pennsylvania and its political subdivisions, agencies,
authorities and instrumentalities and also other issuers such as Puerto Rico and
the Virgin Islands whose bonds are also free of federal and Pennsylvania state
income taxes.
Tax-Free New Jersey Fund
We invest primarily in municipal securities paying interest income that is
exempt from federal and New Jersey income taxes. Determination of whether a
bond's income qualifies for tax-exemption is based on the opinion of the bond
issuer's legal counsel. The securities we invest in include debt obligations of
the State of New Jersey and its political subdivisions, agencies, authorities
and instrumentalities and also other issuers such as Puerto Rico and the Virgin
Islands whose bonds are also free of federal and New Jersey state income taxes.
Tax-Free Ohio Fund
We invest primarily in municipal securities paying interest income that is
exempt from federal and Ohio income taxes. Determination of whether a bond's
income qualifies for tax-exemption is based on the opinion of the bond issuer's
legal counsel. The securities we invest in include debt obligations of the State
of Ohio and its political subdivisions, agencies, authorities and
instrumentalities and also other issuers such as Puerto Rico and the Virgin
Islands whose bonds are also free of federal and Ohio state income taxes.
14
<PAGE>
How we manage the Funds (continued)
The securities we typically invest in
Fixed-income securities offer the potential for greater income payments than
stocks, and also may provide capital appreciation. Municipal bond securities
typically pay income free of federal income taxes and may be free of state
income taxes in the state where they are issued.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
- ----------------------------------------------------------- -------------------------------------------------------------------
<S> <C>
General obligation bonds: municipal bonds on which the Each Fund may invest without limit in general
payment of principal and interest is secured by the obligation bonds with an emphasis on bonds rated
issuer's pledge of its full faith, credit and taxing in the top four quality grades.
power.
- ----------------------------------------------------------- -------------------------------------------------------------------
Revenue bonds: municipal bonds on which principal and Each Fund may invest without limit in revenue bonds with an
interest payments are made from revenues derived from a emphasis on bonds rated in the top four quality grades.
particular facility, from the proceeds of a special
excise tax or from revenue generated by the operating
project. Principal and interest are not secured by the
general taxing power. Tax-exempt industrial development
bonds, in most cases, are a type of revenue bond that is
not backed by the credit of the issuing municipality and
may therefore involve more risk.
- ----------------------------------------------------------- -------------------------------------------------------------------
Insured municipal bonds: Various municipal issuers may Each Fund may invest without limit in insured bonds. We do not
obtain insurance for their obligations. In the event of a evaluate the creditworthiness of the private insurer. Instead,
default, the insurer is required to make payments of we focus first on the creditworthiness of the actual bond issuer
interest and principal when due to the bondholders. and its ability to pay interest and principal.
However, there is no assurance that the insurance company
will meet its obligations. Insured obligations are It is possible that a substantial portion of a Fund's portfolio may
typically rated in the top quality grades by an NRSRO. consist of municipal bonds that are insured by a single insurance
company.
Insurance is available on uninsured bonds and each Fund may
purchase such insurance directly. We will generally do so
only if we believe that purchasing and insuring a bond
provides an investment opportunity at least comparable to
owning other available uninsured securities.
- ----------------------------------------------------------- -------------------------------------------------------------------
Private activity or private placement bonds: municipal Each Fund may invest up to 20% of its assets in bonds whose
bond issues whose proceeds are used to finance certain income is subject to the federal alternative minimum tax. This
non-government activities, including some types of means that a portion of the Fund's distributions could be subject
industrial revenue bonds such as privately-owned sports to the federal alternative minimum tax that applies to certain
and convention facilities. The Tax Reform Act of 1986 taxpayers.
subjects interest income from these bonds to the federal
alternative minimum tax and makes the tax-exempt status
of certain bonds dependent on the issuer's compliance
with specific requirements after the bonds are issued.
- ----------------------------------------------------------- -------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
- ----------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Leases and Certificates of Participation (COPs): Each Fund may also invest in municipal lease obligations
Certificates of Participation are widely used by state primarily through certificates of participation.
and local governments to finance the purchase of property
and facilities. COPs are like installment purchase As with its other investments, each Fund expects its investments
agreements. A governmental corporation may create a COP in municipal lease obligations to be exempt from regular federal
when it issues long-term bonds to pay for the acquisition income taxes.
of property or facilities. The property or facilities
are then leased to a municipality, which makes lease We invest only in certificates of participation that are rated
payments to repay interest and principal to the holders within the four highest rating categories of NRSRO. We may also
of the bonds. Once the lease payments are completed, the invest in unrated COPs that we believe to be of comparable
municipality gains ownership of the property for a quality. We believe this quality strategy mitigates the risk of
nominal sum. non-appropriation which is described below.
A feature that distinguishes COPs from municipal debt is
that leases typically contain a "nonappropriation" or
"abatement" clause. This means the municipality leasing the
property or facility must use its best efforts to make lease
payments, but may terminate the lease without penalty if its
legislature or other appropriating body does not allocate
the necessary money. In such a case, the creator of the COP,
or its agent, is typically entitled to repossess the
property. In most cases, however, the market value of the
property will be less than the amount the municipality was
paying.
COPs will be considered illiquid and subject to each Fund's
limitations on illiquid securities unless we determine they
are liquid according to the guidelines set by the Board of
Trustees.
- ----------------------------------------------------------- -------------------------------------------------------------------
Inverse floaters: Inverse floaters are instruments with Tax-Free Pennsylvania Fund may invest in inverse floaters to the
floating or variable interest rates that move in the extent that investments in these securities, when combined with
opposite direction of short-term interest rates usually futures contracts, options on futures contracts and securities that
at an accelerated speed. Consequently, the market values are rated below investment grade, do not exceed 20% of the Fund's
of inverse floaters will generally be more volatile than total assets.
other tax-exempt investments. These securities may be
considered to be derivative securities. Tax-Free New Jersey Fund and Tax-Free Ohio Fund may invest up to
10% of their respective assets in inverse floaters.
Investment in inverse floaters could increase the volatility
of the Funds' share price.
- ----------------------------------------------------------- -------------------------------------------------------------------
Variable rate and floating rate obligations: These Each Fund may purchase "floating-rate" and "variable-rate"
obligations pay interest at rates that are not fixed, but obligations. We generally do not intend to invest more than 5%
instead vary with changes in specified market rates or of any Fund's net assets in these instruments.
indexes on pre-designed dates.
- ----------------------------------------------------------- -------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Securities How we use them
- ----------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advanced refunded bonds: In an advance refunding, the We may invest without limit in refunded bonds. These bonds are
issuer will use the proceeds of a new bond issue to generally considered to be of very high quality because of the
purchase high-grade interest-bearing debt securities, escrow account which typically holds U.S. Treasuries.
that are deposited into an irrevocable escrow account
held by a trustee bank to secure all future payments
of principal and interest on pre-existing bonds which
are then considered to be "advance refunded bonds."
Escrow secured bonds often receive the highest rating
from S&P and Moody's.
- ----------------------------------------------------------- -------------------------------------------------------------------
High-yield, higher risk municipal bonds: Municipal debt Each Fund may invest up to 20% of its net assets in high-yield,
obligations rated lower than investment grade by a higher risk fixed-income securities. We will not invest in
nationally recognized statistical ratings organization securities, that are rated lower than B by S&P or similarly by
(NRSRO) or, if unrated, of comparable quality. These another rating agency. We will not invest in unrated bonds that
securities are often referred to as "junk bonds" and are we consider to be of a quality lower than B.
considered to be of poor standing and predominately
speculative.
- ----------------------------------------------------------- -------------------------------------------------------------------
Restricted securities: Privately placed securities whose We may invest without limitation in privately placed securities
resale is restricted under securities law. that are eligible for resale only among certain institutional
buyers without registration. These are commonly known as "Rule
144A Securities."
- ----------------------------------------------------------- -------------------------------------------------------------------
Illiquid securities: Securities that do not have a ready Tax-Free Pennsylvania Fund may invest up to 10% of net assets
market, and cannot be easily sold, if at all, at in illiquid securities
approximately the price that the Fund has valued them.
Tax-Free New Jersey Fund and Tax-Free Ohio Fund may invest up
to 15% of their respective net assets in illiquid securities.
- ----------------------------------------------------------- -------------------------------------------------------------------
</TABLE>
The Funds may also invest in other securities including options and futures.
Tax-Free New Jersey Fund and Tax-free Ohio Fund may invest in zero coupon bonds
and derivative tax-exempt obligations. Please see the Statement of Additional
Information for additional descriptions on these securities as well as those
listed in the table above.
Borrowing money
Each Fund is permitted to borrow money but normally does not do so. As a
temporary measure for extraordinary purposes or to meet redemption requests,
Tax-free New Jersey Fund and Tax-free Ohio Fund may borrow up to 10% of the
value of their assets.
Purchasing securities on a when-issued or delayed delivery basis
Tax-Free Pennsylvania Fund, Tax-Free New Jersey Fund and Tax-Free Ohio Fund may
buy or sell securities on a when-issued or delayed delivery basis; that is,
paying for securities before delivery or taking delivery up to 45 days later.
Portfolio turnover
We anticipate that Tax-Free Pennsylvania Fund's, Tax-Free New Jersey Fund's and
Tax-Free Ohio Fund's annual portfolio turnover will be less than 100%. A
turnover rate of 100% would occur if a Fund sold and replaced securities valued
at 100% of its net assets within one year.
17
<PAGE>
How we manage the Funds (continued)
The risks of investing in the Funds
Investing in any mutual fund involves risk, including the risk that you may
receive little or no return on your investment, and the risk that you may lose
part or all of the money you invest. Before you invest in a Fund you should
carefully evaluate the risks. An investment in Tax-Free Pennsylvania Fund,
Tax-Free New Jersey Fund or Tax-Free OH Fund typically provides the best results
when held for a number of years. The following are the chief risks you assume
when investing in these funds. Please see the Statement of Additional
Information for further discussion of these risks and the other risks not
discussed here.
<TABLE>
<CAPTION>
- ------------------------------------------------------- -------------------------------------------------------------------
Risks How we strive to manage them
- ------------------------------------------------------- -------------------------------------------------------------------
Tax-Free Pennsylvania Fund, Tax-Free New Jersey
Fund and Tax-Free Ohio Fund
- ------------------------------------------------------- -------------------------------------------------------------------
<S> <C>
Market risk is the risk that all or a majority of the We maintain a long-term investment approach and focus on bonds we
securities in a certain market--like the stock or bond believe will provide a steady income stream regardless of interim
market--will decline in value because of factors such market fluctuations. We do not try to predict overall market
as economic conditions, future expectations or movements and do not trade for short-term purposes.
investor confidence.
- ------------------------------------------------------- -------------------------------------------------------------------
Industry and security risk is the risk that the value We diversify the Fund's assets across different types of
of securities in a particular industry or the value municipal bonds and among bonds representing different industries
of an individual security will decline because of and regions within a state. We also follow a rigorous selection
changing expectations for the performance of that process before choosing securities for the portfolio.
industry or for the individual issuer of the security.
- ------------------------------------------------------- -------------------------------------------------------------------
Interest rate risk is the risk that securities, We do not try to increase return by predicting and aggressively
particularly bonds with longer maturities, will capitalizing on interest rate moves.
decrease in value if interest rates rise.
- ------------------------------------------------------- -------------------------------------------------------------------
Credit risk
The possibility that a bond's issuer (or an entity We conduct careful, credit analysis of individual bonds. We
that insures the bond) will be unable to make timely focus on high quality bonds and limit our holdings of bonds rated
payments of interest and principal. below investment grade. We also hold a number of different bonds in
the portfolio. All of this is designed to help reduce credit risk.
In the case of municipal bonds, issuers may be
affected by poor economic conditions in their state.
- ------------------------------------------------------- -------------------------------------------------------------------
Call risk is the risk that a bond issuer will prepay We take into consideration the likelihood of prepayment when we
the bond during periods of low interest rates, select bonds and in certain environments may look for bonds that
forcing an investor to reinvest their money at have protection against early prepayment.
interest rates that might be lower than rates on the
called bond.
- ------------------------------------------------------- -------------------------------------------------------------------
Liquidity risk is the possibility that securities We limit exposure to illiquid securities.
cannot be readily sold, if at all, at approximately
the price that a Fund values them.
- ------------------------------------------------------- -------------------------------------------------------------------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------- -------------------------------------------------------------------
Risks How we strive to manage them
- ------------------------------------------------------- -------------------------------------------------------------------
Tax-Free Pennsylvania Fund, Tax-Free New Jersey
Fund and Tax-Free Ohio Fund
- ------------------------------------------------------- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-diversified funds Non-diversified funds Each Fund is a non-diversified investment
have the flexibility to invest as much as 50% company, subject to this risk. Nevertheless,
of their assets in as few as two issuers we typically hold securities from a variety of
provided no single issuer accounts for more than different issuers representing different
25% of the portfolio. The remaining 50% of the sectors and different types of municipal
portfolio must be diversified so that no more than projects. We also perform extensive credit
5% of the Fund's assets is invested in the analysis on all securities. We are
securities of a single issuer. When a Fund particularly diligent in reviewing the credit
invests its assets in fewer issuers, the value of status of bonds that represent a larger
Fund shares may increase or decrease more rapidly percentage of portfolio assets.
than if the Fund were fully diversified. If a Fund
has invested more than 5% of its assets in a
single issuer and that issuer encounters difficulties
in satisfying its financial obligations, the Fund would
be affected more than a fully diversified fund.
- ------------------------------------------------------- -------------------------------------------------------------------
Concentration risk is the risk that a fund Each Fund invests primarily in a specific
which concentrates on investments from a state and may be subject to concentration
particular state or region could be adversely risk. However, we believe that the economies
affected by political and economic conditions and municipal bond markets in Pennsylvania,
in that state or region. There is also a risk New Jersey, and Ohio are broad enough to
that the supply of municipal bonds in a satisfy our investment needs. In addition, we
particular state or region would not be sufficient have the flexibility to invest in issuers in
to meet the portfolio's needs. Puerto Rico and the Virgin Islands whose bonds
are also free of Pennsylvania, New Jersey and
Ohio state income taxes.
- ------------------------------------------------------- -------------------------------------------------------------------
</TABLE>
19
<PAGE>
Who manages the Funds
Investment manager
The Funds are managed by Delaware Management Company, a series of Delaware
Management Business Trust which is an indirect, wholly owned subsidiary of
Delaware Management Holdings, Inc. Delaware Management Company makes investment
decisions for the Funds, manages the Funds' business affairs and provides daily
administrative services. For these services, the manager was paid a fee for the
last fiscal year as follows:
Investment management fees
<TABLE>
<CAPTION>
- --------------------------------------------------------------------- ----------------- -------------- -------------
Tax-Free
Pennsylvania Tax-Free New Tax-Free
Fund Jersey Fund Ohio Fund
- --------------------------------------------------------------------- ----------------- -------------- -------------
<S> <C> <C> <C>
As a percentage of average daily net assets 0.58% 0.30%* 0.30%*
- --------------------------------------------------------------------- ----------------- -------------- -------------
</TABLE>
*Reflects the voluntary waiver of fees by the manager.
Portfolio managers
Patrick P. Coyne and Mitchell L. Conery have primary responsibility for making
day-to-day investment decisions for each Fund. Mr. Coyne and Mr. Conery have
managed Tax-Free New Jersey Fund and Tax-Free Ohio Fund since their inception.
Mr. Coyne assumed primary responsibility for managing Pennsylvania Fund on
November 26, 1996. Mr. Conery became co-manager of Tax-Free Pennsylvania Fund in
January 1997.
Patrick P. Coyne, Vice President/Senior Portfolio Manager for each Fund, is a
graduate of Harvard University with an MBA from the University of Pennsylvania's
Wharton School. Mr. Coyne joined Delaware Investment's fixed-income department
in 1990. Prior to joining Delaware Investments, he was a manager of Kidder,
Peabody & Co. Inc.'s trading desk, and specialized in trading high grade
municipal bonds and municipal futures contracts. Mr. Coyne is a member of the
Municipal Bond Club of Philadelphia.
Mitchell L. Conery, Vice President/Senior Portfolio Manager for each Fund,
joined Delaware Investments in January 1997. Mr. Conery holds a bachelor's
degree from Boston University and an MBA in Finance from the State University of
New York at Albany. He has served as an investment officer with Travelers
Insurance and as a research analyst with CS First Boston and MBIA Corporation.
20
<PAGE>
Who's who?
This diagram shows the various organizations involved with managing,
administering, and servicing the Delaware Investments funds.
[GRAPHIC OMITTED: DIAGRAM SHOWING THE VARIOUS ORGANIZATIONS INVOLVED WITH
MANAGING, ADMINISTERING, AND SERVICING THE DELAWARE INVESTMENTS FUNDS]
Board of Trustees
Investment Manager The Funds Custodian
Delaware Management Company The Chase Manhattan Bank
One Commerce Square 4 Chase Metrotech Center
Philadelphia, PA 19103 Brooklyn, NY 11245
Portfolio managers Distributor Service agent
(see page 14 for details) Delaware Distributors, L.P. Delaware Service
1818 Market Street Company, Inc.
Philadelphia, PA 19103 1818 Market Street
Philadelphia, PA 19103
Financial advisers
Shareholders
Board of trustees A mutual fund is governed by a board of trustees which has
oversight responsibility for the management of the fund's business affairs.
Trustees establish procedures and oversee and review the performance of the
investment manager, the distributor and others that perform services for the
fund. At least 40% of the board of trustees must be independent of the fund's
investment manager or distributor. These independent fund trustees, in
particular, are advocates for shareholder interests.
Investment manager An investment manager is a company responsible for selecting
portfolio investments consistent with the objective and policies stated in the
mutual fund's prospectus. The investment manager places portfolio orders with
broker/dealers and is responsible for obtaining the best overall execution of
those orders. A written contract between a mutual fund and its investment
manager specifies the services the manager performs. Most management contracts
provide for the manager to receive an annual fee based on a percentage of the
fund's average daily net assets. The manager is subject to numerous legal
restrictions, especially regarding transactions between itself and the funds it
advises.
Portfolio managers Portfolio managers are employed by the investment manager to
make investment decisions for individual portfolios on a day-to-day basis.
Custodian Mutual funds are legally required to protect their portfolio
securities and typically place them with a qualified bank custodian who
segregates fund securities from other bank assets.
Distributor Most mutual funds continuously offer new shares to the public
through distributors who are regulated as broker-dealers and are subject to
National Association of Securities Dealers, Inc. (NASD) rules governing mutual
fund sales practices.
Service agent Mutual fund companies employ service agents (sometimes called
transfer agents) to maintain records of shareholder accounts, calculate and
disburse dividends and capital gains and prepare and mail shareholder statements
and tax information, among other functions. Many service agents also provide
customer service to shareholders.
Financial advisers Financial advisers provide advice to their clients--analyzing
their financial objectives and recommending appropriate funds or other
investments. Financial advisers are compensated for their services, generally
through sales commissions, and through 12b-1 and/or service fees deducted from
the fund's assets.
Shareholders Like shareholders of other companies, mutual fund shareholders have
specific voting rights, including the right to elect directors. Material changes
in the terms of a fund's management contract must be approved by a shareholder
vote, and funds seeking to change fundamental investment objectives or policies
must also seek shareholder approval.
21
<PAGE>
About your account
Investing in the Funds
You can choose from a number of share classes for each Fund. Because each share
class has a different combination of sales charges, fees, and other features,
you should consult your financial adviser to determine which class best suits
your investment goals and time frame.
Choosing a share class
Class A
o Class A shares have an up-front sales charge of up to 3.75% that you pay when
you buy the shares. The offering price for Class A shares includes the
front-end sales charge.
o If you invest $100,000 or more, your front-end sales charge will be reduced.
o You may qualify for other reduced sales charges, as described in "How to
reduce your sales charge," and under certain circumstances the sales charge
may be waived; please see the Statement of Additional Information for details.
o Class A shares are also subject to an annual 12b-1 fee no greater than 0.30%
of average daily net assets, which is lower than the 12b-1 fee for Class B and
Class C shares.
o Class A shares generally are not subject to a contingent deferred sales
charge.
<TABLE>
<CAPTION>
Class A Sales Charges
Sales charge as % of amount invested
Sales charge as % Tax-Free Tax-Free Tax-Free Dealer's commission as %
Amount of purchase of offering price PA Fund NJ Fund OH Fund of offering price
- ---------------------- ------------------ --------------------- ------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Less than $100,000 3.75% 3.86% 3.83% 3.89% 3.25%
$100,000 but 3.00% 3.14% 3.13% 3.01% 2.50%
under $250,000
$250,000 but 2.50% 2.53% 2.61% 2.48% 2.00%
under $500,000
$500,000 but 2.00% 2.05% 2.09% 2.12% 1.75%
under $1 million
</TABLE>
As shown below, there is no front-end sales charge when you purchase $1 million
or more of Class A shares. However, if your financial adviser is paid a
commission on your purchase, you may have to pay a limited contingent deferred
sales charge of 1% if you redeem these shares within the first year and 0.50% if
you redeem them within the second year.
22
<PAGE>
<TABLE>
<CAPTION>
- --------------------- --------------------- -------------------------------------------------------------- -------------------------
Sales charge as % of amount invested
Sales charge as % Tax-Free PA Tax-Free NJ Dealer's commission as %
Amount of purchase Of offering price Fund Fund Tax-Free OH Fund of offering price
- --------------------- --------------------- ------------------ ------------------- ----------------------- -------------------------
<S> <C> <C>
$1 million up to $5 none none none none 1.00%
million
- --------------------- --------------------- ------------------ ------------------- ----------------------- -------------------------
Next $20 million none none none none 0.50%
Up to $25 million
- --------------------- --------------------- ------------------ ------------------- ----------------------- -------------------------
Amount over $25 none none none none 0.25%
million
- --------------------- --------------------- ------------------ ------------------- ----------------------- -------------------------
</TABLE>
Class B
o Class B shares have no up-front sales charge, so the full amount of
your purchase is invested in the Fund. However, you will pay a
contingent deferred sales charge if you redeem your shares within six
years after you buy them.
o If you redeem Class B shares during the first two years after you buy
them, the shares will be subject to a contingent deferred sales charge
of 4%. The contingent deferred sales charge is 3% during the third and
fourth years, 2% during the fifth year, 1% during the sixth year, and
0% thereafter.
o Under certain circumstances the contingent deferred sales charge may be
waived; please see the Statement of Additional Information for details.
o For approximately eight years after you buy your Class B shares, they
are subject to annual 12b-1 fees no greater than 1% of average daily
net assets, of which 0.25% are service fees paid to the distributor,
dealers or others for providing services and maintaining accounts.
o Because of the higher 12b-1 fees, Class B shares have higher expenses
and any dividends paid on these shares are lower than dividends on
Class A shares.
o Approximately eight years after you buy them, Class B shares
automatically convert into Class A shares with a 12b-1 fee of no more
than 0.30%. Conversion may occur as late as three months after the
eighth anniversary of purchase, during which time Class B's higher
12b-1 fees apply.
o You may purchase up to $250,000 of Class B shares at any one time.
23
<PAGE>
Class C
o Class C shares have no up-front sales charge, so the full amount of your
purchase is invested in the Fund. However, you will pay a contingent
deferred sales charge if you redeem your shares within 12 months after you
buy them.
o Under certain circumstances the contingent deferred sales charge may be
waived; please see the Statement of Additional Information for details.
o Class C shares are subject to an annual 12b-1 fee which may not be greater
than 1% of average daily net assets, of which 0.25% are service fees paid
to the distributor, dealers or others for providing services and
maintaining shareholder accounts.
o Because of the higher 12b-1 fees, Class C shares have higher expenses and
pay lower dividends than Class A shares.
o Unlike Class B shares, Class C shares do not automatically convert into
another class.
o You may purchase any amount less than $1,000,000 of Class C shares at any
one time.
Each share class of the Funds has adopted a separate 12b-1 plan that allows it
to pay distribution fees for the sales and distribution of its shares. Because
these fees are paid out of the Fund's assets on an ongoing basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
24
<PAGE>
About your account (continued)
How to reduce your sales charge
We offer a number of ways to reduce or eliminate the sales charge on shares.
Please refer to the Statement of Additional Information for detailed information
and eligibility requirements. You can also get additional information from your
financial adviser. You or your financial adviser must notify us at the time you
purchase shares if you are eligible for any of these programs.
<TABLE>
<CAPTION>
- ------------------------------------------- ------------------------------------- ------------------------------------------
Program How it works Share class
A B C
- ------------------------------------------- ------------------------------------- -------------- ---------------------------
<S> <C> <C> <C>
Letter of Intent Through a Letter of Intent you X Although the Letter of
agree to invest a certain Intent and Rights of
amount in Delaware Investment Accumulation do not apply
Funds (except money market to the purchase of Class
funds with no sales charge) B and C shares, you can
over a 13-month period to combine your purchase of
qualify for reduced front-end Class A shares with your
sales charges. purchase of B and C
shares to fulfill your
Letter of Intent or
qualify for Rights of
Accumulation.
- ------------------------------------------- ----------------------------------- -------------- ---------------------------
Rights of Accumulation You can combine your holdings X
or purchases of all funds in the
Delaware Investments family
(except money market funds with
no sales charge) as well as the
holdings and purchases of your
spouse and children under 21 to
qualify for reduced front-end
sales charges.
- ------------------------------------------- ----------------------------------- -------------- ---------------------------
Reinvestment of redeemed shares Up to 12 months after you X Not available.
redeem shares, you can reinvest
the proceeds without paying a
front-end sales charge.
- ------------------------------------------- ----------------------------------- -------------- ---------------------------
</TABLE>
25
<PAGE>
How to buy shares
[GRAPHIC OMITTED: ILLUSTRATION OF A PERSON]
Through your financial adviser
Your financial adviser can handle all the details of purchasing shares,
including opening an account. Your adviser may charge a separate fee for this
service.
[GRAPHIC OMITTED: ILLUSTRATION OF AN ENVELOPE]
By mail
Complete an investment slip and mail it with your check, made payable to the
fund and class of shares you wish to purchase, to Delaware Investments, 1818
Market Street, Philadelphia, PA 19103-3682. If you are making an initial
purchase by mail, you must include a completed investment application (or an
appropriate retirement plan application if you are opening a retirement account)
with your check.
[GRAPHIC OMITTED: ILLUSTRATION OF A JAGGED LINE]
By wire
Ask your bank to wire the amount you want to invest to First Union Bank, ABA
#031201467, Bank Account number 2014 12893 4013. Include your account number and
the name of the fund in which you want to invest. If you are making an initial
purchase by wire, you must call us so we can assign you an account number.
[GRAPHIC OMITTED: ILLUSTRATION OF AN EXCHANGE SYMBOL]
By exchange
You can exchange all or part of your investment in one or more funds in the
Delaware Investments family for shares of other funds in the family. Please keep
in mind, however, that under most circumstances you are allowed to exchange only
between like classes of shares. To open an account by exchange, call the
Shareholder Service Center at 800.523.1918.
[GRAPHIC OMITTED: ILLUSTRATION OF A KEYPAD]
Through automated shareholder services
You can purchase or exchange shares through Delaphone, our automated telephone
service or through our web site, www.delawarefunds.com. For more information
about how to sign up for these services, call our Shareholder Service Center at
800.523.1918.
26
<PAGE>
About your account (continued)
How to buy shares (continued)
Once you have completed an application, you can generally open an account with
an initial investment of $1,000 and make additional investments at any time for
as little as $100. If you are buying shares under the Uniform Gifts to Minors
Act or the Uniform Transfers to Minors Act; or through an Automatic Investing
Plan, the minimum purchase is $250, and you can make additional investments of
only $25.
The price you pay for shares will depend on when we receive your purchase order.
If we or an authorized agent receive your order before the close of trading on
the New York Stock Exchange (normally 4:00 p.m. Eastern time) on a business day,
you will pay that day's closing share price which is based on the Fund's net
asset value. If we receive your order after the close of trading, you will pay
the next business day's price. A business day is any day that the New York Stock
Exchange is open for business. Currently the Exchange is closed when the
following holidays are observed: New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas. We reserve the right to reject any purchase
order.
We determine the Funds' net asset value (NAV) per share at the close of trading
of the New York Stock Exchange each business day that the Exchange is open. We
calculate this value by adding the market value of all the securities and assets
in a Fund's portfolio, deducting all liabilities, and dividing the resulting
number by the number of shares outstanding. The result is the net asset value
per share. We price securities and other assets for which market quotations are
available at their market value. We price fixed-income securities on the basis
of valuations provided to us by an independent pricing service that uses methods
approved by the board of directors. Any fixed-income securities that have a
maturity of less than 60 days we price at amortized cost. We price all other
securities at their fair market value using a method approved by the board of
directors.
27
<PAGE>
How to redeem shares
[GRAPHIC OMITTED: ILLUSTRATION OF A PERSON]
Through your financial adviser
Your financial adviser can handle all the details of redeeming your shares. Your
adviser may charge a separate fee for this service.
[GRAPHIC OMITTED: ILLUSTRATION OF AN ENVELOPE]
By mail
You can redeem your shares (sell them back to the fund) by mail by writing to:
Delaware Investments, 1818 Market Street, Philadelphia, PA 19103-3682. All
owners of the account must sign the request, and for redemptions of $50,000 or
more, you must include a signature guarantee for each owner. Signature
guarantees are also required when redemption proceeds are going to an address
other than the address of record on an account.
[GRAPHIC OMITTED: ILLUSTRATION OF A TELEPHONE]
By telephone
You can redeem up to $50,000 of your shares by telephone. You may have the
proceeds sent to you by check, or, if you redeem at least $1,000 of shares, you
may have the proceeds sent directly to your bank by wire. Bank information must
be on file before you request a wire redemption.
[GRAPHIC OMITTED: ILLUSTRATION OF A JAGGED LINE]
By wire
You can redeem $1,000 or more of your shares and have the proceeds deposited
directly to your bank account the next business day after we receive your
request. If you request a wire deposit, the First Union Bank fee (currently
$7.50) will be deducted from your proceeds. Bank information must be on file
before you request a wire redemption.
[GRAPHIC OMITTED: ILLUSTRATION OF A KEYPAD]
Through automated shareholder services
You can redeem shares through Delaphone, our automated telephone service or
through our web site, www.delawarefunds.com. For more information about how to
sign up for these services, call our Shareholder Service Center at 800.523.1918.
28
<PAGE>
About your account (continued)
How to redeem shares (continued)
If you hold your shares in certificates, you must submit the certificates with
your request to sell the shares. We recommend that you send your certificates by
certified mail.
When you send us a properly completed request to redeem or exchange shares
before the close of trading on the New York Stock Exchange (normally 4:00 p.m.
Eastern time) you will receive the net asset value as determined on the business
day we receive your request. We will deduct any applicable contingent deferred
sales charges. You may also have to pay taxes on the proceeds from your sale of
shares. We will send you a check, normally the next business day, but no later
than seven days after we receive your request to sell your shares. If you
purchased your shares by check, we will wait until your check has cleared, which
can take up to 15 days, before we send your redemption proceeds.
If you are required to pay a contingent deferred sales charge when you redeem
your shares, the amount subject to the fee will be based on the shares' net
asset value when you purchased them or their net asset value when you redeem
them, whichever is less. This arrangement assures that you will not pay a
contingent deferred sales charge on any increase in the value of your shares.
You also will not pay the charge on any shares acquired by reinvesting dividends
or capital gains. If you exchange shares of one fund for shares of another, you
do not pay a contingent deferred sales charge at the time of the exchange. If
you later redeem those shares, the purchase price for purposes of the contingent
deferred sales charge formula will be the price you paid for the original
shares--not the exchange price. The redemption price for purposes of this
formula will be the NAV of the shares you are actually redeeming.
Account minimums
If you redeem shares and your account balance falls below the required account
minimum of $1,000 ($250 for Uniform Gift to Minors Act accounts or accounts with
automatic investing plans) for three or more consecutive months, you will have
until the end of the current calendar quarter to raise the balance to the
minimum. If your account is not at the minimum by the required time, you will be
charged a $9 fee for that quarter and each quarter after that until your account
reaches the minimum balance. If your account does not reach the minimum balance,
the Fund may redeem your account after 60 days' written notice to you.
29
<PAGE>
Special services
To help make investing with us as easy as possible, and to help you build your
investments, we offer the following special services.
Automatic Investing Plan
The Automatic Investing Plan allows you to make regular monthly investments
directly from your checking account.
Direct Deposit
With Direct Deposit you can make additional investments through payroll
deductions, recurring government or private payments such as Social Security or
direct transfers from your bank account.
Wealth Builder Option
With the Wealth Builder Option you can arrange automatic monthly exchanges
between your shares in one or more Delaware Investments funds. Wealth Builder
exchanges are subject to the same rules as regular exchanges (see below) and
require a minimum monthly exchange of $100 per fund.
Dividend Reinvestment Plan
Through our Dividend Reinvestment Plan, you can have your distributions
reinvested in your account or the same share class in another fund in the
Delaware Investments family. The shares that you purchase through the Dividend
Reinvestment Plan are not subject to a front-end sales charge or to a contingent
deferred sales charge. Under most circumstances, you may reinvest dividends only
into like classes of shares.
Exchanges
You can exchange all or part of your shares for shares of the same class in
another Delaware Investments fund without paying a sales charge and without
paying a contingent deferred sales charge at the time of the exchange. However,
if you exchange shares from a money market fund that does not have a sales
charge you will pay any applicable sales charges on your new shares. When
exchanging Class B and Class C shares of one fund for similar shares in other
funds, your new shares will be subject to the same contingent deferred sales
charge as the shares you originally purchased. The holding period for the CDSC
will also remain the same, with the amount of time you held your original shares
being credited toward the holding period of your new shares. You don't pay sales
charges on shares that you acquired through the reinvestment of dividends. You
may have to pay taxes on your exchange. When you exchange shares, you are
purchasing shares in another fund so you should be sure to get a copy of the
fund's prospectus and read it carefully before buying shares through an
exchange.
30
<PAGE>
About your account (continued)
Special services (continued)
MoneyLineSM On Demand Service
Through our MoneyLineSM On Demand Service, you or your financial adviser may
transfer money between your Fund account and your predesignated bank account by
telephone request. MoneyLine has a minimum transfer of $25 and a maximum
transfer of $50,000.
MoneyLine Direct Deposit Service
Through our MoneyLine Direct Deposit Service you can have $25 or more in
dividends and distributions deposited directly to your bank account. Delaware
Investments does not charge a fee for this service; however, your bank may
assess one.
Systematic Withdrawal Plan
Through our Systematic Withdrawal Plan you can arrange a regular monthly or
quarterly payment from your account made to you or someone you designate. If the
value of your account is $5,000 or more, you can make withdrawals of at least
$25 monthly, or $75 quarterly. You may also have your withdrawals deposited
directly to your bank account through our MoneyLine Direct Deposit Service.
Dividends, distributions and taxes
For each Fund, dividends, if any, are paid monthly, while any capital gains are
distributed annually. We automatically reinvest all dividends and any capital
gains, unless you tell us otherwise.
Tax laws are subject to change, so we urge you to consult your tax adviser about
your particular tax situation and how it might be affected by current tax law.
The tax status of your distributions from these Funds is the same whether you
reinvest your dividends or receive them in cash.
Dividends paid by the Funds are generally expected to be exempt from federal
income tax. However, they must be included in the tax base for determining how
much of a shareholder's Social Security benefits are subject to federal income
tax. Shareholders are required to disclose tax-exempt interest received from the
Funds on their federal income tax returns.
Distributions from a Fund's long-term capital gains are taxable as capital
gains. Short-term capital gains are generally taxable as ordinary income. Any
capital gains may be taxable at different rates depending on the length of time
the Fund held the assets. In addition, you may be subject to state and local
taxes on distributions.
The sale of Fund shares either through redemption or exchange, is a taxable
event and may result in a capital gain or loss to shareholders.
We will send you a statement each year by January 31 detailing the amount and
nature of all dividends and capital gains that you were paid for the prior year
as well as all redemptions and exchanges.
Tax-Free Pennsylvania Fund
Any dividends paid by the Fund that are properly attributable to interest on
Pennsylvania state and municipal obligations or U.S. government obligations (the
interest on which is exempt from state taxation under the laws of Pennsylvania
or the United States) will be exempt from Pennsylvania personal income tax. For
shareholders who are residents of Philadelphia, income from these sources, as
well as distributions designated as capital gain dividends, will also be exempt
from Philadelphia School District income tax.
Shares of the Fund are exempt from Pennsylvania county personal property tax to
the extent the portfolio securities consist of Pennsylvania state and municipal
obligations or qualifying obligations of the United States and its agencies and
instrumentalities on the annual assessment date. It should be noted, however,
that at present, Pennsylvania counties generally have stopped assessing personal
property taxes. This is due, in part, to ongoing litigation challenging the
validity of the tax.
31
<PAGE>
Shareholders of the Fund will receive notification from the Fund annually as to
the taxability of such distributions in Pennsylvania.
Tax-Free New Jersey Fund
Any distributions paid by the Fund that are properly attributable to income or
net capital gains from New Jersey state and municipal obligations or obligations
of the United States and certain of its territories, agencies and
instrumentalities will be exempt from the New Jersey gross income tax (the
interest on which is exempt from state taxation under the laws of the state of
New Jersey or the United States).
Gains resulting from the redemption or sale of shares of the Fund will also be
exempt from New Jersey gross income tax.
Tax-Free New Jersey Fund has qualified and will continue to qualify as a
"qualified investment fund" under the New Jersey gross income tax law except
when investing for defensive purposes under certain circumstances. This
qualification is described more fully in the Statement of Additional
Information. The exemptions described above are effective as long as the Fund
remains a "qualified investment fund." If the Fund fails to be a qualified
investment fund, none of its distributions for the entire taxable year will
qualify for tax-exempt status under New Jersey law.
Tax-Free Ohio Fund
Any distributions paid by the Fund that are properly attributable to interest on
obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities thereof (Ohio Obligations) are exempt
from
o Ohio personal income tax, and
o school district and municipal income taxes in Ohio
provided that the Fund continues to qualify as a regulated investment company
for federal income tax purposes and that at all times at least 50% of the value
of the total assets of the Fund consists of Ohio Obligations or similar
obligations of other states or their subdivisions. It is assumed for purposes of
this discussion of Ohio taxation that these requirements are satisfied.
All distributions received from the Fund are excluded from the net income base
of the Ohio corporation franchise tax to the extent that they (a) are properly
attributable to interest on Ohio Obligations, or (b) represent exempt-interest
dividends for federal income tax purposes. Fund shares will be included in a
shareholder's tax base for purposes of computing the Ohio corporation franchise
tax on the net worth basis.
Capital gains distributions from the Fund will be exempt from Ohio personal
income tax and school district and municipal income taxes in Ohio and will be
excluded from the net income base of the Ohio corporation franchise tax provided
that such distributions are properly attributable to profits made on the Fund's
sale, exchange or other disposition of Ohio Obligations.
Distributions properly attributable to interest on obligations of the United
States or of any authority, commission, or instrumentality of the United States
or obligations of Puerto Rico, the Virgin Islands, or Guam or their authorities
or instrumentalities (the interest on which is exempt from state income taxes
under the laws of the United States) will also be exempt from Ohio personal
income tax and school district and municipal income taxes in Ohio. Distributions
properly attributable to interest on obligations of U.S. territories (for
example Puerto Rico) will also be excluded from the net income base of the Ohio
corporation franchise tax provided that such interest is excluded from gross
income for federal income tax purposes.
32
<PAGE>
Certain management considerations
Year 2000
As with other mutual funds, financial and business organizations and individuals
around the world, the Funds could be adversely affected if the computer systems
used by their service providers do not properly process and calculate
date-related information from and after January 1, 2000. This is commonly known
as the "Year 2000 Problem." Each Fund is taking steps to obtain satisfactory
assurances that its major service providers are taking steps reasonably designed
to address the Year 2000 Problem on the computer systems that the service
providers use. However, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on the business of the Funds. The
portfolio managers and investment professionals of the Funds consider Year 2000
compliance in the securities selection and investment process. However, there
can be no guarantees that, even with their due diligence efforts, they will be
able to predict the effect of Year 2000 on any company or the performance of its
securities.
33
<PAGE>
Financial highlights
These Financial highlights tables are intended to help you understand each
Fund's financial performance. All "per share" information reflects financial
results for a single Fund share. This information has been audited by Ernst &
Young LLP, whose report, along with the Funds' financial statements, is included
in the Funds' annual report, which is available upon request by calling
800.523.1918.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Tax-Free Pennsylvania Fund A Class Tax-Free Pennsylvania Fund B Class
Year Ended 2/28 Year Ended 2/28
1999 1998 1997 1996 1995 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.420 $8.240 $8.460 $8.180 $8.610 $8.420 8.240 8.460 8.180
Income from investment operations
Net investment income 0.415 0.430 0.456 0.476 0.494 0.348 0.370 0.390 0.408
Net realized and unrealized gain (loss)
on investments (0.034) 0.193 (0.105) 0.330 (0.430) (0.034) 0.193 (0.105) 0.330
-------- -------- -------- ---------- -------- ------- ------- ------- -------
Total from investment operations 0.381 0.623 0.351 0.806 0.064 0.314 0.563 0.285 0.738
-------- -------- -------- ---------- -------- ------- ------- ------- -------
Less dividends and distributions
Dividends from net investment income (0.415) (0.430) (0.456) (0.476) (0.494) (0.348) (0.370) (0.390) (0.408)
Distributions from net realized gain
on investments (0.096) (0.013) (0.115) (0.050) none (0.096) (0.013) (0.115) (0.050)
-------- -------- -------- ---------- -------- ------- ------- ------- -------
Total dividends and distributions (0.511) (0.443) (0.571) (0.526) (0.494) (0.444) (0.383) (0.505) (0.458)
-------- -------- -------- ---------- -------- ------- ------- ------- -------
Net asset value, end of period $8.290 $8.420 $8.240 $8.460 $8.180 $8.290 $8.420 $8.240 $8.460
======== ======== ======== ========== ======== ======= ======= ======= =======
Total return(2) 4.64% 7.78% 4.35% 10.08% 0.91% 3.81% 6.92% 3.52% 9.19%
Ratios and supplemental data
Net assets, end of period (000 omitted) $871,740 $917,364 $954,258 $1,002,888 $976,313 $42,994 $37,631 $31,644 $20,861
Ratio of expenses to average net assets 0.95% 0.94% 0.91% 0.90% 0.90% 1.75% 1.74% 1.71% 1.71%
Ratio of net investment income
to average net assets 4.96% 5.20% 5.52% 5.67% 6.03% 4.16% 4.40% 4.72% 4.86%
Portfolio turnover 41% 32% 27% 25% 18% 41% 32% 27% 25%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Tax-free
Pennsylvania
Fund B Class
Period Tax-Free Pennsylvania Period
5/2/94(1) Fund C Class 11/29/95(1)
through Year Ended 2/28 through
2/28/95 1999 1998 1997 2/28/96
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period 8.310 8.420 8.240 8.460 8.510
Income from investment operations
Net investment income 0.353 0.355 0.364 0.390 0.102
Net realized and unrealized gain (loss)
on investments (0.130) (0.034) 0193 (0.105) none
------- ------ ------ ------ ----
Total from investment operations 0.223 0.321 0.557 0.285 0.102
------- ------ ------ ------ ----
Less dividends and distributions
Dividends from net investment income (0.353) (0.355) (0.364) (0.390) (0.102)
Distributions from net realized gain
on investments none (0.096) (0.013) (0.115) (0.050)
------- ------ ------ ------ ----
Total dividends and distributions (0.353) (0.451) (0.377) (0.505) (0.152)
------- ------ ------ ------ ----
Net asset value, end of period $8.180 $8.290 $8.420 $8.240 $8.460
======= ====== ====== ====== ====
Total return(2) 2.79% 3.81% 6.92% 3.52% 1.19%
Ratios and supplemental data
Net assets, end of period (000 omitted) $10,239 $3,963 $2,569 $1,181 $123
Ratio of expenses to average net assets 1.73% 1.75% 1.74% 1.71% 1.71%
Ratio of net investment income
to average net assets 5.20% 4.16% 4.40% 4.72% 4.86%
Portfolio turnover 18% 41% 32% 27% 25%
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Date of initial public offering; ratios have been annualized and total
return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions of net asset
value and does not reflect the impact of a sales charge.
34
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Tax-Free Tax-Free Tax-Free Tax-Free Tax-Free
New Jersey New Jersey New Jersey New Jersey New Jersey
Fund A Class Fund A Class Fund B Class Fund B Class Fund C Class
---------------- -------------- --------------- ---------------- ---------------
Period Period
9/2/97(1) Year Ended 9/2/97(1)
Year Ended 2/28 through 2/28 through Year Ended
1999 2/28/98 1999 2/28/98 2/28/98(4)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $5.700 $5.500 $5.700 $5.500 $5.700
Income from investment operations
Net investment income 0.256 0.115 0.213 0.069 0.213
Net realized and unrealized gain
on investments 0.075 0.200 0.075 0.200 0.075
----- ----- ----- ----- -----
Total from investment operations 0.331 0.315 0.288 0.269 0.288
----- ----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.256) (0.115) (0.213) (0.069) (0.213)
Distributions from realized gain on (0.025) none (0.025) none (0.025)
------- ------- ------- ---- -------
investments
Total dividends and distributions (0.281) (0.115) (0.238) (0.069) (0.238)
------- ------- ------- ------- -------
Net asset value, end of period $5.750 $5.700 $5.750 $5.700 $5.750
====== ====== ====== ====== ======
Total return(2)(3) 5.93% 5.77% 5.14% 4.90% 5.14%
Ratios and supplemental data
Net assets, end of period (000 omitted) $2,052 $1,141 $1,680 $146 $171
Ratio of expenses to average net assets 0.50% 0.88% 1.25% 1.56% 1.25%
Ratio of expenses to average net assets
prior to expense limitation and
expenses paid indirectly 1.75% 1.93% 2.50% 2.61% 2.50%
Ratio of net investment income
to average net assets 4.42% 4.23% 3.67% 3.63% 3.67%
Ratio of net investment income
to average net assets prior to expense
limitation and expenses paid indirectly 3.17% 3.18% 2.42% 2.58% 2.42%
Portfolio turnover 0% 47% 0% 47% 0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Date of initial public offering; ratios have been annualized but total
return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
(3) Total investment return reflects the voluntary waiver and payment of fees by
the manager.
(4) Shares of the Tax-Free New Jersey Fund C Class were initially offered on
September 2, 1997. On October 20, 1997 the C Class sold shares which were
subsequently repurchased, leaving a balance of 1 share, which is the initial
seed purchase, as of February 28, 1998. This shareholder data is not being
disclosed because the data is not believed to be meaningful.
35
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------ ---------------- -------------- --------------- ----------------
Tax-Free Tax-Free Tax-Free Tax-Free
Ohio Fund Ohio Fund Ohio Fund Ohio Fund
A Class A Class B Class C Class
---------------- -------------- --------------- ----------------
Period
9/3/97(1)
Year Ended 2/28 through Year Ended Year Ended
1999 2/28/98 2/28/98(4) 2/28/98(4)
- ------------------------------------------ ---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $5.730 $5.500 $5.690 $5.690
Income from investment operations
Net investment income 0.272 0.120 0.231 0.231
Net realized and unrealized gain
on investments 0.013 0.230 0.053 0.053
----- ----- ----- -----
Total from investment operations 0.285 0.350 0.284 0.284
----- ----- ----- -----
Less dividends and distributions
Dividends from net investment income (0.272) (0.120) (0.231) (0.231)
Distribution from net realized gain on
investments (0.093) none (0.093) (0.093)
Total dividends and distributions (0.365) (0.120) (0.324) (0.324)
------- ------- ------- -------
Net asset value, end of period $5.650 $5.730 $5.650 $5.650
====== ====== ====== ======
Total return(2)(3) 5.12% 6.41% 4.37% 4.37%
Ratios and supplemental data
Net assets, end of period (000 omitted) $1,422 $1,201 $80 $16
Ratio of expenses to average net assets 0.50% 0.88% 1.25% 1.25%
Ratio of expenses to average net assets
prior to expense limitation and fees
paid indirectly 1.86% 1.93% 2.61% 2.61%
Ratio of net investment income
to average net assets 4.75% 4.38% 4.00% 4.00%
Ratio of net investment income
to average net assets prior to expense
limitation 3.39% 3.33% 2.64% 2.64%
Portfolio turnover 45% 66% 45% 45%
- ------------------------------------------ ---------------- -------------- --------------- ----------------
</TABLE>
(1) Date of initial public offering; ratios have been annualized but total
return has not been annualized.
(2) Total investment return is based on the change in net asset value of a share
during the period and assumes reinvestment of distributions at net asset
value and does not reflect the impact of a sales charge.
(3) Total investment return reflects the voluntary waiver and payment of fees by
the manager.
(4) Shares of the Tax-Free Ohio Fund B and C Classes were initially offered on
September 2, 1997. For the period September 2, 1997 through February 28,
1998, there was no shareholder activity besides the initial seed purchase of
1 share. This shareholder data is not being disclosed because the data is
not believed to be meaningful.
36
<PAGE>
How to read the Financial highlights
Net investment income
Net investment income includes dividend and interest income earned from the
Fund's securities; it is after expenses have been deducted.
Net realized and unrealized gain (loss)
A realized gain on investments occurs when we sell an investment at a profit,
while a realized loss occurs when we sell an investment at a loss. When an
investment increases or decreases in value but we do not sell it, we record an
unrealized gain or loss. The amount of realized gain per share that we pay to
shareholders, if any, is listed under "Less dividends and
distributions-Distributions from net realized gain on investments."
Net asset value (NAV)
This is the value of a mutual fund share, calculated by dividing the net assets
by the number of shares outstanding.
Total return
This represents the rate that an investor would have earned or lost on an
investment in the Fund. In calculating this figure for the financial highlights
table, we include applicable fee waivers, exclude front-end and contingent
deferred sales charges, and assume the shareholder has reinvested all dividends
and realized gains.
Net assets
Net assets represent the total value of all the assets in the Fund's portfolio,
less any liabilities, that are attributable to that class of the Fund.
Ratio of expenses to average net assets
The expense ratio is the percentage of net assets that a fund pays annually for
operating expenses and management fees. These expenses include accounting and
administration expenses, services for shareholders, and similar expenses.
Ratio of net investment income to average net assets
We determine this ratio by dividing net investment income by average net assets.
Portfolio turnover
This figure tells you the amount of trading activity in a fund's portfolio. For
example, a fund with a 50% turnover has bought and sold half of the value of its
total investment portfolio during the stated period.
37
<PAGE>
How to use this glossary
This glossary includes definitions of investment terms used throughout the
Prospectus. If you would like to know the meaning of an investment term that is
not explained in the text please check the glossary.
[begin glossary]
Amortized cost
Amortized cost is a method used to value a fixed-income security that starts
with the face value of the security and then adds or subtracts from that value
depending on whether the purchase price was greater or less than the value of
the security at maturity. The amount greater or less than the par value is
divided equally over the time remaining until maturity.
Average maturity
An average of when the individual bonds and other debt securities held in a
portfolio will mature.
Bond
A debt security, like an IOU, issued by a company, municipality or government
agency. In return for lending money to the issuer, a bond buyer generally
receives fixed periodic interest payments and repayment of the loan amount on a
specified maturity date. A bond's price changes prior to maturity and is
inversely related to current interest rates. When interest rates rise, bond
prices fall, and when interest rates fall, bond prices rise.
Bond ratings
Independent evaluations of creditworthiness, ranging from Aaa/AAA (highest
quality) to D (lowest quality). Bonds rated Baa/BBB or better are considered
investment grade. Bonds rated Ba/BB or lower are commonly known as junk bonds.
See also Nationally recognized statistical rating organization.
Capital
The amount of money you invest.
Capital appreciation
An increase in the value of an investment.
Capital gains distributions
Payments to mutual fund shareholders of profits (realized gains) from the sale
of a fund's portfolio securities. Usually paid once a year; may be either
short-term gains or long-term gains.
Commission
The fee an investor pays to a financial adviser for investment advice and help
in buying or selling mutual funds, stocks, bonds or other securities.
Compounding
Earnings on an investment's previous earnings.
Consumer Price Index (CPI)
Measurement of U.S. inflation; represents the price of a basket of commonly
purchased goods.
Contingent deferred sales charge (CDSC)
Fee charged by some mutual funds when shares are redeemed (sold back to the
fund) within a set number of years; an alternative method for investors to
compensate a financial adviser for advice and service, rather than an up-front
commission.
Corporate bond
A debt security issued by a corporation. See bond.
Depreciation
A decline in an investment's value.
38
<PAGE>
Diversification
The process of spreading investments among a number of different securities,
asset classes or investment styles to reduce the risks of investing.
Dividend distribution
Payments to mutual fund shareholders of dividends passed along from the fund's
portfolio of securities.
Duration
A measurement of a fixed-income investment's price volatility. The larger the
number, the greater the likely price change for a given change in interest
rates.
Expense ratio
A mutual fund's total operating expenses, expressed as a percentage of its total
net assets. Operating expenses are the costs of running a mutual fund, including
management fees, offices, staff, equipment and expenses related to maintaining
the fund's portfolio of securities and distributing its shares. They are paid
from the fund's assets before any earnings are distributed to shareholders.
Financial adviser
Financial professional (e.g., broker, banker, accountant, planner or insurance
agent) who analyzes clients' finances and prepares personalized programs to meet
objectives.
Fixed-income securities
With fixed-income securities, the money you originally invested is paid back at
a pre-specified maturity date. These securities, which include government,
corporate or municipal bonds, as well as money market securities, typically pay
a fixed rate of return (often referred to as interest). See bond.
Inflation
The increase in the cost of goods and services over time. U.S. inflation is
frequently measured by changes in the Consumer Price Index (CPI).
Investment goal
The objective, such as long-term capital growth or high current income, that a
mutual fund pursues.
Lehman Brothers Municipal Bond Index
The Lehman Brothers Municipal Bond Index is an index that includes approximately
15,000 bonds. To be included in the index a municipal bond must have the
following criteria: a minimum credit rating of at lease Baa; has been part of a
deal of at least $50 million; been issued within the last 5 years; and has a
maturity of at least 2 years. Bonds subject to the Alternative Minimum Tax are
excluded. Bonds with floating or zero coupons are also excluded.
Management fee
The amount paid by a mutual fund to the investment adviser for management
services, expressed as an annual percentage of the fund's average daily net
assets.
Market capitalization
The value of a corporation determined by multiplying the current market price of
a share of common stock by the number of shares held by shareholders. A
corporation with one million shares outstanding and the market price per share
of $10 has a market capitalization of $10 million.
Maturity
The length of time until a bond issuer must repay the underlying loan principal
to bondholders.
National Association of Securities Dealers (NASD)
A self-regulating organization, consisting of brokerage firms (including
distributors of mutual funds), that is responsible for overseeing the actions of
its members.
39
<PAGE>
Nationally recognized statistical rating organization (NRSRO)
A company that assesses the credit quality of bonds, commercial paper, preferred
and common stocks and municipal short-term issues, rating the probability that
the issuer of the debt will meet the scheduled interest payments and repay the
principal. Ratings are published by such companies as Moody's Investors Service
(Moody's), Standard & Poor's Corporation (S&P), Duff & Phelps, Inc. (Duff), and
Fitch IBCA, Inc. (Fitch).
Net asset value (NAV)
The daily dollar value of one mutual fund share. Equal to a fund's net assets
divided by the number of shares outstanding.
Preferred stock
Preferred stock has preference over common stock in the payment of dividends and
liquidation of assets. Preferred stocks also often pays dividends at a fixed
rate and is sometimes convertible into common stock.
Price/earnings ratio
A measure of a stock's value calculated by dividing the current market price of
a share of stock by its annual earnings per share. A stock selling for $100 per
share with annual earnings per share of $5 has a P/E of 20.
Principal
Amount of money you invest (also called capital). Also refers to a bond's
original face value, due to be repaid at maturity.
Prospectus
The official offering document that describes a mutual fund, containing
information required by the SEC, such as investment objectives, policies,
services and fees.
Redeem
To cash in your shares by selling them back to the mutual fund.
Risk
Generally defined as variability of value; also credit risk, inflation risk,
currency and interest rate risk. Different investments involve different types
and degrees of risk.
Sales charge
Charge on the purchase or redemption of fund shares sold through financial
advisers. May vary with the amount invested. Typically used to compensate
advisers for advice and service provided.
SEC (Securities and Exchange Commission)
Federal agency established by Congress to administer the laws governing the
securities industry, including mutual fund companies.
Share classes
Different classifications of shares; mutual fund share classes offer a variety
of sales charge choices.
Signature guarantee
Certification by a bank, brokerage firm or other financial institution that a
customer's signature is valid; signature guarantees can be provided by members
of the STAMP program.
40
<PAGE>
Standard deviation
A measure of an investment's volatility; for mutual funds, measures how much a
fund's total return has typically varied from its historical average.
Statement of Additional Information (SAI)
The document serving as "Part B" of a fund's prospectus that provides more
detailed information about the fund's organization, investments, policies and
risks.
Stock
An investment that represents a share of ownership (equity) in a corporation.
Stocks are often referred to as "equities."
Total return
An investment performance measurement, expressed as a percentage, based on the
combined earnings from dividends, capital gains and change in price over a given
period.
Uniform Gift to Minors Act and Uniform Transfers to Minors Act
Federal and state laws that provide a simple way to transfer property to a minor
with special tax advantages.
Volatility
The tendency of an investment to go up or down in value by different magnitudes.
Investments that generally go up or down in value in relatively small amounts
are considered "low volatility" investments, whereas those investments that
generally go up or down in value in relatively large amounts are considered
"high volatility" investments.
<PAGE>
Tax-Free Pennsylvania Fund
Tax-Free New Jersey Fund
Tax-Free Ohio Fund
Additional information about the Funds' investments is available in the Funds'
annual and semi-annual reports to shareholders. In the Funds' shareholder
reports, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during the report
period. You can find more detailed information about the Funds in the current
Statement of Additional Information, which we have filed electronically with the
Securities and Exchange Commission (SEC) and which is legally a part of this
prospectus. If you want a free copy of the Statement of Additional Information,
the annual or semi-annual report, or if you have any questions about investing
in these Funds, you can write to us at 1818 Market Street, Philadelphia, PA
19103-3682, or call toll-free 800.523.1918. You may also obtain additional
information about the Funds from your financial adviser.
You can find reports and other information about the Funds on the SEC web site
(http://www.sec.gov), or you can get copies of this information, after payment
of a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009. Information about the Funds, including their
Statement of Additional Information, can be reviewed and copied at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
You can get information on the public reference room by calling the SEC at
1.800.SEC.0330.
Web site
www.delawarefunds.com
E-mail
[email protected]
Shareholder Service Center
800.523.1918
Call the Shareholder Service Center Monday to Friday, 8 a.m. to 8 p.m. Eastern
time:
oFor fund information; literature; price, yield and performance figures.
oFor information on existing regular investment accounts and retirement plan
accounts including wire investments; wire redemptions; telephone redemptions and
telephone exchanges.
Delaphone Service
800.362.FUND (800.362.3863)
oFor convenient access to account information or current performance information
on all Delaware Investments Funds seven days a week, 24 hours a day, use this
Touch-Tone(R) service.
Investment Company Act file number: 811-2715
- --------------------------------------------------------------------------------
Fund name CUSIP number NASDAQ symbol
- --------------------------------------------------------------------------------
Tax-Free Pennsylvania Fund A Class 233216100 DELIX
- --------------------------------------------------------------------------------
Tax-Free Pennsylvania Fund B Class 233216209 DPTBX
- --------------------------------------------------------------------------------
Tax-Free Pennsylvania Fund C Class 233216308 DPTCX
- --------------------------------------------------------------------------------
Tax-Free New Jersey Fund A Class 24609H107 DPJAX
- --------------------------------------------------------------------------------
Tax-Free New Jersey Fund B Class 24609H206 DPJBX
- --------------------------------------------------------------------------------
Tax-Free New Jersey Fund C Class 24069H305 DPJCX
- --------------------------------------------------------------------------------
Tax-Free Ohio Fund A Class 24609H404 DPOAX
- --------------------------------------------------------------------------------
Tax-Free Ohio Fund B Class 24609H503 DPOBX
- --------------------------------------------------------------------------------
Tax-Free Ohio Fund Class 24609H602 DPOCX
- --------------------------------------------------------------------------------
DELAWARE
INVESTMENTS
-----------
Philadelphia * London
P-007 [--] PP 5/99
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
APRIL 29, 1999
DELAWARE GROUP STATE TAX-FREE INCOME TRUST
TAX-FREE PENNSYLVANIA FUND
TAX-FREE NEW JERSEY FUND
TAX-FREE OHIO FUND
1818 Market Street
Philadelphia, PA 19103
For Prospectus, Performance and Information on Existing Accounts of
Class A Shares, Class B Shares and Class C Shares: Nationwide 800-523-1918
Dealer Services:
(BROKER/DEALERS ONLY) Nationwide 800-362-7500
Delaware Group State Tax-Free Income Trust (the "Trust") is a
professionally-managed mutual fund of the series type which currently offers
three series of shares: Tax-Free Pennsylvania Fund, Tax-Free New Jersey Fund and
Tax-Free Ohio Fund (individually, a "Fund", and collectively, the "Funds").
Each Fund offers three retail classes: Class A Shares, Class B Shares
and Class C Shares (individually, a "Class" and collectively, the "Fund
Classes").
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectus for
the Fund Classes dated April 29, 1999, as it may be amended from time to time.
Part B should be read in conjunction with the Class' Prospectus. Part B is not
itself a prospectus but is, in its entirety, incorporated by reference into each
Class' Prospectus. A prospectus relating to the Fund Class may be obtained by
writing or calling your investment dealer or by contacting each Fund's national
distributor, Delaware Distributors, L.P. (the "Distributor"), at the above
address or by calling the above phone numbers. The Funds' financial statements,
the notes relating thereto, the financial highlights and the report of
independent auditors are incorporated by reference from the Annual Report into
this Part B. The Annual Report will accompany any request for Part B. The Annual
Report can be obtained, without charge, by calling 800-523-1918.
<PAGE>
TABLE OF CONTENTS{}
Cover Page 1
Investment Objectives and Policies 3
Performance Information
Trading Practices and Brokerage
Purchasing Shares
Investment Plans
Determining Offering Price and Net Asset Value
Redemption and Repurchase
Dividends and Distributions
Taxes
Investment Management Agreements
Officers and Trustees
Exchange Privilege
General Information
Appendix A--Investing in Pennsylvania, New Jersey and Ohio Tax-Exempt
Obligations
[Appendix B--Description of Ratings
Appendix C--Investment Objectives of the Other Funds in the Delaware
Investments Family]
Financial Statements
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Pennsylvania Fund--The objective of the Fund is to seek as high a level
of current interest income exempt from federal income tax and certain
Pennsylvania state and local taxes as is available from municipal bonds and as
is consistent with preservation of capital. There is no assurance that this
objective can be achieved. This objective is a matter of fundamental policy and
may not be changed without shareholder approval.
The Fund seeks to achieve this objective by investing its assets in a
nondiversified portfolio of debt obligations issued by or on behalf of the
Commonwealth of Pennsylvania and its political subdivisions, agencies,
authorities and instrumentalities, certain interstate agencies, Puerto Rico, the
Virgin Islands and certain other territories and qualified obligations of the
United States that pay interest income which, in the opinion of counsel, is
exempt from federal income taxes and from certain Pennsylvania state and local
taxes. However, the Fund may invest not more than 20% of its assets in debt
obligations issued by other states.
The Fund intends to invest at least 80% of its net assets in
Pennsylvania tax-exempt debt obligations which are rated by Standard & Poor's
Ratings Group ("S&P"), Moody's Investors Service, Inc. ("Moody's") or Fitch
IBCA, Inc. (formerly Fitch Investor Service, Inc.) ("Fitch") at the time of
purchase as being within their top four grades, or which are unrated but
considered by Delaware Management Company (the "Manager") to be comparable in
quality to the top four grades. The fourth grade is considered medium grade and
may have speculative characteristics. The Fund may also invest up to 20% of its
net assets in securities with grades lower than the top four grades of S&P,
Moody's or Fitch, and in comparable unrated securities. These securities are
speculative and may involve greater risk and have higher yields.
New Jersey Fund--The objective of the Fund is to seek as high a level
of current interest income exempt from federal income tax and certain New Jersey
state and local taxes as is available from municipal bonds and as is consistent
with preservation of capital. There is no assurance that this objective can be
achieved. This objective is a matter of fundamental policy and may not be
changed without shareholder approval.
The Fund seeks to achieve this objective by investing its assets in a
nondiversified portfolio of debt obligations issued by or on behalf of the State
of New Jersey its political subdivisions, agencies, authorities and
instrumentalities, certain interstate agencies, Puerto Rico, the Virgin Islands
and certain other territories and qualified obligations of the United States
that pay interest income which, in the opinion of counsel, is exempt from
federal income taxes and from certain New Jersey state and local taxes. However,
the Fund may invest not more than 20% of its assets in debt obligations issued
by other states.
The Fund intends to invest at least 80% of its net assets in New Jersey
tax-exempt debt obligations which are rated by S&P, Moody's or Fitch at the time
of purchase as being within their top four grades, or which are unrated but
considered by Delaware Management Company (the "Manager") to be comparable in
quality to the top four grades. The fourth grade is considered medium grade and
may have speculative characteristics. The Fund may also invest up to 20% of its
net assets in securities with grades lower than the top four grades of S&P,
Moody's or Fitch, and in comparable unrated securities. These securities are
speculative and may involve greater risk and have higher yields.
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<PAGE>
Ohio Fund--The objective of the Fund is to seek as high a level of
current interest income exempt from federal income tax and certain Ohio state
and local taxes as is available from municipal bonds and as is consistent with
preservation of capital. There is no assurance that this objective can be
achieved. This objective is a matter of fundamental policy and may not be
changed without shareholder approval.
The Fund seeks to achieve this objective by investing its assets in a
nondiversified portfolio of debt obligations issued by or on behalf of the State
of Ohio, its political subdivisions, agencies, authorities and
instrumentalities, certain interstate agencies, Puerto Rico, the Virgin Islands
and certain other territories and qualified obligations of the United States
that pay interest income which, in the opinion of counsel, is exempt from
federal income taxes and from certain Ohio state and local taxes. However, the
Fund may invest not more than 20% of its assets in debt obligations issued by
other states.
The Fund intends to invest at least 80% of its net assets in Ohio
tax-exempt debt obligations which are rated by S&P, Moody's or Fitch at the time
of purchase as being within their top four grades, or which are unrated but
considered by the Manager to be comparable in quality to the top four grades.
The fourth grade is considered medium grade and may have speculative
characteristics. The Fund may also invest up to 20% of its net assets in
securities with grades lower than the top four grades of S&P, Moody's or Fitch,
and in comparable unrated securities. These securities are speculative and may
involve greater risk and have higher yields.
See Appendix A - Description of Ratings in the Prospectus for a
description of S&P, Moody's and Fitch ratings.
Each Fund may invest more than 25% of its assets in municipal
obligations relating to similar types of projects or with other similar
economic, business or political characteristics (such as bonds of housing
finance agencies or health care facilities). In addition, the Funds may invest
more than 25% of its assets in industrial development bonds or pollution control
bonds which may be backed only by the assets and revenues of a nongovernmental
user.
Each Fund may invest in restricted securities, including unregistered
securities eligible for resale without registration pursuant to Rule 144A ("Rule
144A Securities") under the Securities Act of 1933 (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 a 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 Board of Trustees and the
Manager will continue to monitor the liquidity of that security to ensure that
Pennsylvania Fund has no more than 10% and New Jersey Fund and Ohio Fund each
has no more than 15% of its net assets in illiquid securities.
Each Fund may also invest in "when-issued securities" for which a Fund
will maintain a segregated account containing cash or high-grade debt
obligations which it will mark to market daily. When-issued securities involve
commitments to purchase new issues of securities which are offered on a
when-issued basis which usually involve delivery and payment up to 45 days after
the date of transaction. During this period between the date of commitment and
the date of delivery, a Fund does not accrue interest on the investment, but the
market value of the bonds could fluctuate. This would result in a Fund having
unrealized appreciation or depreciation which would affect the net asset value
of its shares.
-4-
<PAGE>
Each Fund will invest its assets in securities of varying maturities,
without limitation, depending on market conditions. Typically, the remaining
maturity of municipal bonds will range between five and 30 years. From time to
time, a Fund may also invest in short-term, tax-free instruments such as
tax-exempt commercial paper and general obligation, revenue and project notes.
Each Fund may also invest in variable and floating rate demand obligations
(longer-term instruments with an interest rate that fluctuates and a demand
feature that allows the holder to sell the instruments back to the issuer from
time to time) but generally does not intend to invest more than 5% of its net
assets in these instruments. The Manager will attempt to adjust the maturity
structure of the portfolio to provide a high level of tax-exempt income
consistent with preservation of capital.
Under abnormal conditions, each Fund may invest in taxable instruments
for temporary defensive purposes. These would include obligations of the U.S.
government, its agencies and instrumentalities.
The principal risk to which a Fund is subject is price fluctuation due
to changes in interest rates caused by government policies and economic factors
which are beyond the control of the investment manager. In addition, although
some municipal bonds are government obligations backed by the issuer's full
faith and credit, others are only secured by a specific revenue source and not
by the general taxing power. The Fund will invest in both types.
Each Fund is registered as a nondiversified investment company. Each
Fund has the ability to invest as much as 50% of its assets in as few as two
issuers provided that no single issuer accounts for more than 25% of the
portfolio. The remaining 50% must be diversified so that no more than 5% is
invested in the securities of a single issuer. Because each Fund may invest its
assets in fewer issuers, the value of Fund shares may fluctuate more rapidly
than if the Fund were fully diversified. In the event a Fund invests more than
5% of its assets in a single issuer, it would be affected more than a
fully-diversified fund if that issuer encounters difficulties in satisfying its
financial obligations. Each Fund may invest without limitation in U.S.
government and government agency securities backed by the U.S. government or its
agencies or instrumentalities.
Each Fund will invest in securities for income earnings rather than
trading for profit. A Fund will not vary portfolio investments, except to:
1. eliminate unsafe investments and investments not consistent with the
preservation of the capital or the tax status of the investments of the Fund;
2. honor redemption orders, meet anticipated redemption requirements,
and negate gains from discount purchases;
3. reinvest the earnings from securities in like securities; or
4. defray normal administrative expenses.
Investment Restrictions
The Trust has adopted the following restrictions for each Fund
(except where otherwise noted) which ]cannot be changed without approval by the
holders of a "majority" of the respective Fund's outstanding shares, which
is a vote by the holders of the lesser of a) 67% or more of the voting
securities present in person or by proxy at a meeting, if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy; or b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time of purchase of securities.
Each Fund shall not:
1. Make investments that will result in the concentration (as that term
may be defined in the 1940 Act, any rule or other thereunder, or U.S. Securities
and Exchange Commission ("SEC") staff interpretation thereof) of its investments
in the securities of issuers primarily engaged in the same industry, provided
that this restriction does not limit the Fund from investing in obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
or in certificates of deposit.
2. Borrow money or issue senior securities, except as the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof, may permit.
3. Underwrite the securities of other issuers, except that the Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the Securities Act of 1933.
4. Purchase or sell real estate, unless acquired as a result of
ownership of securities or other instruments and provided that this restriction
does not prevent the Fund from investing in issuers which invest, deal or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
5. Purchase or sell physical commodities, unless acquired as a result
of ownership of securities or
-5-
<PAGE>
other instruments and provided that this restriction does not prevent the Fund
from engaging in transactions involving futures contracts and options thereon or
investing in securities that are secured by physical commodities.
6. Make loans, provided that this restriction does not prevent the Fund
from purchasing debt obligations, entering into repurchase agreements, loaning
its assets to broker/dealers or institutional investors and investing in loans,
including assignments and participation interests.
In addition to the fundamental policies and investment restrictions
described above, and the various general investment policies described in the
prospectus, each Fund will be subject to the following investment restrictions,
which are considered non-fundamental and may be changed by the Board of
Directors without shareholder approval.
1. The Fund is permitted to invest in other investment companies,
including open-end, closed-end or unregistered investment companies, either
within the percentage limits set forth in the 1940 Act, any rule or order
thereunder, or SEC staff interpretation thereof, or without regard to percentage
limits in connection with a merger, reorganization, consolidation or other
similar transaction. However, the Fund may not operate as a "fund of funds"
which invests primarily in the shares of other investment companies as permitted
by Section 12(d)(1)(F) or (G) of the 1940 Act, if its own shares are utilized as
investments by such a "fund of funds."
2. The Fund may not invest more than 15% of its net assets in
securities which it cannot sell or dispose of in the ordinary course of business
within seven days at approximately the value at which the Fund has valued the
investment.
The following sets forth additional investment restrictions, which are
considered non-fundamental and may be changed by the Board of Directors without
shareholder approval. The percentage limitations contained in the restrictions
and policies set forth herein apply at the time of purchase of securities.
Tax-Free Pennsylvania Fund
The Fund shall not:
1. Purchase securities other than municipal bonds and taxable
short-term investments as defined above.
2. Borrow money in excess of 10% of the value of its assets and then
only as a temporary measure for extraordinary purposes. Any borrowing will be
done from a bank and to the extent that such borrowing exceeds 5% of the value
of the Fund's assets, asset coverage of at least 300% is required. In the event
that such asset coverage shall at any time fall below 300%, the Fund shall,
within three days thereafter (not including Sunday or holidays) or such longer
period as the SEC may prescribe by rules and regulations, reduce the amount of
its borrowings to such an extent that the asset coverage of such borrowings
shall be at least 300%. The Fund will not issue senior securities as defined in
the 1940 Act, except for notes to banks. Investment securities will not normally
be purchased while there is an outstanding borrowing.
3. Sell securities short.
4. Write or purchase put or call options.
5. Underwrite the securities of other issuers, except that the Fund may
participate as part of a group in bidding for the purchase of municipal bonds
directly from an issuer for its own portfolio in order to take advantage of the
lower purchase price available to members of such a group; nor invest more than
10% of the value of the Fund's net assets in illiquid assets.
-6-
<PAGE>
6. Purchase or sell commodities or commodity contracts.
7. Purchase or sell real estate, but this shall not prevent the Fund
from investing in municipal bonds secured by real estate or interests therein.
8. Make loans to other persons except through the use of repurchase
agreements or the purchase of commercial paper. For these purposes the purchase
of a portion of debt securities which is part of an issue to the public shall
not be considered the making of a loan. Not more than 10% of the Fund's total
assets will be invested in repurchase agreements and other assets maturing in
more than seven days.
9. With respect to 50% of the value of the assets of the Fund, invest
more than 5% of its assets in the securities of any one issuer or invest in more
than 10% of the outstanding voting securities of any one issuer, except that
U.S. government and government agency securities backed by the U.S. government
or its agencies or instrumentalities may be purchased without limitation. For
the purposes of this limitation, the Fund will regard the state and each
political subdivision, agency or instrumentality of the state, and each
multistate agency of which the state is a member as a separate issuer.
10. Invest in companies for the purpose of exercising control.
11. Invest in securities of other investment companies, except as they
may be acquired as part of a merger, consolidation or acquisition of assets.
12. Invest more than 25% of its total assets in any particular industry
or industries, except that the Fund may invest more than 25% of the value of its
total assets in municipal bonds, including industrial development and pollution
control bonds, and in obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities.
Although not a fundamental investment restriction, the Fund currently
does not invest its assets in real estate limited partnerships or oil, gas and
other mineral leases.
From time to time, more than 10% of the Fund's assets may be invested
in municipal bonds insured as to payment of principal and interest by a single
insurance company. The Fund believes such investments are consistent with the
foregoing restrictions. If a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentages resulting from change in
value of net assets will not result in a violation of the restrictions.
Special Considerations Relating to Pennsylvania Tax-Exempt Securities
Pennsylvania Fund concentrates its investments in the Commonwealth of
Pennsylvania. Therefore, there are risks associated with the Fund that would not
be present if the Fund were diversified nationally. These risks include any new
legislation that would adversely affect Pennsylvania tax-exempt obligations,
regional or local economic conditions that could adversely affect these
obligations, and differing levels of supply and demand for municipal bonds
particular to the Commonwealth of Pennsylvania.
Tax-Free New Jersey Fund
The Fund shall not:
1. Purchase securities other than municipal bonds and taxable
short-term investments.
2. Borrow money in excess of 10% of the value of its assets and then
only as a temporary measure for extraordinary purposes. Any borrowing will be
done from a bank and to the extent that such borrowing exceeds 5% of the value
of the Fund's assets, asset coverage of at least 300% is required. In the event
that such asset
-7-
<PAGE>
coverage shall at any time fall below 300%, the Fund shall, within three days
thereafter (not including Sunday or holidays) or such longer period as the
Securities and Exchange Commission (the "SEC") may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. The Fund will not
issue senior securities as defined in the Investment Company Act of 1940 (the
"1940 Act"), except for notes to banks. Investment securities will not normally
be purchased while there is an outstanding borrowing.
3. Make short sales of securities, or purchase securities on margin,
except that the Fund may satisfy margin requirements with respect to futures
transactions.
4. Underwrite the securities of other issuers, except that the Fund may
participate as part of a group in bidding for the purchase of municipal bonds
directly from an issuer for its own portfolio in order to take advantage of the
lower purchase price available to members of such a group;
5. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with the Fund's investment
objective and policies are considered loans.
6. With respect to 50% of the value of the assets of the Fund, invest
more than 5% of its assets in the securities of any one issuer or invest in more
than 10% of the outstanding voting securities of any one issuer, except that
U.S. government and government agency securities backed by the U.S. government
or its agencies or instrumentalities may be purchased without limitation. For
the purposes of this limitation, the Fund will regard the state and each
political subdivision, agency or instrumentality of the state, and each
multistate agency of which the state is a member as a separate issuer.
7. Invest in securities of other investment companies, except as part
of a merger, consolidation or other acquisition, or in accordance with the
limitations contained in the 1940 Act.
8. Invest more than 25% of its total assets in any particular industry
or industries, except that the Fund may invest more than 25% of the value of its
total assets in municipal bonds, including industrial development and pollution
control bonds, and in obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities.
From time to time, more than 10% of the Fund's assets may be invested
in municipal bonds insured as to payment of principal and interest by a single
insurance company. The Fund believes such investments are consistent with the
foregoing restrictions. As a matter of non-fundamental policy, no more than 15%
of the Fund's total assets will be invested in repurchase agreements and other
assets maturing in more than seven days, or invest in companies for the purpose
of exercising control. If a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentages resulting from change in
value of net assets will not result in a violation of the restrictions.
Special Considerations Relating to New Jersey Tax-Exempt Securities
New Jersey Fund concentrates its investments in the State of New
Jersey. Therefore, there are risks associated with the Fund that would not be
present if the Fund were diversified nationally. These risks include any new
legislation that would adversely affect New Jersey tax-exempt obligations,
regional or local economic conditions that could adversely affect these
obligations, and differing levels of supply and demand for municipal bonds
particular to the State of New Jersey.
Tax-Free Ohio Fund
The Fund shall not:
1. Purchase securities other than municipal bonds and taxable
short-term investments.
-8-
<PAGE>
2. Borrow money in excess of 10% of the value of its assets and then
only as a temporary measure for extraordinary purposes. Any borrowing will be
done from a bank and to the extent that such borrowing exceeds 5% of the value
of the Fund's assets, asset coverage of at least 300% is required. In the event
that such asset coverage shall at any time fall below 300%, the Fund shall,
within three days thereafter (not including Sunday or holidays) or such longer
period as the SEC may prescribe by rules and regulations, reduce the amount of
its borrowings to such an extent that the asset coverage of such borrowings
shall be at least 300%. The Fund will not issue senior securities as defined in
the 1940 Act, except for notes to banks. Investment securities will not normally
be purchased while there is an outstanding borrowing.
3. Make short sales of securities, or purchase securities on margin,
except that the Fund may satisfy margin requirements with respect to futures
transactions.
4. Underwrite the securities of other issuers, except that the Fund may
participate as part of a group in bidding for the purchase of municipal bonds
directly from an issuer for its own portfolio in order to take advantage of the
lower purchase price available to members of such a group.
5. Make loans, except to the extent that purchases of debt obligations
(including repurchase agreements) in accordance with the Fund's investment
objective and policies are considered loans.
6. With respect to 50% of the value of the assets of the Fund, invest
more than 5% of its assets in the securities of any one issuer or invest in more
than 10% of the outstanding voting securities of any one issuer, except that
U.S. government and government agency securities backed by the U.S. government
or its agencies or instrumentalities may be purchased without limitation. For
the purposes of this limitation, the Fund will regard the state and each
political subdivision, agency or instrumentality of the state, and each
multistate agency of which the state is a member as a separate issuer.
7. Invest in securities of other investment companies, except as part
of a merger, consolidation or other acquisition, or in accordance with the
limitations contained in the 1940 Act.
8. Invest more than 25% of its total assets in any particular industry
or industries, except that the Fund may invest more than 25% of the value of its
total assets in municipal bonds, including industrial development and pollution
control bonds, and in obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities.
From time to time, more than 10% of the Fund's assets may be invested
in municipal bonds insured as to payment of principal and interest by a single
insurance company. The Fund believes such investments are consistent with the
foregoing restrictions. As a matter of non-fundamental policy, no more than 15%
of the Fund's total assets will be invested in repurchase agreements and other
assets maturing in more than seven days, or invest in companies for the purpose
of exercising control. If a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentages resulting from change in
value of net assets will not result in a violation of the restrictions.
Special Considerations Relating to Ohio Tax-Exempt Securities
Ohio Fund concentrates its investments in the State of Ohio. Therefore,
there are risks associated with the Fund that would not be present if the Fund
were diversified nationally. These risks include any new legislation that would
adversely affect Ohio tax-exempt obligations, regional or local economic
conditions that could adversely affect these obligations, and differing levels
of supply and demand for municipal bonds particular to the State of Ohio.
Repurchase Agreements
While each Fund is permitted to do so, it normally does not invest in
repurchase agreements, except under some circumstances to invest cash balances.
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The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the 1940 Act to
allow the funds in the Delaware Investments family jointly to invest cash
balances. Each Fund may invest cash balances in a joint repurchase agreement in
accordance with the terms of the Order and subject generally to the conditions
described below.
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 a
Fund, if any, would be the difference between the repurchase price and the
market value of the security. Each Fund will limit its investments in repurchase
agreements to those which the Manager, under the guidelines of the Board of
Trustees, determines to present minimal credit risks and which are of high
quality. In addition, a Fund must have collateral of at least 100% of the
repurchase price, including the portion representing that Fund's yield under
such agreements which is monitored on a daily basis.
Municipal Bonds
The term "municipal bonds" is generally understood to include debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities such as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets and water
and sewer works. Other public purposes for which municipal bonds may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to lend to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide privately-operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity or sewage or solid waste
disposals. Such obligations are included within the term "municipal bonds"
provided that the interest paid thereon qualifies as exempt from federal income
tax in the opinion of bond counsel to the issuer. In addition, the interest paid
on industrial development bonds, the proceeds from which are used for the
construction, equipment, repair or improvement of privately-operated industrial
or commercial facilities, may be exempt from federal income tax, although
current federal tax laws place substantial limitations on the size of such
issues.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source, but not from
the general taxing power. Tax-exempt industrial development bonds are in most
cases revenue bonds and do not generally carry the pledge of the credit of the
issuer of such bonds. There are, of course, variations in the security of
municipal bonds, both within a particular classification and between
classifications.
The yields on municipal bonds are dependent on a variety of factors,
including general money market conditions, general conditions of the municipal
bond market, size of a particular offering, maturity of the obligations and
rating of the issue. The imposition of a Fund's management fee, as well as other
operating expenses, will have the effect of reducing the yield to investors.
Private Purpose Bonds
The Tax Reform Act of 1986 (the "Act") limits the amount of new
"private purpose" bonds that each state can issue and subjects interest income
from these bonds to the federal alternative minimum tax. "Private purpose" bonds
are issues whose proceeds are used to finance certain nongovernment activities,
and could include some types of industrial revenue bonds such as privately-owned
sports and convention facilities. The Act also makes the tax-exempt status of
certain bonds depend upon the issuer's compliance with specific requirements
after the bonds are issued.
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Each Fund intends to seek to achieve a high level of tax-exempt income.
However, if a Fund invests in newly-issued private purpose bonds, a portion of
Fund distributions would be subject to the federal alternative minimum tax
applicable to certain shareholders.
Municipal Bond Insurance
The practice has developed among municipal issuers of having their
issues insured by various companies. In particular, the Municipal Bond Insurance
Association ("MBIA") and its affiliate, Municipal Bond Investors Assurance
Corporation ("MBIA Corp."), Financial Guaranty Insurance Company ("FGIC"),
Financial Security Assurance ("FSA") and the AMBAC Indemnity Corporation
("AMBAC") are presently insuring a great many issues. It is expected that other
insurance associations or companies will enter this field, and that a
substantial portion of municipal bond issues available for investment by
companies such as the Fund will be insured. Accordingly, from time to time a
substantial portion of a Fund's assets may be invested in municipal bonds
insured as to payment of principal and interest when due by a single insurance
company. The Manager will review the creditworthiness of the issuer and its
ability to meet its obligations to pay interest and repay principal and not the
creditworthiness of the private insurer. However, since insured obligations are
typically rated in the top grades by Moody's, S&P and Fitch, most insured
obligations will qualify for investment under each Fund's ratings standards
discussed above. If the issuer defaults on payment of interest or principal, the
trustee and/or payment agent of the issuer will notify the insurer who will make
payment to the bondholders. There is no assurance that any insurance company
will meet its obligations. The Fund believes such investments are consistent
with its fundamental investment policies and restrictions.
Municipal Leases
As stated in the Prospectus, a portion of each Fund's assets may be
invested in municipal lease obligations, primarily through certificates of
participation ("COPs"). COPs function much like installment purchase agreements
and are widely used by state and local governments to finance the purchase of
property. The lease format is generally not subject to constitutional
limitations on the issuance of state debt, and COPs enable a governmental issuer
to increase government liabilities beyond constitutional debt limits. A
principal distinguishing feature separating COPs from municipal debt is the
lease, which contains a "nonappropriation" or "abatement" clause. This clause
provides that, although the municipality will use its best efforts to make lease
payments, it may terminate the lease without penalty if its appropriating body
does not allocate the necessary funds. Each Fund will invest only in COPs rated
within the four highest rating categories of Moody's, S&P or Fitch, or in
unrated COPs believed to be of comparable quality.
Each Fund follows certain guidelines to determine whether the COPs held
in a Fund's portfolio constitute liquid investments. These guidelines set forth
various factors to be reviewed by the Manager and which will be monitored by the
Board. Such factors include (a) the credit quality of such securities and the
extent to which they are rated; (b) the size of the municipal securities market
for the Fund both in general and with respect to COPs; and (c) the extent to
which the type of COPs held by the Fund trade on the same basis and with the
same degree of dealer participation as other municipal bonds of comparable
credit rating or quality.
Options--Tax-Free New Jersey Fund and Tax-Free Ohio Fund
Tax-Free New Jersey Fund and Tax-Free Ohio Fund may write put and call
options on a covered basis only, and will not engage in option writing
strategies for speculative purposes. The Funds may write covered call options
and secured put options from time to time on such portion of its portfolio,
without limit, as the Manager determines is appropriate in seeking to obtain a
Fund's investment objective. A Fund may also purchase (i) call options to the
extent that premiums paid for such options do not exceed 2% of the Fund's total
assets and (ii) put options to the extent that premiums paid for such options
do not exceed 2% of the Fund's total assets.
A. Covered Call Writing - A call option gives the purchaser of such
option the right to buy, and the writer, in this case the Fund, the obligation
to sell the underlying security at the exercise price during the option period.
There is no percentage limitation on writing covered call options.
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The advantage to a Fund of writing covered calls is that the Fund
receives a premium which is additional income. The disadvantage is that if the
security rises in value the Fund will lose the 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.
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 a Fund
to write another call option on the underlying security with either a different
exercise price or expiration date or both. A 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, a 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,
a 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 the 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.
Call options will be written only on a covered basis, which means that
a Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, a
Fund would be required to continue to hold a security which it might otherwise
wish to sell. Options written by the Fund will normally have expiration dates
between three 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.
B. Purchasing Call Options - New Jersey Fund and Ohio Fund may purchase
call options to the extent that premiums paid by the Fund do not aggregate more
than 2% of the Fund's total assets. When a Fund purchases a call option, in
return for a premium paid by the Fund to the writer of the option, the 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 is that a Fund may hedge against an
increase in the price of securities which it ultimately wishes to buy. However,
the premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option.
A 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. A 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; the 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 a 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 may exist. In such event, it may not be possible to
effect closing transactions in particular options, with the result that a Fund
would be required 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 the Fund may expire without any
value to a Fund.
C. Secured Put Writing - A put option gives the purchaser of the option
the right to sell, and the writer, in this case a Fund, the obligation to buy
the underlying security at the exercise price during the option period. During
the option period, the writer of a put option may be assigned an exercise notice
by the broker/dealer through whom the option was sold requiring the writer to
make payment of the exercise price against delivery of the underlying security.
In this event, the exercise price will usually exceed the then-market value of
the underlying security. This obligation terminates upon expiration of the put
option or at such earlier time at which the writer effects a closing purchase
transaction. The operation of put options in other respects is substantially
identical to that of call options. Premiums on outstanding put options written
or purchased by a Fund may not exceed 2% of its total assets.
The advantage to a Fund of writing such options is that it receives
premium income. The disadvantage is that a Fund may have to purchase securities
at higher prices than the current market price when the put is exercised.
Put options will be written only on a secured basis, which means that a
Fund will maintain in a segregated account with its Custodian Bank, (Bankers
Trust Company for Pennsylvania Fund and The Chase Manhattan Bank for New Jersey
Fund and Ohio Fund), 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 a Fund. Secured put options will
generally be written in circumstances where the Manager wishes to purchase the
underlying security for a Fund's portfolio at a price lower than the current
market price of the security. In such event, a 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.
D. Purchasing Put Options - New Jersey Fund and Ohio Fund may purchase
put options to the extent that premiums paid for such options do not exceed 2%
of the Fund's total assets. A Fund will, at all times during which it holds a
put option, own the security covered by such option.
A Fund intends to 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 a Fund to protect unrealized gain in an
appreciated security in its portfolio without actually selling the security. In
addition, a Fund will continue to receive interest income on the security. If
the security does not drop in value, the Fund will lose the value of the premium
paid. A 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.
Futures--Tax-Free New Jersey Fund and Tax-Free Ohio Fund
Tax-Free New Jersey Fund and Tax-Free Ohio Fund may enter into
contracts for the purchase or sale for future delivery of securities. 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 a Fund enters into a futures transaction, it must deliver to
the futures commission merchant selected by that Fund an amount referred to as
"initial margin." This amount is maintained by the futures commission merchant
in an account at New Jersey Fund's and Ohio Fund's Custodian Bank. Thereafter, a
"variation margin" may be paid by a Fund to, or drawn by a Fund from, such
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account in accordance with controls set for such accounts, depending upon
changes in the price of the underlying securities subject to the futures
contract.
A Fund may also purchase and write options to buy or sell futures
contracts. Options on futures are similar to options on securities except that
options on futures give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract, rather than actually to purchase or
sell the futures contract, at a specified exercise price at any time during the
period of the option.
The purpose of the purchase or sale of futures contracts for a Fund,
which consists of a substantial number of municipal securities, is to protect a
Fund against the adverse effects of fluctuations in interest rates without
actually buying or selling such securities. Similarly, when it is expected that
interest rates may decline, futures contracts may be purchased to hedge in
anticipation of subsequent purchases of municipal securities at higher prices.
With respect to options on futures contracts, when a 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 declining prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at the expiration of the option is below the exercise price, a
Fund will retain the full amount of the option premium which provides a partial
hedge against any decline that may have occurred in the portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the securities which are deliverable upon exercise
of the futures contract. If the futures price at expiration of the option is
higher than the exercise price, a Fund will retain the full amount of the option
premium which provides a partial hedge against any increase in the price of
municipal securities which a Fund intends to purchase.
To the extent that a Fund purchases an option on a futures contract and
fails to exercise the option prior to the exercise date, it will suffer a loss
of the premium paid. Further, with respect to options on futures contracts, a
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.
In addition, when a 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 the Fund with respect to such futures contracts.
A Fund may enter into such futures contracts to protect against the
adverse effects of fluctuations in interest rates without actually buying or
selling the securities. For example, if interest rates are expected to increase,
a 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 a 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 a Fund would increase at approximately the same rate, thereby
keeping the net asset value of the 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, a 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 a Fund could then buy debt securities on the
cash market.
With respect to options on futures contracts, when a 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
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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 a 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 which is deliverable
upon exercise of the futures contract. If the futures price at the expiration of
the option is below the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any decline that may
have occurred in that 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,
a Fund will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities which a Fund
intends to purchase.
If a put or call option a Fund has written is exercised, that 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, a 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, a Fund will purchase a put
option on a futures contract to hedge that Fund's portfolio against the risk of
rising interest rates.
To the extent that interest rates move in an unexpected direction, a
Fund may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize a loss. For example, if a 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, a 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 a 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. A 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, a 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.
Variable or Floating Rate Demand Notes--Tax-Free New Jersey Fund and Tax-Free
Ohio Fund
Variable or floating rate demand notes ("VRDNs") are tax-exempt
obligations which contain a floating or variable interest rate adjustment
formula and an unconditional right of demand to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period (generally up
to 30 days) prior to specified dates, either from the issuer or by drawing on a
bank letter of credit, a guarantee or insurance issued with respect to such
instrument. The interest rates are adjustable at intervals ranging from daily to
up to six months to some prevailing market rate for similar investments, such
adjustment formula being calculated to maintain the market value of the VRDN at
approximately the par value of the VRDN upon the adjustment date. The
adjustments are typically based upon the price rate of a bank or some other
appropriate interest rate adjustment index. The Manager will decide which
variable or floating rate demand instruments a Fund will purchase in accordance
with procedures prescribed by the Board of Trustees to minimize credit risks.
Any VRDN must be of high quality as determined by the Manager and subject to
review by the Board, with respect to both its long-term and short-term aspects,
except where credit support for the instrument is provided even in the event of
default on the underlying security, the Fund may rely only on the high quality
character of the short-term aspect of the demand instrument, i.e., the demand
feature. A VRDN which is unrated must have high quality characteristics similar
to those rated in accordance with policies and guidelines determined by the
Board. If the quality of any VRDN falls below the quality level required by the
Board and any applicable rules adopted by the SEC, a Fund must dispose of the
instrument within a
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reasonable period of time by exercising the demand feature or by selling the
VRDN in the secondary market, whichever is believed by the Manager to be in the
best interests of a Fund and its shareholders.
Zero-Coupon Bonds
Tax-Free New Jersey Fund and Tax-Free Ohio Fund may invest in
zero-coupon and payment-in-kind bonds. Zero-coupon bonds do not entitle the
holder to any periodic payment of interest prior to maturity or a specified date
when the securities begin paying current interest. They are issued and traded at
a discount, which discount varies depending on the time remaining until cash
payments begin, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. Since a Fund must distribute at least
90% of its investment income each year, in order to maintain its desired tax
treatment, the Fund may be required to borrow or to liquidate portfolio
securities in order to distribute income which has been attributed to
zero-coupon bonds but which the Fund has not yet received. Payment-in-kind
securities are securities that pay interest through the issuance of additional
securities. Such securities generally are more volatile in response to changes
in interest rates and are more speculative investments than are securities that
pay interest periodically in cash.
Derivative Tax Exempt Obligations
Tax-Free New Jersey Fund and Tax-Free Ohio Fund may also acquire
Derivative Tax Exempt Obligations, which are custodial receipts or certificates
that evidence ownership of future interest payments, principal payments or both
on certain tax exempt securities. The sponsor of these certificates or receipts
typically purchases and deposits the securities in an irrevocable trust or
custodial account with a custodian bank, which then issues the receipts or
certificates that evidence ownership. Although a Fund typically would be
authorized to assert its rights directly against the issuer of the underlying
obligation, the Fund could be required to assert such rights through the
custodian bank. Thus, in the event of a default, a Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer.
In addition, if the trust or custodial account in which the underlying
security had been deposited is determined to be a taxable entity, it would be
subject to state income tax on the income earned on the underlying security.
Furthermore, amounts paid by the trust or custodial account to a Fund would
become taxable in the hands of the Fund and its shareholders. However, a Fund
will only invest in custodial receipts which are accompanied by a tax opinion
stating that interest payable on the receipts is tax exempt. Also, it is
possible that a portion of the discount at which a Fund purchases the receipts
might have to be accrued as taxable income during the period that the Fund holds
the receipts.
Concentration
In applying the Funds' fundamental policy concerning concentration that
is described above, it is a matter of non-fundamental policy that: (i) utility
companies will be divided according to their services, for example, gas, gas
transmission, electric and telephone will each be considered a separate
industry; (ii) financial service companies will be classified according to the
end users of their services, for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; and (iii) asset
backed securities will be classified according to the underlying assets securing
such securities.
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PERFORMANCE INFORMATION
From time to time, each Fund 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 periods, as applicable. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC, applicable only to certain redemptions of those shares, will not be
deducted from any computation of total return. See the Prospectus 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.
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;
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
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 Fund may present total
return information that does not reflect the deduction of the maximum front-end
sales charge or any applicable CDSC.
Each Fund may also state total return performance for its Classes in
the form of an average annual return. This average annual return figure will be
computed by taking the sum of a Class' annual returns, then dividing that figure
by the number of years in the overall period indicated. The computation will
reflect the impact of the maximum front-end sales charge or CDSC, if any, paid
on the illustrated investment amount against the first year's return.
The performance of Class A Shares, as shown below, is the average
annual total return quotations of Pennsylvania Fund and aggregate total return
quotations for New Jersey Fund and Ohio Fund through February 28, 1999. The
average annual total return (and, as applicable, aggregate total return) for
Class A Shares at offer reflects the maximum front-end sales charge of 3.75%
paid on the purchase of shares. The average annual total return (and, as
applicable, aggregate total return) for Class A Shares at net asset value (NAV)
does not reflect the payment of any front-end sales charge.
The performance of Class B Shares and Class C Shares, as shown below,
is the average annual total return quotations for Pennsylvania Fund and the
aggregate total return quotations for New Jersey Fund through February 28, 1999.
The average annual total return (and, as applicable, aggregate total return) for
Class B Shares and Class C Shares including deferred sales charge reflects the
deduction of the applicable CDSC that would have been paid
-17-
<PAGE>
if the shares were redeemed at February 28, 1998. The average annual total
return (and, as applicable, aggregate total return) for Class B Shares and Class
C Shares excluding deferred sales charge assumes the shares were not redeemed at
February 28, 1999 and therefore does not reflect the deduction of a CDSC.
Securities prices fluctuated during the periods covered and past
results should not be considered as representative of future performance.
Average Annual Total Return
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Class B Class B Class C
Class A (1) Class A (1) including excluding Class C excluding
Tax-Free PA Fund at offer(2) at NAV CDSC CDSC including CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception
3/23/77) 3/23/77) 5/2/94) 5/2/94) 11/29/95) 11/29/95)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 year ended 0.70% 4.64% (0.13%) 3.81% 2.83% 3.81%
2/28/99
- --------------------------------------------------------------------------------------------------------
3 years 4.24% 5.58% 3.84% 4.74% 4.74% 4.74%
ended 2/28/99
- --------------------------------------------------------------------------------------------------------
5 years 4.69% 5.50% N/A N/A N/A N/A
ended 2/28/99
- --------------------------------------------------------------------------------------------------------
10 years 6.89% 7.30% N/A N/A N/A N/A
ended 2/28/99
- --------------------------------------------------------------------------------------------------------
15 years 8.25% 8.53% N/A N/A N/A N/A
ended 2/28/99
- --------------------------------------------------------------------------------------------------------
Life of Fund 6.42% 6.61% 5.07% 5.41% 4.74% 4.74%
- --------------------------------------------------------------------------------------------------------
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return]
- ---------------------------------------------------------------------------------------
Class B Class B Class C Class C
Tax-Free Class A Class A including excluding including excluding
New Jersey at offer at NAV CDSC CDSC CDSC CDSC
Fund(3) (Inception (Inception (Inception (Inception (Inception (Inception
9/2/97) 9/2/97) 9/2/97) 9/2/97) 9/2/97) 9/2/97)
<S> <C> <C> <C> <C> <C> <C>
1 year ended 1.99% 5.93% 1.14% 5.14% 4.14% 5.14%
2/28/99
- ---------------------------------------------------------------------------------------
Life of Fund 5.23% 7.91% 4.17% 6.78% 6.45% 6.45%
- ---------------------------------------------------------------------------------------
Class B Class B Class C Class C
Tax-Free Class A Class A including excluding including excluding
Ohio at offer at NAV CDSC CDSC CDSC CDSC
Fund(3) (Inception (Inception (Inception (Inception (Inception (Inception
9/2/97) 9/2/97) 9/2/97) 9/2/97) 9/2/97) 9/2/97)
- ---------------------------------------------------------------------------------------
1 year ended 1.23% 5.12% 0.43% 4.37% 3.38% 4.37%
2/28/99
- ---------------------------------------------------------------------------------------
Life of Fund 5.12% 7.79% 3.15% 5.78% 5.79% 5.79%
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Performance figures for periods after May 31, 1992 reflect applicable Rule
12b-1 distribution expenses. Future performance will be affected by such
expenses.
(2) Effective June 9, 1997, the maximum front-end sales charge was reduced
from 4.75% to 3.75%. The above performance numbers are calculated using
3.75% as the applicable sales charge for all time periods, and are more
favorable than they would have been had they been calculated using the
former front-end sales charges.
(3) Total return reflects voluntary expense caps in effect for the Fund.
Returns would be lower without the caps. See Investment Management
Agreements.
-19-
<PAGE>
Each Fund may also quote its current yield for each Class in
advertisements and investor communications. The yield computation is determined
by dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period and annualizing
the resulting figure, according to the following formula:
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends;
d = the maximum offering price per share on the last
day of the period.
The above formula will be used in calculating quotations of yield of
each Class, based on specified 30-day periods identified in advertising by the
Fund. The yields of Class A Shares, Class B Shares and Class C Shares of each
Fund as of February 28, 1999 using this formula were as follows: Class A Shares
Class B Shares Class C Shares
Tax-Free Pennsylvania Fund 5.10% 4.13% 4.13%
Tax-Free New Jersey Fund 5.98% 5.10% 5.10%
Tax-Free Ohio Fund 6.49% 5.67% 5.67%
Yield calculations assume the maximum front-end sales charge, if any,
and does not reflect the deduction of any CDSC or Limited CDSC. The yields for
Tax-Free New Jersey Fund and Tax-Free Ohio Fund reflect the voluntary waiver and
payment of fees by the Manager. Actual yield may be affected by variations in
sales charges on investments.
Past performance, such as is reflected in quoted yields, should not be
considered as a representation of the results which may be realized from an
investment in any Class of the Fund in the future.
Each Fund may also publish a tax-equivalent yield concerning a Class
based on federal and, if applicable, state tax rates, which demonstrates the
taxable yield necessary to produce an after-tax yield equivalent to such Class'
yield. For the 30-day period ended February 28, 1999, the tax-equivalent yield,
assuming a federal income tax rate of 31%, of Class A Shares, Class B Shares and
Class C Shares of each Fund was as follows:
Class A Shares Class B Shares Class C Shares
Tax-Free Pennsylvania Fund 3.21% 2.54% 2.54%
Tax-Free New Jersey Fund 3.82% 3.21% 3.21%
Tax-Free Ohio Fund 4.17% 3.60% 3.60%
These yields were computed by dividing that portion of a Class' yield
which is tax-exempt by one minus a stated income tax rate (in this case, a
federal income tax rate of 31%) and adding the product to that portion, if any,
of the yield that is not tax-exempt. The yields for Tax-Free New Jersey Fund and
Tax-Free Ohio Fund reflect the voluntary waiver and payment of fees by the
Manager. In addition, the Fund may advertise a tax-equivalent yield assuming
other income tax rates, when applicable.
Investors should note that the income earned and dividends paid by a
Fund will vary with the fluctuation of interest rates and performance of the
portfolio. The net asset value of a Fund may change. Unlike money market
-20-
<PAGE>
funds, each Fund invests in longer-term securities that fluctuate in value and
do so in a manner inversely correlated with changing interest rates. A Fund's
net asset value will tend to rise when interest rates fall. Conversely, a Fund's
net asset value will tend to fall as interest rates rise. Normally, fluctuations
in interest rates have a greater effect on the prices of longer-term bonds. The
value of the securities held in a Fund will vary from day to day and investors
should consider the volatility of a Fund's net asset value as well as its yield
before making a decision to invest.
Total return performance of each Class will reflect the appreciation or
depreciation of principal, reinvestment of income and any capital gains
distributions paid during any indicated period, and the impact of the maximum
front-end sales charge or CDSC, if any, paid on the illustrated investment
amount, annualized. The results will not reflect any income taxes, if
applicable, payable by shareholders on the reinvested distributions included in
the calculations. As securities prices fluctuate, an illustration of past
performance should not be considered as representative of future results.
From time to time, each Fund may also quote its Classes' actual total
return and/or yield performance, dividend results and other performance
information in advertising and other types of literature. This information may
be compared to that of other mutual funds with similar investment objectives and
to stock, bond and other relevant indices or to rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. For example, the performance of a Fund (or Class)
may be compared to data prepared by Lipper Analytical Services, Inc.,
Morningstar, Inc. or the performance of unmanaged indices compiled or maintained
by statistical research firms such as Lehman Brothers or Salomon Brothers, Inc.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare a Fund's
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The total
return performance reported for these indices will reflect the reinvestment of
all distributions on a quarterly basis and market price fluctuations. The
indices do not take into account any sales charge or other fees. A direct
investment in an unmanaged index is not possible.
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 a Fund may
invest and the assumptions that were used in calculating the blended performance
will be described.
Comparative information on the Consumer Price Index may also be
included in advertisements or other literature. 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.
-21-
<PAGE>
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. A Fund may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of a Fund. Each Fund may also compare performance to that of other compilations
or indices that may be developed and made available in the future.
A Fund may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of a Fund (such as value investing, market timing, dollar
cost averaging, asset allocation, constant ratio transfer, automatic account
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments or global or international investments), economic and
political conditions, the relationship between sectors of the economy and the
economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
bills.
From time to time advertisements, sales literature, communications to
shareholders or other materials may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund), as well as the views as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Fund. In
addition, selected indices may be used to illustrate historic performance of
selected asset classes. A Fund may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs or
drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, domestic stocks,
and/or bonds, treasury bills and shares of that Fund. In addition,
advertisements, sales literature, communications to shareholders or other
materials may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund and/or other mutual funds, shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax planning and investment alternatives to certificates of deposit
and other financial instruments. Such sales literature, communications to
shareholders or other materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
Materials may refer to the CUSIP numbers of a Fund and may illustrate
how to find the listings of that Fund in newspapers and periodicals. Materials
may also include discussions of other Fund products and services.
Each Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Fund may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. Each Fund may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Fund may include information
regarding the background and experience of its portfolio managers.
-22-
<PAGE>
The following tables present examples, for purposes of illustration
only, of cumulative total return performance for each Class of the Funds through
February 28, 1999. Comparative information on the Consumer Price Index is also
included. For these purposes, the calculations reflect maximum sales charges, if
any, and assume the reinvestment of any capital gains distributions and income
dividends paid during the indicated periods. The performance does not reflect
any income taxes payable by shareholders on the reinvested distributions
included in the calculations. The performance of Class A Shares as shown below,
reflects maximum front-end sales charge paid on the purchase of shares but may
also be shown without reflecting the impact on any front-end sales charge. The
performance of Class B Shares and Class C Shares is calculated both with the
applicable CDSC included and excluded. The net asset value of a Class fluctuates
so shares, when redeemed, may be worth more or less than the original
investment, and a Class' results should not be considered as representative of
future performance.
Cumulative Total Return
<TABLE>
<CAPTION>
Class B Class B Class C Class C
Class A (1) Class A (1) including excluding including excluding
at offer(2) at NAV CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception
Tax-Free PA Fund 3/23/77) 3/23/77) 5/2/94) 5/2/94) 11/29/95) 11/29/95)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3 months (3.11%) 0.61% (3.56%) (0.41%) 0.58% 0.41%
ended 2/28/99
- -------------------------------------------------------------------------------------------------------------
6 months (2.17%) 1.67% (2.68%) 1.27% 0.28% 1.27%
ended 2/28/99
- -------------------------------------------------------------------------------------------------------------
9 months (0.46%) 3.45% (1.11%) 2.83% 1.85% 2.83%
ended 2/28/99
- -------------------------------------------------------------------------------------------------------------
1 year ended 0.70% 4.64% (0.13%) 3.81% 2.83% 3.81%
2/28/99
- -------------------------------------------------------------------------------------------------------------
3 years 13.27% 17.69% 11.97% 14.91% 14.91% 14.91%
ended 2/28/99
- -------------------------------------------------------------------------------------------------------------
5 years 25.76% 30.72% N/A N/A N/A N/A
ended 2/28/99
- -------------------------------------------------------------------------------------------------------------
10 years 94.77% 102.36% N/A N/A N/A N/A
ended 2/28/99
- -------------------------------------------------------------------------------------------------------------
15 years 228.32% 241.23% N/A N/A N/A N/A
ended 2/28/99
- -------------------------------------------------------------------------------------------------------------
Life of Fund 291.80% 306.97% 26.97% 28.97% 16.28% 16.28%
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- -------------------------------------------------------------------------------------------------------------------
{} Class B {} Class B {}
Class C [Class C] {} Class A
including CDSC excluding CDSC
including excluding CDSC
Class A at NAV (Inception (Inception CDSC (Inception
at offer (Inception 9/2/97) 9/2/97) (Inception 9/2/97)
Tax-Free New (Inception 9/2/97) 9/2/97)
Jersey Fund(3) 9/2/97)
- ------------------ --------------- ---------------- ---------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
3 months (3.61%) 0.21% (3.84%) 0.03% (0.97%) (0.03%)
ended 2/28/99
- ------------------ --------------- ---------------- ---------------- ----------------- -------------- ---------------
6 months (1.92%) 1.82% (2.55%) 1.44% 0.44% 1.44%
ended 2/28/99
- ------------------ --------------- ---------------- ---------------- ----------------- -------------- ---------------
9 months 0.28% 4.13% (0.45%) 3.55% 2.55% 3.55%
ended 2/28/99
- ------------------ --------------- ---------------- ---------------- ----------------- -------------- ---------------
1 year ended 1.99% 5.93% 1.14% 5.14% 4.14% 5.14%
2/28/99
- ------------------ --------------- ---------------- ---------------- ----------------- -------------- ---------------
Life of Fund 5.23% 7.91% 4.17% 6.78% 6.15% 6.15%
- ------------------ --------------- ---------------- ---------------- ----------------- -------------- ---------------
{} Class B {} Class B {} Class C [Class C] {}
including CDSC excluding CDSC including excluding CDSC
Class A Class A (Inception (Inception CDSC (Inception
at offer at NAV 9/2/97) 9/2/97) (Inception 9/2/97)
Tax-Free Ohio (Inception (Inception 9/2/97)
Fund(3) 9/2/97) 9/2/97)
{} 3 months (2.62%) 1.17% (3.19%) 0.81% (0.01%) 0.99%
ended 2/28/99
- ------------------ ------------- ------------- ---------------- ----------------- -------------- ---------------
{} 6 months (1.95%) 1.80% (3.14%) 0.79% 0.45% 1.43%
ended 2/28/99
- ------------------ ------------- ------------- ---------------- ----------------- -------------- ---------------
{} 9 months 0.18% 4.03% (1.80%) 2.15% 2.47% 3.46%
ended 2/28/99
- ------------------ ------------ ------------- ---------------- ----------------- -------------- ---------------
{} 1 year ended 1.23% 5.12% 0.43% 4.37% 3.38% 4.37%
2/28/99
- ------------------ ------------ ------------- ---------------- ----------------- -------------- ---------------
{} Life of Fund 5.12% 7.79% 3.15% 5.78% 5.79% 5.79%
- ------------------ ------------ ------------- ---------------- ----------------- -------------- ---------------
</TABLE>
-24-
<PAGE>
(1) Performance figures for periods after May 31, 1992 reflect applicable Rule
12b-1 distribution expenses. Future performance will be affected by such
expenses.
(2) Effective June 9, 1997, the maximum front-end sales charge was reduced
from 4.75% to 3.75%. The above performance numbers are calculated using
3.75% as the applicable sales charge for all time periods, and are more
favorable than they would have been had they been calculated using the
former front-end sales charges.
(3) Total return reflects voluntary expense caps in effect for the Fund.
Returns would be lower without the caps. See Investment Management
Agreements.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Funds and other mutual funds available from
Delaware Investments, 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 Funds', and other
Delaware Investments 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 such persons.
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.
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
Investments offers three services -- Automatic Investing Program, Direct Deposit
Program 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.
Investment Price Per Number of
Amount Share Shares Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $5.00 12
Month 4 $100 $10.00 10
---------------------------------------------------------------------------
$400 $37.50 48
-25-
<PAGE>
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 available from
Delaware Investments.
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional Fund
shares, your investment is given yet another opportunity to grow. It's called
the Power of Compounding. Each Fund may include illustrations showing the power
of compounding in advertisements and other types of literature.
-26-
<PAGE>
TRADING PRACTICES AND BROKERAGE
Brokers, dealers and banks are selected to execute transactions for the
purchase or sale of portfolio securities on the basis of the Manager's judgment
of their professional capability to provide the service. The primary
consideration is to have brokers, dealers or banks 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 nearly all instances, trades are made on a
net basis where securities are either bought or sold directly from or to a
broker, dealer or bank. 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, a Fund pays
reasonably competitive brokerage commission rates based upon the professional
knowledge of its trading department as to rates paid and charged for similar
transactions throughout the securities industry. In some instances, a Fund pays
a minimal share transaction cost when the transaction presents no difficulty.
During the past three fiscal years of Pennsylvania Fund, there were no
brokerage commissions paid, and for the period ended February 28, 1999, there
were no brokerage commissions paid for New Jersey Fund or Ohio Fund.
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 process 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
each Fund's Investment Management Agreement, 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, a Fund believes 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 a Fund and to other funds in the Delaware
Investments family. 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.
-27-
<PAGE>
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 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 Funds may place orders with broker/dealers that have agreed to
defray certain expenses of the funds in the Delaware Investments family such as
custodian fees, and may, at the request of the Distributor, give consideration
to sales of such funds' shares as a factor in the selection of brokers and
dealers to execute Fund portfolio transactions.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish a Fund's
objective in relation to anticipated movements in the general level of interest
rates. A Fund is free to dispose of portfolio securities at any time, subject to
complying with the Internal Revenue Code of 1986, as amended, (the "Code") and
the 1940 Act, when changes in circumstances or conditions make such a move
desirable in light of the investment objective. A Fund will not attempt to
achieve or be limited to a predetermined rate of portfolio turnover, such a
turnover always being incidental to transactions undertaken with a view to
achieving a Fund's investment objective. Portfolio transactions will be
undertaken only to accomplish a Fund's objectives and not for the purpose of
realizing capital gains, although capital gains may be realized on certain
portfolio transactions. For example, capital gains may be realized when a
security is sold: (1) so that, provided capital is preserved or enhanced,
another security can be purchased to obtain a higher yield; (2) to take
advantage of what the Manager believes to be a temporary disparity in the normal
yield relationship between the two securities to increase income or improve the
quality of the portfolio; (3) to purchase a security which the Manager believes
is of higher quality than its rating or current market value would indicate; or
(4) when the Manager anticipates a decline in value due to market risk or credit
risk. A Fund anticipates the portfolio turnover rate will ordinarily be less
than 100%.
During the past two fiscal years, each Fund's portfolio turnover rates
were as follows:
February 28
1998 1999
Tax-Free Pennsylvania Fund 32% 41%
Tax-Free New Jersey Fund 47%* 0%
Tax-Free Ohio Fund 66%* 45%
*Annualized.
Each Fund's portfolio turnover rate 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 Fund during the particular fiscal year, exclusive of securities whose
maturities at the time of acquisition are one year or less.
-28-
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for each Fund's
shares and has agreed to use its best efforts to sell shares of each Fund. See
the Prospectus for information on how to invest. Shares of each Fund 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 purchase is generally $1,000 for each Class.
Subsequent purchases must generally be at least $100. The initial and subsequent
investment minimums for Class A Shares will be waived for purchases by officers,
directors and employees of any fund in the Delaware Investments family, the
Manager or any of the Manager's affiliates if the purchases are made pursuant to
a payroll deduction program. Shares purchased pursuant to the Uniform Gifts to
Minors Act or the 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 Asset Planner Service are subject to a minimum initial investment of $2,000
per Asset Planner strategy selected.
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. 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. In doing so, 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 its shares of
either Fund if in the opinion of management such rejection is in such Fund's
best interest. If a purchase is canceled because your check is returned unpaid,
you are responsible for any loss incurred. A Fund can redeem shares from your
account(s) to reimburse itself for any loss, and you may be restricted from
making future purchases in any of the funds in the Delaware Investments family.
Each Fund reserves the right to reject purchase orders paid by third-party
checks or checks that are not drawn on a domestic branch of a United States
financial institution. If a check drawn on a foreign financial institution is
accepted, you may be subject to additional bank charges for clearance and
currency conversion.
Each Fund also reserves the right, following shareholder notification,
to charge a service fee on accounts that, as a result of redemption, have
remained below the minimum stated account balance for a period of three or more
consecutive months. Holders of such accounts may be notified of their
insufficient account balance and advised that they have until the end of the
current calendar quarter to raise their balance to the stated minimum. If the
account has not reached the minimum balance requirement by that time, the Fund
will charge a $9 fee for that quarter and each subsequent calendar quarter until
the account is brought up to the minimum balance. The service fee will be
deducted from the account during the first week of each calendar quarter for the
previous quarter, and will be used to help defray the cost of maintaining
low-balance accounts. No fees will be charged without proper notice, and no CDSC
will apply to such assessments.
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
-29-
<PAGE>
The NASD has adopted amendments to its 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 3.75%; however, lower front-end sales charges
apply for larger purchases. See the table in the Fund Classes' Prospectus. Class
A Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment.
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 B Shares are subject to annual 12b-1 Plan
expenses for approximately eight years after purchase. See Automatic Conversion
of Class B Shares, below.
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.
Class A Shares, Class B Shares and Class C Shares represent a
proportionate interest in a Fund's assets and will receive a proportionate
interest in that Fund's income, before application of any expenses under that
Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
unless, in the case of Class A Shares, a shareholder submits a specific request.
Certificates are not issued in the case of Class B Shares or Class C Shares.
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 Fund 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.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A Shares, Class B Shares
and Class C Shares 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 and incur a
front-end sales charge and annual 12b-1 Plan expenses of up to a maximum of
0.30% (currently no more than 0.25% in the case of New Jersey Fund and Ohio
Fund) of the average daily net assets of Class A Shares, or to purchase either
Class B or Class C Shares and have the entire initial purchase amount invested
in the Fund 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% (currently no more than 0.25% in the case of New Jersey Fund and Ohio
Fund) of average daily net assets of such shares. Unlike Class B Shares, Class C
Shares do not convert to another Class.
-30-
<PAGE>
The higher 12b-1 Plan expenses on Class B Shares and Class C Shares
will be offset to the extent a return is realized on the additional money
initially invested upon the purchase of such shares. However, there can be no
assurance as to the return, if any, that will be realized on such additional
money. In addition, the effect of any return earned on such additional money
will diminish over time. In comparing Class B Shares to Class C Shares,
investors should also consider the duration of the annual 12b-1 Plan expenses to
which each of the classes is subject and the desirability of an automatic
conversion feature, which is available only for Class B Shares.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Funds, the Distributor and others will be paid, in the
case of Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of Class B Shares and Class C Shares, from the
proceeds of the 12b-1 Plan fees and, if applicable, the CDSC incurred upon
redemption. Financial advisers may receive different compensation for selling
Class A Shares, Class B Shares and Class C Shares. Investors should understand
that the purpose and function of the respective 12b-1 Plans and the CDSCs
applicable to Class B Shares and Class C Shares are the same as those of the
12b-1 Plan and the front-end sales charge applicable to Class A Shares in that
such fees and charges are used to finance the distribution of the respective
Classes. See Plans under Rule 12b-1 for the Fund Classes.
Dividends, if any, paid on Class A Shares, Class B Shares and Class C
Shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except that the additional amount of 12b-1
Plan expenses relating to Class B Shares and Class C Shares will be borne
exclusively by such shares. See Determining Offering Price and Net Asset Value.
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 table in the Fund Classes'
Prospectus, 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.
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 the front-end sales.
In addition, certain dealers who enter into an agreement to provide extra
training and information on Delaware Investments products and services and who
increase sales of Delaware Investments 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. Dealers who receive 90% or more of
the sales charge may be deemed to be underwriters under the 1933 Act.
Dealer's Commission
As described in the Prospectus, 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.
For accounts with assets over $1 million, the dealer commission resets
annually to the highest incremental commission rate on the anniversary of the
first purchase. In determining a financial adviser's eligibility for the
dealer's commission, purchases of Class A Shares of other Delaware Investments
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) may be aggregated with those of the Class A Shares of a
Fund. 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.
-31-
<PAGE>
An exchange from other Delaware Investments 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 above, 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. For purposes of this formula, the "net asset value at the time of
purchase" will be the net asset value at purchase of Class B Shares or Class C
Shares of a Fund, even if those shares are later exchanged for shares of another
Delaware Investments fund. In the event of an exchange of the shares, the "net
asset value of such shares at the time of redemption" will be the net asset
value of the shares that were acquired in the exchange. See Waiver of Contingent
Deferred Sales Charge--Class B Shares and Class C Shares under Redemption and
Exchange for the Fund Classes for a list of the instances in which the CDSC is
waived.
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares 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
Fund. See Automatic Conversion of Class B Shares below. Such conversion will
constitute a tax-free exchange for federal income tax purposes. See Taxes.
Investors are reminded that the Class A Shares into which Class B Shares will
convert are subject to ongoing annual 12b-1 Plan expenses of up to a maximum of
0.30% (currently no more than 0.25% in the case of New Jersey Fund and Ohio
Fund) of average daily net assets of such shares.
In determining whether a CDSC applies to a redemption of Class B
Shares, it will be assumed that shares held for more than six years are redeemed
first, followed by shares acquired through the reinvestment of dividends or
distributions, and finally by shares held longest during the six-year period.
With respect to Class C Shares, it will be assumed that shares held for more
than 12 months are redeemed first followed by shares acquired through the
reinvestment of dividends or distributions, and finally by shares held for 12
months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
Deferred Sales Charge Alternative - Class B Shares
Class B Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class B Shares at the time of purchase from its
own assets in an amount equal to no more than 4% of the dollar amount purchased.
In addition, 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 pay additional compensation to dealers or brokers for selling
Class B Shares at the time of purchase. As discussed below, however, Class B
Shares are subject to annual 12b-1 Plan expenses and, if redeemed within six
years of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares. These
payments support the compensation paid to dealers or brokers for selling Class B
Shares. Payments to the Distributor and others under the Class B 12b-1 Plan may
be in an amount equal to no more than 1% annually.
-32-
<PAGE>
The combination of the CDSC and the proceeds of the 12b-1 Plan fees makes it
possible for a Fund to sell Class B Shares without deducting a front-end sales
charge at the time of purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class B Shares
described in this Part B, even after the exchange. Such CDSC schedule may be
higher than the CDSC schedule for Class B Shares acquired as a result of the
exchange. See Redemption and Exchange.
Automatic Conversion of Class B Shares
Class B Shares, other than shares acquired through reinvestment of
dividends, held for eight years after purchase are eligible for automatic
conversion into Class A Shares. Conversions of Class B Shares into Class A
Shares will occur only four times in any calendar year, on the last business day
of the second full week of March, June, September and December (each, a
"Conversion Date"). If the eighth anniversary after a purchase of Class B Shares
falls on a Conversion Date, an investor's Class B Shares will be converted on
that date. If the eighth anniversary occurs between Conversion Dates, an
investor's Class B Shares will be converted on the next Conversion Date after
such anniversary. Consequently, if a shareholder's eighth anniversary falls on
the day after a Conversion Date, that shareholder will have to hold Class B
Shares for as long as three additional months after the eighth anniversary of
purchase before the shares will automatically convert into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute
tax-free exchanges for federal income tax purposes. See Taxes.
Level Sales Charge Alternative - Class C Shares
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount purchased.
As discussed below, Class C Shares are subject to annual 12b-1 Plan expenses
and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class C
Shares. Payments to the Distributor and others under the Class C 12b-1 Plan may
be in an amount equal to no more than 1% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class C Shares as
described in this Part B. See Redemption and Exchange.
-33-
<PAGE>
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 the Fund (the "Plans"). Each Plan permits the relevant Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the Class to which the Plan applies.
The Plans permit a Fund, 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 dealer's agreements with the Distributor. The
Plan expenses relating to Class B Shares 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, each Fund may make payments out of the assets of Class A
Shares, Class B Shares 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 the Fund under the Plans, and the
Fund's Distribution Agreement, is on an annual basis up to 0.30% (currently, no
more than 0.25% for New Jersey Fund and Ohio Fund pursuant to Board action) of
average daily net assets of Class A Shares, and up to 1% (0.25% of which are
service fees to be paid to the Distributor, dealers and others for providing
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.
Effective June 1, 1992, the Board of Trustees has determined that the
annual fee payable on a monthly basis for Class A Shares of Pennsylvania Fund,
pursuant to its Plan, will be equal to the sum of: (i) the amount obtained by
multiplying 0.30% by the average daily net assets represented by Class A Shares
that were acquired by shareholders on or after June 1, 1992, and (ii) the amount
obtained by multiplying 0.10% by the average daily net assets represented by
Class A Shares that were acquired before June 1, 1992. While this is the method
for calculating Class A Shares' 12b-1 expense, such expense is a Class expense
so that all such shareholders of the Class, regardless of when they purchased
their shares, will bear 12b-1 expenses at the same rate per share. As Class A
Shares are sold on or after June 1, 1992, the initial rate of at least 0.10%
will increase over time. Thus, as the proportion of Class A Shares purchased on
or after June 1, 1992 to Class A Shares outstanding prior to June 1, 1992
increases, the expenses attributable to payments under the Plan relating to
Class A Shares will also increase (but will not exceed 0.30% of average daily
net assets). In addition, the Board of Trustees set the fee for Class A Shares
of New Jersey Fund and Ohio Fund at 0.25% of average daily net assets. While
this describes the current basis for calculating the fees which will be payable
under the Plans with respect to Class A Shares, such Plans permit a full 0.30%
on all Class A Shares' assets to be paid at any time following appropriate Board
approval.
-34-
<PAGE>
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 Shares, Class B Shares and Class C Shares would be borne by such persons
without any reimbursement from the Classes. Subject to seeking best price and
execution, the Classes 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 Agreement, as amended, have 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 Agreement. Continuation of the Plans and the Distribution Agreement, 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 and that there is a reasonable likelihood of
the Plan relating to a Class providing a benefit to that Fund Class. The Plans
and the Distribution Agreement, as amended, may be terminated at any time
without penalty by a majority of those trustees who are not "interested persons"
or by a majority vote of the relevant Class' outstanding voting securities. Any
amendment materially increasing the maximum percentage payable under the Plans
must likewise be approved by a majority vote of the relevant Class' outstanding
voting securities, as well as by a majority vote of those trustees who are not
"interested persons." With respect to the Class A Share Plan, any material
increase in the maximum percentage payable thereunder must also be approved by a
majority of the outstanding voting securities of a Fund's B Class. 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 trustees 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.
-35-
<PAGE>
For the fiscal year ended February 28, 1999, payments from Class A
Shares, Class B Shares and Class C Shares of each Fund were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
New New New
Jersey Jersey Jersey Ohio Ohio Ohio
Pennsylvania Pennsylvania Pennsylvania Fund A Fund B Fund B Fund A Fund B Fund C
Fund A Class Fund B Class Fund C Class Class Class Class Class Class Class
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advertising $17,899 --- --- --- --- --- --- --- ---
- ---------------------------------------------------------------------------------------------------------------------
Annual/Semi $24,600 --- --- $541 --- --- $503 --- ---
Annual Reports
- ---------------------------------------------------------------------------------------------------------------------
Broker Trails $1,584,961 $98,123 $13,015 $575 $1,410 $160 $688 $49 $737
- ---------------------------------------------------------------------------------------------------------------------
Broker Sales --- $165,082 $10,303 --- $2,155 $138 $300 $24 ---
Charges
- ---------------------------------------------------------------------------------------------------------------------
Dealer Service --- --- $149 --- --- --- --- --- ---
Expenses
- ---------------------------------------------------------------------------------------------------------------------
Interest on
Broker Sales --- $110,841 $293 --- $1,674 $25 --- $107 $9
Charges
- ---------------------------------------------------------------------------------------------------------------------
Commissions to
Wholesalers $49,571 $17,663 $4,557 $1,338 $222 $129 $300 $24
- ---------------------------------------------------------------------------------------------------------------------
Promotional- $6,865 $2,093 $67 $57 --- --- $577 $45 $5
Broker Meetings
- ---------------------------------------------------------------------------------------------------------------------
Promotional-Other $17,422 --- --- $831 --- --- $1,293 --- ---
- ---------------------------------------------------------------------------------------------------------------------
Prospectus $14,779 --- --- $499 --- --- --- --- ---
Printing
- ---------------------------------------------------------------------------------------------------------------------
Telephone
--- --- --- --- $8 --- --- --- $6
- ---------------------------------------------------------------------------------------------------------------------
Other $3,995 $378 $1,921 $315 --- $40 $445 --- $22
- ---------------------------------------------------------------------------------------------------------------------
Total $1,720,092 $394,180 $30,305 $4,156 $5,469 $492 $3,806 $390 $123
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Payments to Dealers - Class A Shares, Class B Shares 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 Investments family of funds. In some instances, these
incentives or payments may be offered only to certain dealers who maintain, have
sold or 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 Investments fund shares.
Subject to pending amendments to the NASD's Conduct Rules, in
connection with the promotion of Delaware Investments fund shares, the
Distributor may, from time to time, pay to participate in dealer-sponsored
seminars and conferences, reimburse dealers for expenses incurred in connection
with preapproved seminars, conferences and advertising and may, from time to
time, pay or allow additional promotional incentives to dealers,
-36-
<PAGE>
which shall include non-cash concessions, such as certain luxury merchandise or
a trip to or attendance at a business or investment seminar at a luxury resort,
as part of preapproved sales contests. Payment of non-cash compensation to
dealers is currently under review by the NASD and the Securities and Exchange
Commission. It is likely that the NASD's Conduct Rules will be amended such that
the ability of the Distributor to pay non-cash compensation as described above
will be restricted in some fashion. The Distributor intends to comply with the
NASD's Conduct Rules as they may be amended.
Special Purchase Features - Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares of the Fund may be purchased at net asset value under
the Delaware Investments Dividend Reinvestment Plan and, under certain
circumstances, the Exchange Privilege and the 12-Month Reinvestment Privilege.
Purchases of Class A Shares may be made at net asset value by current
and former officers, directors and employees (and members of their families) of
the Manager, any affiliate, any of the funds in the Delaware Investments family,
certain of their agents and registered representatives and employees of
authorized investment dealers and by employee benefit plans for such entities.
Individual purchases, including those in retirement accounts, must be for
accounts in the name of the individual or a qualifying family member. 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 after the registered representative changes 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 funds in the
Delaware Investments family. 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. Investors may be charged a fee when effecting transactions in Class A
Shares through a broker or agent that offers these special investment products.
Investors in Delaware Investments 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 Investments family at net asset value.
The Trust 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
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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 a Fund and of any class of any of the other mutual funds available from the
Delaware Investments family (except shares of any fund in the Delaware
Investments family 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 fund in the Delaware Investments family
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.
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 Funds, as well as shares of any other class of any of the other
funds in the Delaware Investments family (except shares of any funds in the
Delaware Investments family 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 fund in the
Delaware Investments family 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
holdings of shares of funds in the Delaware Investments family.
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 Fund as well
as shares of any other class of any of the funds in the Delaware Investments
family which offer such classes (except shares of any funds in the Delaware
Investments family 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 shares from a fund in the Delaware
Investments family 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 3.00%. 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 in the Prospectus to determine the applicability of the Right
of Accumulation to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of a Fund 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 the Fund or in Class A Shares of any of the other
funds in the Delaware Investments family, 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 available from the Delaware Investments
family 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
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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.
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Fund's 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 connection with the features described above.
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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
Classes in which an investor has an account (based on the net asset value in
effect on the payable date) and will be credited to the shareholder's account on
that date. Confirmations of each dividend payment from net investment income
will be mailed to shareholders quarterly. 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
a Fund Class. Such purchases, which must meet the minimum subsequent purchase
requirements stated in the Prospectus and this Part B, are made for Class A
Shares at the public offering price and for Class B Shares and Class C 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 Investments Family of Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A Shares,
Class B Shares and Class C Shares may automatically reinvest dividends and/or
distributions in any of the mutual funds in the Delaware Investments, including
the Funds, 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.
Subject to the following limitations, dividends and/or distributions
from other funds in Delaware Investments may be invested in shares of the Funds,
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.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware
Investments family, you may write and authorize an exchange of part or all of
your investment into shares of a Fund. If you wish to open an account by
exchange, call the Shareholder Service Center for more information. All
exchanges are subject to the eligibility and minimum purchase requirements set
forth in each fund's prospectus. See Redemption and Exchange for more complete
information concerning your exchange privileges.
Holders of Class A Shares of a Fund may exchange all or part of their
shares for certain of the shares of other funds in the Delaware Investments
family, including other Class A Shares, but may not exchange their Class A
Shares for Class B Shares or Class C Shares of the Fund or of any other fund in
the Delaware Investments family. Holders of Class B Shares of a Fund are
permitted to exchange all or part of their Class B Shares only into Class B
Shares of other Delaware Investments funds. Similarly, holders of Class C Shares
of a Fund are permitted to exchange all or part of their Class C Shares only
into Class C Shares of other Delaware Investments funds. Class B Shares of a
Fund and Class C Shares of a Fund acquired by exchange will continue to carry
the CDSC and, in the case of Class B Shares, the automatic conversion schedule
of the fund from which the exchange is made. The holding period of Class B
Shares of a Fund acquired by exchange will be added to that of the shares that
were exchanged for purposes of determining the time of the automatic conversion
into Class A Shares of that Fund.
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Permissible exchanges into Class A Shares of a Fund will be made
without a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares of a Fund will be made without the imposition of a CDSC
by the fund from which the exchange is being made at the time of the exchange.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan--Investors may arrange for either Fund to
accept for investment in Class A Shares, Class B Shares 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 Shares, Class B
Shares and Class C Shares may make automatic investments by authorizing, in
advance, monthly payments directly from their checking account for deposit into
their Fund 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.
* * *
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 Fund 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 Fund 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 Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. Either Fund 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.
MoneyLine (SM) On Demand
You or your investment dealer may request purchases of Fund shares by
phone using MoneyLine (SM) On Demand. When you authorize a Fund to accept such
requests from you or your investment dealer, funds will be withdrawn from (for
share purchases) your predesignated bank account. Your request will be processed
the same day if you call prior to 4 p.m., Eastern time. There is a $25 minimum
and $50,000 maximum limit for MoneyLine (SM) On Demand transactions.
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It may take up to four business days for the transactions to be
completed. You can initiate this service by completing an Account Services form.
If your name and address are not identical to the name and address on your Fund
account, you must have your signature guaranteed. The Funds do not charge a fee
for this service; however, your bank may charge a fee.
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 Investments family. Shareholders of the Fund Classes may
elect to invest in one or more of the other mutual funds in Delaware Investments
family through the Wealth Builder Option. If in connection with the election of
the Wealth Builder Option, you wish to open a new account to receive the
automatic investment, such new account must meet the minimum initial purchase
requirements described in the prospectus of the fund that you select. All
investments under this option are exchanges and are therefore subject to the
same conditions and limitations as other exchanges noted above.
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
Investments family, subject to the conditions and limitations set forth in the
Fund Classes' Prospectus. 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 giving written notice to the fund from which exchanges are made.
Asset Planner
To invest in Delaware Investments funds using the Asset Planner asset
allocation service, you should complete an Asset Planner Account Registration
Form, which is available only from a financial adviser or investment dealer.
Effective September 1, 1997, the Asset Planner Service is only available to
financial advisers or investment dealers who have previously used this service.
The Asset Planner service offers a choice of four predesigned asset allocation
strategies (each with a different risk/reward profile) in predetermined
percentages in Delaware Investments 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
Investments accounts into the Asset Planner service may be made at net asset
value under the circumstances described under Investing by Exchange. Also see
Buying Class A Shares at Net Asset Value. 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 a Fund and of other funds in the
Delaware Investments family may be used in the same Strategy with consultant
class shares that are offered by certain other Delaware Investments funds.
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
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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 will receive a
customized quarterly Strategy Report summarizing all 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.
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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 after receipt of the order by a Fund, its agent or certain
other authorized persons. Orders for purchases of Class B Shares and Class C
Shares are effected at the net asset value per share next calculated by a Fund
after receipt of the order by a Fund, its agent or other certain authorized
persons. See Distribution and Service under Investment Management Agreements.
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 front-end 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
Trust 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, is included in the
Trust's financial statements which are incorporated by reference into this Part
B.
Each Fund's net asset value per share is computed by adding the value
of all securities and other assets in the portfolio, deducting any liabilities
and dividing by the number of Fund shares outstanding. In determining a Fund's
total net assets, portfolio securities are valued at fair value, using methods
determined in good faith by the trustees. This method utilizes the services of
an independent pricing organization which employs a combination of methods
including, among others, the obtaining of market valuations from dealers who
make markets and deal in such securities, and by comparing valuations with those
of other comparable securities in a matrix of such securities. A pricing
service's activities and results are reviewed by the officers of a Fund. In
addition, money market instruments having a maturity of less than 60 days are
valued at amortized cost. Expenses and fees are accrued daily.
Each Class of a Fund will bear, pro-rata, all of the common expenses of
that Fund. The net asset values of all outstanding shares of each Class of a
Fund will be computed on a pro-rata basis for each outstanding share based on
the proportionate participation in the Fund represented by the value of shares
of that Class. All income earned and expenses incurred by a Fund will be borne
on a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in the Fund represented by the value of shares of such Classes,
except that the Class A Shares, Class B Shares and Class C Shares alone will
bear the 12b-1 Plan expenses payable under their respective Plans. Due to the
specific distribution expenses and other costs that would be allocable to each
Class, the dividends paid to each Class of a Fund may vary. However, the net
asset value per share of each Class is expected to be equivalent.
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REDEMPTION AND EXCHANGE
You can redeem or exchange your shares in a number of different ways.
Exchanges are subject to the requirements of each fund and all exchanges of
shares constitute taxable events. Further, in order for an exchange to be
processed, shares of the fund being acquired must be registered in the state
where the acquiring shareholder resides. You may want to consult your financial
adviser or investment dealer to discuss which funds in Delaware Investments will
best meet your changing objectives, and the consequences of any exchange
transaction. You may also call the Delaware Investments directly for fund
information.
Your shares will be redeemed or exchanged at a price based on the net
asset value next determined after a Fund receives your request in good order,
subject, in the case of a redemption, to any applicable CDSC or Limited CDSC.
For example, redemption or exchange requests received in good order after the
time the offering price and net asset value of shares are determined will be
processed on the next business day. A shareholder submitting a redemption
request may indicate that he or she wishes to receive redemption proceeds of a
specific dollar amount. In the case of such a request, a Fund will redeem the
number of shares necessary to deduct the applicable CDSC in the case of Class B
Shares and Class C Shares, and, if applicable, the Limited CDSC in the case of
Class A Shares and tender to the shareholder the requested amount, assuming the
shareholder holds enough shares in his or her account for the redemption to be
processed in this manner. Otherwise, the amount tendered to the shareholder upon
redemption will be reduced by the amount of the applicable CDSC or Limited CDSC.
Redemption proceeds will be distributed promptly, as described below, but not
later than seven days after receipt of a redemption request.
Except as noted below, for a redemption request to be in "good order,"
you must provide your account number, account registration, and the total number
of shares or dollar amount of the transaction. For exchange requests, you must
also provide the name of the fund in which you want to invest the proceeds.
Exchange instructions and redemption requests must be signed by the record
owner(s) exactly as the shares are registered. You may request a redemption or
an exchange by calling the Shareholder Service Center at 800-523-1918. Each Fund
may suspend, terminate, or amend the terms of the exchange privilege upon 60
days' written notice to shareholders.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Funds, offers to repurchase Fund 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 Fund,
its agent, or certain authorized persons, subject to 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 Funds 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 Fund 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.
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 by the Fund or certain other authorized persons (see Distribution
and Service under Investment Management Agreements); 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 Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. Each Fund will honor redemption requests as to shares for which a
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check was tendered as payment, but a Fund will not mail or wire the proceeds
until it is reasonably satisfied that the purchase check has cleared, which may
take up to 15 days from the purchase date. You can avoid this potential delay if
you purchase shares by wiring Federal Funds. Each Fund reserves the right to
reject a written or telephone redemption request or delay payment of redemption
proceeds if there has been a recent change to the shareholder's address of
record.
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
Fund 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 a Fund 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 Fund of securities owned by it is not reasonably practical,
or it is not reasonably practical for a Fund fairly to value its assets, or in
the event that the SEC has provided for such suspension for the protection of
shareholders, a Fund 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 1940 Act pursuant to which
each Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of such Fund during any 90-day period for
any one shareholder.
The value of a Fund's investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Fund may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
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, below.
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; (iv) 1% if shares are redeemed during the sixth year
following purchase; and (v) 0% thereafter. Class C Shares are subject to a CDSC
of 1% if shares are redeemed within 12 months 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 Purchasing Shares. Except for the applicable CDSC or Limited CDSC
and, with respect to the expedited payment by wire described below, there is
currently a $7.50 bank wiring cost, neither the Funds nor the Distributor
charges a fee for redemptions or repurchases, but such fees could be charged at
any time in the future.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of other funds in the Delaware Investments (in
each case, "New Shares") in a permitted exchange, will not be subject to a CDSC
that might otherwise be due upon redemption of the Original Shares. However,
such shareholders will continue to be subject to the CDSC and, in the case of
Class B Shares, the automatic conversion schedule of the Original Shares as
described in this Part B and any CDSC assessed upon redemption will be charged
by the fund from which the Original Shares were exchanged. In an exchange of
Class B Shares from a Fund, the Fund's CDSC schedule may be higher than the CDSC
schedule relating to the New Shares acquired as a result of the exchange. For
purposes of computing the CDSC that may be payable upon a disposition of the New
Shares, the period of time that an investor held the Original Shares is added to
the period of time that an investor held the New Shares. With respect to Class B
Shares, the automatic conversion schedule of the Original Shares may be longer
than that of the New Shares. Consequently, an investment in New Shares by
exchange may subject an investor to the higher 12b-1
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fees applicable to Class B Shares of a Fund for a longer period of time than if
the investment in New Shares were made directly.
Written Redemption
You can write to each Fund at 1818 Market Street, Philadelphia, PA
19103 to redeem some or all of your shares. The request must be signed by all
owners of the account or your investment dealer of record. For redemptions of
more than $50,000, or when the proceeds are not sent to the shareholder(s) at
the address of record, the Funds require a signature by all owners of the
account and a signature guarantee for each owner. A signature guarantee can be
obtained from a commercial bank, a trust company or a member of a Securities
Transfer Association Medallion Program ("STAMP"). Each Fund reserves the right
to reject a signature guarantee supplied by an eligible institution based on its
creditworthiness. The Funds may require further documentation from corporations,
executors, retirement plans, administrators, trustees or guardians.
Payment is normally mailed the next business day after receipt of your
redemption request. If your Class A Shares are in certificate form, the
certificate(s) must accompany your request and also be in good order.
Certificates are issued for Class A Shares only if a shareholder submits a
specific request. Certificates are not issued for Class B Shares or Class C
Shares.
Written Exchange
You may also write to each Fund (at 1818 Market Street, Philadelphia,
PA 19103) to request an exchange of any or all of your shares into another
mutual fund in Delaware Investments, subject to the same conditions and
limitations as other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption - Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your account
in writing that you do not wish to have such services available with respect to
your account. Each Fund reserves the right to modify, terminate or suspend these
procedures upon 60 days' written notice to shareholders. It may be difficult to
reach the Funds by telephone during periods when market or economic conditions
lead to an unusually large volume of telephone requests.
Neither the Funds nor their Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, each Fund 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 Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by the
Fund Classes are generally tape recorded, and a written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone. By exchanging shares by telephone, you are acknowledging prior
receipt of a prospectus for the fund into which your shares are being exchanged.
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Telephone Redemption--Check to Your Address of Record
The Telephone Redemption feature is a quick and easy method to redeem
shares. You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your address of record. Checks will be payable
to the shareholder(s) of record. Payment is normally mailed the next business
day after receipt of the redemption request. This service is only available to
individual, joint and individual fiduciary-type accounts.
Telephone Redemption--Proceeds to Your Bank
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must complete an Authorization Form and have your signature
guaranteed. For your protection, your authorization must be on file. If you
request a wire, your funds will normally be sent the next business day. 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. First Union National Bank's fee
(currently $7.50) will be deducted from Fund Class redemption proceeds. If you
ask for a check, it will normally be mailed the next business day after receipt
of your redemption request to your predesignated bank account. There are no
separate fees for this redemption method, but the mail time may delay getting
funds into your bank account. Simply call the Shareholder Service Center prior
to the time the offering price and net asset value are determined, as noted
above.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to
adjust your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in Delaware Investments under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
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 Investments family. Telephone exchanges may be subject to
limitations as to amounts or frequency. The Transfer Agent and each Fund reserve
the right to record exchange instructions received by telephone and to reject
exchange requests at any time in the future.
MoneyLine (SM) On Demand
You or your investment dealer may request redemptions of Fund shares by
phone using MoneyLine (SM) On Demand. When you authorize a Fund to accept such
requests from you or your investment dealer, funds will be deposited to (for
share redemptions) your predesignated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine (SM) On Demand transactions. See
MoneyLine (SM) On Demand under Investment Plans.
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"), the Funds will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Investments funds from Timing Firms. A Fund 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 Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund'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.
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Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Investments funds: (1)
Decatur Income Fund, (2) Decatur Total Return Fund, (3) Delaware Balanced Fund,
(4) Limited-Term Government Fund, (5) USA Fund, (6) Delaware Cash Reserve, (7)
Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other Delaware
Investments funds are available for timed exchanges. Assets redeemed or
exchanged out of Timing Accounts in Delaware Investments funds not listed above
may not be reinvested back into that Timing Account. Each Fund reserves the
right to apply these same restrictions to the account(s) of any person whose
transactions seem to follow a time pattern (as described above).
Each Fund 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 Fund 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
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund 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.
Systematic Withdrawal Plans
Shareholders of Class A Shares, Class B Shares and Class C Shares 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 Funds do not recommend any
specific amount of withdrawal. This is particularly useful to shareholders
living on fixed incomes, since it can provide them with a stable supplemental
amount. 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.
Shareholders should not purchase additional shares while participating in a
Systematic Withdrawal Plan.
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.
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 Delaware Investments 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. The applicable CDSC for Class B Shares and Class C Shares redeemed via
a Systematic Withdrawal Plan will be waived if, on the date that the Plan is
established, the annual amount selected to be withdrawn is less than 12% of the
account balance. If the annual amount selected to be withdrawn exceeds 12% of
the account balance on the date that the
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Systematic Withdrawal Plan is established, all redemptions under the Plan will
be subject to the applicable CDSC. Whether a waiver of the CDSC is available or
not, the first shares to be redeemed for each Systematic Withdrawal Plan payment
will be those not subject to a CDSC because they have either satisfied the
required holding period or were acquired through the reinvestment of
distributions. The 12% annual limit will be reset on the date that any
Systematic Withdrawal Plan is modified (for example, a change in the amount
selected to be withdrawn or the frequency or date of withdrawals), based on the
balance in the account on that date. See Waiver of Contingent Deferred Sales
Charge - Class B Shares and Class C Shares, below.
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 Funds 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.
Systematic Withdrawal Plan payments are normally made by check. In the
alternative, you may elect to have your payments transferred from your Fund
account to your predesignated bank account through the MoneyLine (SM) Direct
Deposit Service. Your funds will normally be credited to your bank account up to
four business days after the payment date. There are no separate fees for this
redemption method. It may take up to four business days for the transactions to
be completed. You can initiate this service by completing an Account Services
form. If your name and address are not identical to the name and address on your
Fund account, you must have your signature guaranteed. The Funds do not charge a
fee for any this service; however, your bank may charge a fee.
Shareholders should consult with their financial advisers to determine
whether a Systematic Withdrawal Plan would be suitable for them.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
For purchases of $1,000,000 or more made on or after July 1, 1998, a
Limited CDSC will be imposed on certain redemptions of Class A Shares (or shares
into which such Class A Shares are exchanged) according to the following
schedule: (1) 1.00% if shares are redeemed during the first year after the
purchase; and (2) 0.50% if such shares are redeemed during the second year after
the purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission described above.
The Limited CDSC will be paid to the Distributor and will be assessed
on an amount equal to the lesser of: (1) the net asset value at the time of
purchase of the Class A Shares being redeemed or (2) the net asset value of such
Class A Shares at the time of redemption. For purposes of this formula, the "net
asset value at the time of purchase" will be the net asset value at purchase of
the Class A Shares even if those shares are later exchanged for shares of
another Delaware Investments fund and, in the event of an exchange of Class A
Shares, the "net asset value of such shares at the time of redemption" will be
the net asset value of the shares acquired in the exchange.
Redemptions of such Class A Shares held for more than two years will
not be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Investments fund will not trigger the imposition of the Limited
CDSC at the time of such exchange. The period a shareholder owns shares into
which Class A Shares are exchanged will count towards satisfying the two-year
holding period. The Limited CDSC is assessed if such two year period is not
satisfied irrespective of whether the redemption triggering its payment is of
Class A Shares of a Fund or Class A Shares acquired in the exchange.
In determining whether a Limited CDSC is payable, it will be assumed
that shares not subject to the Limited CDSC are the first redeemed followed by
other shares held for the longest period of time. The Limited CDSC will not be
imposed upon shares representing reinvested dividends or capital gains
distributions, or upon amounts representing share appreciation. All investments
made during a calendar month, regardless of what day of the month the investment
occurred, will age one month on the last day of that month and each subsequent
month.
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Waiver of Limited Contingent Deferred Sales Charge -- Class A Shares
The Limited CDSC for Class A Shares on which a dealer's commission has
been paid will be waived in the following instances: (i) redemptions that result
from a Fund's right to liquidate a shareholder's account if the aggregate net
asset value of the shares held in the account is less than the then-effective
minimum account size; and (ii) redemptions by the classes of shareholders who
are permitted to purchase shares at net asset value, regardless of the size of
the purchase (see Buying Class A Shares at Net Asset Value under Purchasing
Shares).
Waiver of Contingent Deferred Sales Charge -- Class B Shares and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares in
connection with the following redemptions: (i) redemptions that result from a
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the then-effective minimum
account size; and (ii) distributions from an account if the redemption results
from the death of all registered owners of the account (in the case of accounts
established under the Uniform Gifts to Minors or Uniform Transfers to Minors
Acts or trust accounts, the waiver applies upon the death of all beneficial
owners) or a total and permanent disability (as defined in Section 72 of the
Internal Revenue Code of 1986, as amended (the "Code")) of all registered owners
occurring after the purchase of the shares being redeemed.
The CDSC of Class C Shares is waived in connection with the following
redemptions: (i) redemptions that result from a Fund's right to liquidate a
shareholder's account if the aggregate net asset value of the shares held in the
account is less than the then-effective minimum account size; and (ii)
distributions from an account if the redemption results from the death of all
registered owners of the account (in the case of accounts established under the
Uniform Gifts to Minors or Uniform Transfers to Minors Acts or trust accounts,
the waiver applies upon the death of all beneficial owners) or a total and
permanent disability (as defined in Section 72 of the Code) of all registered
owners occurring after the purchase of the shares being redeemed.
In addition, the CDSC will be waived on Class B Shares and Class C
Shares redeemed in accordance with a Systematic Withdrawal Plan if the annual
amount selected to be withdrawn under the Plan does not exceed 12% of the value
of the account on the date that the Systematic Withdrawal Plan was established
or modified.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund declares a dividend from net investment income to its
shareholders on a daily basis. Dividends are declared each day the Funds are
open and are paid monthly on the first business day following the end of each
month. Payment by check of cash dividends will ordinarily be mailed within three
business days after the payable date. Net investment income earned on days when
the Funds are not open will be declared as a dividend on the next business day.
Purchases of Fund shares by wire begin earning dividends when converted into
Federal Funds and available for investment, normally the next business day after
receipt. However, if a Fund is given prior notice of Federal Funds wire and an
acceptable written guarantee of timely receipt from an investor satisfying a
Fund's credit policies, the purchase will start earning dividends on the date
the wire is received. Investors desiring to guarantee wire payments must have an
acceptable financial condition and credit history in the sole discretion of a
Fund. Each Fund reserves the right to terminate this option at any time.
Purchases by check earn dividends upon conversion to Federal Funds, normally one
business day after receipt.
Any distributions from net realized securities profits will be made
annually during the quarter following the close of the fiscal year. Such
distributions will be reinvested in shares at the net asset value in effect on
the first business day after month end, unless the shareholder elects to receive
them in cash. The Trust will mail a quarterly statement showing dividends paid
and all the transactions made during the period.
Each Class of a Fund will share proportionately in the investment
income and expenses of that Fund, except that each Class will alone incur
distribution fees under its 12b-1 Plan. See Plans Under Rule 12b-1.
Dividends are automatically reinvested in additional shares at net
asset value on the payable date, unless an election to receive dividends in cash
has been made. 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 Fund may deduct from
a shareholder's account the costs of the Fund's effort to locate a shareholder
if a shareholder's mail is returned by the Post Office or the Fund 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.
Pennsylvania Fund anticipates that substantially all dividends paid to
shareholders will be exempt from federal and Pennsylvania [personal] income
taxes and from certain [other] Pennsylvania state and local taxes. New Jersey
Fund anticipates that substantially all dividends paid to shareholders will be
exempt from federal and New Jersey {} [gross income ]taxes. In addition, Ohio
Fund anticipates that substantially all dividends paid to shareholders will be
exempt from federal and Ohio [personal] income taxes and from certain [other]
Ohio state and local taxes. Information concerning the tax status of dividends
and distributions will be mailed to shareholders annually, including what
portion, if any, of a Fund's distribution is subject to the federal alternative
minimum tax should that Fund invest in "private purpose" bonds.
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TAXES
Federal Income Tax Aspects
Each Fund has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Code, so as not to be
liable for federal income tax to the extent its earnings are distributed. The
term "regulated investment company" does not imply the supervision of management
or investment practices or policies by any government agency.
Distributions by a Fund representing net interest received on municipal
bonds are considered tax-exempt and are not includable by shareholders in gross
income for federal income tax purposes because the Fund intends to meet the
requirements of the Code applicable to regulated investment companies
distributing exempt-interest dividends. Although exempt from regular federal
income tax, interest paid on certain types of municipal obligations is deemed to
be a preference item under federal tax law and is subject to the federal
alternative minimum tax.
For federal income tax purposes, portfolio securities of Pennsylvania
Fund, New Jersey Fund and Ohio Fund had net unrealized appreciation at February
28, 1999 of $56,032,414, $47,820 and $27,421, respectively, on the basis of
specific cost.
Distributions representing net interest income received by a Fund from
certain temporary investments (such as certificates of deposit, commercial paper
and obligations of the U.S. government, its agencies and instrumentalities) and
net short-term capital gains realized by that Fund, if any, will be taxable to
shareholders as ordinary income and will not qualify for the deduction for
dividends-received by corporations. Distributions of long-term capital gains
realized by a Fund, if any, will be 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. 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. Statements as to the tax
status of each investor's dividends or distributions will be mailed annually.
The percentage of taxable income at the end of the year will not necessarily
bear relationship to the experience over a shorter period of time. Shareholders
may incur a tax liability for federal, state and local taxes upon the sale or
redemption of shares of a Fund.
Section 265 of the Code provides that interest paid on indebtedness
incurred or continued to purchase or carry obligations the interest on which is
tax-exempt, and certain expenses associated with tax-exempt income, are not
deductible. It is probable that interest on indebtedness incurred or continued
to purchase or carry shares of a Fund is not deductible.
A Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by "industrial development bonds" or
for investors who are "related persons" thereof within the meaning of Section
103 of the Code. Persons who are or may be considered "substantial users" should
consult their tax advisers in this matter before purchasing shares of a Fund.
Each Fund intends to use the "average annual" method of allocation in
the event a Fund realizes any taxable interest income. Under this approach, the
percentage of interest income earned that is deemed to be taxable in any year
will be the same for each shareholder who held shares of a Fund at any time
during the year.
State and Local Taxes
See Taxes in the Prospectus for a discussion of Pennsylvania, New
Jersey and Ohio taxation. Shares of a Fund may be taxable for purposes of, as
applicable, Pennsylvania, New Jersey or Ohio inheritance and estate tax.
Shareholders of the Pennsylvania Fund who are residents of the City of
Pittsburgh may be required to pay Pittsburgh School District and City personal
property tax on their equitable interest of that portion of the assets of the
Fund which are not exempt from such tax. However, since the Trust's inception,
all of its assets have been exempt from such tax.
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Distributions by a Fund may not be exempt from state or local income
tax in states other than, as applicable, Pennsylvania, New Jersey or Ohio.
Shareholders of each Fund are advised to consult their own tax adviser in this
regard.
Under the 1997 Act, as revised by the 1998 Act and the Omnibus
Consolidated and Emergency Supplemental Appropriations Act, a Fund 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:
"Mid-term capital gains" or "28 percent rate gain": securities
sold by a Fund 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%. This category of gains applied only
to gains and distributions in 1997.
"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 Fund after July 28,
1997 that were held for more than 18 months. As revised by the 1998
Act, this rate applies to securities held for more than 12 months and
sold in tax years beginning after December 1, 1997. 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. The Omnibus
Consolidated and Emergency Supplemental Appropriations Act passed in
October of 1998 included technical corrections to the 1998 Act. The
effect of this correction is that essentially all capital gain
distributions paid to shareholders during 1998 will be taxed at a
maximum rate of 20%.
"Qualified 5-year gains": For individuals in the 15% bracket,
qualified five-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 five-year gains
are net gains on securities which are purchased after December 31, 2000
and are held for more than five 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 five-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 when sold
after the five-year holding period.
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INVESTMENT MANAGEMENT AGREEMENTS
The Manager, located at One Commerce Square, Philadelphia, PA 19103,
furnishes investment management services to each Fund, subject to the
supervision and direction of the Board of Directors of the Trust
The Manager and its predecessors have been managing the funds in
Delaware Investments since 1938. On February 28, 1999, the Manager and its
affiliates within Delaware Investments, including the Delaware International
Advisers Ltd., were managing in the aggregate more than $44 billion in assets in
the various institutional or separately managed (approximately $24,991,600,000)
and investment company (approximately $18,553,930,000) accounts.
The Investment Management Agreement for the Funds is dated April 1,
1999 and was approved by shareholders on March 17, 1999. The Agreement has an
initial term of two years and may be further renewed after its initial term 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 each Fund to which the Agreement relates, and only if the
terms of 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. The Agreement is terminable without penalty on 60 days notice by the
directors of the Trust or by the Manager. The Agreement will terminate
automatically in the event of its assignment.
The Investment Management Agreement provides that each respective Fund
shall pay the Manager a management fee equal to (on an annual basis) 0.55% on
the first $500 million of average daily net assets of the Fund, 0.50% on the
next $500 million , 0.45% on the next $1.5 billion and 0.425% on the average
daily net assets in excess of $2.5 billion.
The Manager elected voluntarily to waive that portion, if any, of the
annual management fees payable by New Jersey Fund and Ohio Fund and to pay
certain of these Funds' expenses to the extent necessary to ensure that the
Total Operating Expenses of each Class of the Funds do not exceed 0.25%
(exclusive of taxes, interest, brokerage commissions, extraordinary expenses and
12b-1 Plan expenses) from January 22, 1998 through July 31, 1999.
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On February 28, 1999, the total net assets of the Trust were
$924,117,343, broken down as follows:
Pennsylvania Fund $918,696,887
New Jersey Fund $3,902,902
Ohio Fund $1,517,554
On February 28, 1998, the total net assets for each Fund and investment
management fees paid for each Fund for the past three fiscal years were as
follows:
Fund February 28, 1999 February 28, 1998 February 28, 1997
- ---- ----------------- ----------------- -----------------
Pennsylvania Fund $5,416,438 earned $5,604,856 earned $5,727,742 earned
$5,416,438 paid $5,604,856 paid $5,727,742 paid
$-0- waived $-0- waived $-0- waived
New Jersey Fund(1) $12,630 earned $3,235 earned N/A
$-0- paid $-0- paid N/A
$12,630 waived $3,235 waived N/A
Ohio Fund(1) $7,534 earned $2,856 earned N/A
$-0- paid $-0- paid N/A
$7,534 waived $2,856 waived N/A
(1) Commenced operations on September 2, 1997.
Under the general supervision of the Board of Trustees, the Manager
makes all investment decisions which are implemented by the Funds. The Manager
pays the salaries of all trustees, officers and employees of each Fund who are
affiliated with the Manager. Each Fund pays all of its other expenses, including
its proportionate share of rent and certain other administrative expenses. The
Manager is a series of Delaware Management Business Trust. The Manager changed
its form of organization from a corporation to a business trust on March 1,
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 for Pennsylvania Fund
under a Distribution Agreement dated April 3, 1995, as amended on November 29,
1995. The Distributor serves as the national distributor for New Jersey Fund and
Ohio Fund under separate Distribution Agreements dated September 2, 1997. The
Distributor is an affiliate of the Manager and bears all of the costs of
promotion and distribution, except for payments by each Fund on behalf of the
Class A Shares, Class B Shares and Class C Shares under their respective 12b-1
Plans. Delaware Distributors, Inc. ("DDI") is the corporate general partner of
Delaware Distributors, L.P. and both DDI and Delaware Distributors, L.P. are
indirect, wholly owned subsidiaries of Delaware Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
each Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to an amended and restated agreement dated September 2, 1997. The
Transfer Agent also provides accounting services to each Fund 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.
-56-
<PAGE>
The Funds have authorized one or more brokers to accept on their behalf
purchase and redemption orders in addition to the Transfer Agent. Such brokers
are authorized to designate other intermediaries to accept purchase and
redemption orders on the behalf of the Funds. For purposes of pricing, the Funds
will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Investors may be charged a fee effecting transactions through a broker or
agent.
-57-
<PAGE>
OFFICERS AND TRUSTEES
The business and affairs of the Trust are managed under the direction
of its Board of Trustees.
Certain officers and trustees of the Trust hold identical positions in
each of the other funds available from the Delaware Investments family. As of
March 31, 1999, the Trust's officers and trustees, as a group, owned less than
1% of each of the Class A Shares, B Shares and C Shares of Tax-Free Pennsylvania
Fund, Tax-Free New Jersey Fund and Tax-Free Ohio Fund.
As of March 31, 1999, management believes the following accounts held
5% or more of the outstanding shares of Class A Shares, Class B Shares and Class
C Shares of each Fund:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Pennsylvania Merrill Lynch, Pierce, Fenner & Smith
Fund Class A Shares For the Sole Benefit of its Customers
Attn: Fund Admin. Sec.
4800 Dear Lake Drive East, 2nd Floor
Jacksonville, FL 32246 6,218,237 5.93%
Tax-Free Pennsylvania Merrill Lynch, Pierce, Fenner & Smith
Fund Class B Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Dear Lake Drive East, 2nd Floor
Jacksonville, FL 32246 300,267 5.76%
Tax-Free Pennsylvania Margaret M. Magreni
Fund Class C Shares 70 W. Manila Avenue
Pittsburgh, PA 15220 60,944 13.06%
The Mennonite Foundation, Inc.
W&A Rosenberger
P.O. Box 483
Goshen, IL 45,567 9.76%
Joanne Stephano
1152 Thrush Lane
Norristown, PA 19403 45,403 9.73%
David N. Arms and
Janet E. Arms JT WROS
2147 Deep Creek Road
Perkiomenville, PA 18074 44,793 9.64%
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free New Jersey Lincoln National Life Insurance Co.
Fund Class A Shares c/o Lincoln Investment Management, Inc.
Attn: Carol A. Schmidt
200 East Berry Street
Fort Wayne, IN 46802 195,334 53.37%
Daniel Murray
Margaret Murray
2526 Sparrowbush Lane
Manasquan, NJ 08736 25,338 6.92%
Tax-Free New Jersey Donaldson Lufkin Jenrette
Fund Class B Shares Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303 48,837 14.01%
First Clearing Corporation
Theodore W. Gruber, Jr.
P.O. Box 615
Elmer, NJ 44,909 12.88%
John Schley
Custody Account
P.O. Box 181
Whitehouse, NJ 08888 34,192 9.80%
Summit Financial Services Group
Beatrice T. Nucci
One Bethlehem Plaza
Bethlehem, PA 18018 30,932 8.87%
Summit Financial Services Group
Glenna Williams
One Bethlehem Plaza
Bethlehem, PA 18018 23,100 6.62%
First Clearing Corporation
John A. Lanckowski and
Lillian Lanckowski
4 Delford Drive
North Cape May, NJ 08204 21,826 6.26%
Stanley Kumer
Sarita Kumer
29 Quicksilver Court
Lakewood, NJ 08701 19,916 5.71%
</TABLE>
-59-
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free New Jersey Merrill Lynch Pierce Fenner & Smith
Fund Class B Shares For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246 18,104 5.19%
Tax-Free New Jersey Merrill Lynch Pierce Fenner & Smith
Fund Class C Shares For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246 8,861 29.74%
Renee Hackel
Tod, Gerald, Steren, Kaufman, et al.
2000 Linwood Avenue
Fort Lee, NJ 07024 8,621 28.93%
Paine Webber for the benefit of
Robert C. Crosson as Trustee
For Robert C. Crosson Trust
312 Commodore Bay
1100 Ocean Drive
Avalon, NJ 08202 3,502 11.75%
Paine Webber for the benefit of
Ellen J. Crosson as Trustee
For Ellen J. Crosson Trust
312 Commodore Bay
1100 Ocean Drive
Avalon, NJ 08202 3,495 11.73%
Paine Webber for the benefit of
Sara P. Badger
7 Crestview Drive
Somers Point, NJ 08244 3,487 11.70%
Robert V. Barnabet and
Deborah G. Barnabet, JT WROS
59 5th Avenue
Maple Shade, NJ 08052 1,822 6.11%
</TABLE>
-60-
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Ohio Fund Lincoln National Life Insurance Company
Class A Shares c/o Lincoln Investment Management, Inc.
Attn: Carol A. Schmidt
200 East Berry Street 198,516 77.74%
Fort Wayne, IN 46802
David J. Littell and
Mary Ann Littell JT WROS
3804 Long Road 13,544 5.30%
Avon, OH 44011
Tax-Free Ohio Fund Brent W. Wright and
Class B Shares Irrevocable Trust of
Mabel Jean Wright
7676 Red Bank Road 5,360 37.53%
Westerville, OH 43082
Catherine F. Peter 4,106 28.75%
2884 Grandin Road
Cincinnati, OH 45208
Susan S. Lecky 3,928 27.50%
5632 Vogel Road
Cincinnati, OH 45239
Jack R. Gasaway and 886 6.20%
Charlotte J. Gasaway JR WROS
454 S. Beechgrove Road
Wilmington, OH 45177
Tax-Free Ohio Fund Richard M. Payne
Class C Shares 1078 Cross Country Drive
Worthington, OH 43235 15,426 84.77%
First Clearing Corporation
Melvin Strauss Rev. Tr.
Melvin Strauss
30601 Ainsworth Drive 2,769 15.21%
Pepper Pike, OH 44124
</TABLE>
-61-
<PAGE>
DMH Corp., Delvoy, Inc., Delaware Management Business Trust, Delaware
Management Company (a series of Delaware Management Business Trust), Delaware
Management Company, Inc., Delaware Investment Advisers (a series of Delaware
Management Business Trust), 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 Retirement
Financial 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.
-62-
<PAGE>
Directors 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 director is One Commerce
Square, Philadelphia, PA 19103.
* Jeffrey J. Nick (45) Chairman of the Board, President, Chief Executive
Officer and Director and/or Trustee of the Trust,
each of the other 33 investment companies in the
Delaware Investments family, Delaware Management
Business Trust, Delvoy, Inc., DMH Corp. and Founders
Holdings, Inc.
Chairman of the Board, Chief Executive Officer and
Director of Delaware Management Company, Inc.,
Delaware Distributors, Inc., Delaware International
Holdings Ltd., Delaware International Advisers Ltd.
Chairman of the Board and Chief Executive Officer of
Delaware Management Company (a series of Delaware
Management Business Trust)
Chairman of the Board and Director of Delaware
Capital Management, Inc.
Chairman of Delaware Investment Advisers (a series
of Delaware Management Business Trust) and Delaware
Distributors, L.P.
President, Chief Executive Officer and Director of
Delaware Management Holdings, Inc. and Retirement
Financial Services, Inc.
Director of Delaware Service Company, Inc.
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.
- ----------------------
*Director affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
-63-
<PAGE>
*Wayne A. Stork (61) Director and/or Trustee of the Trust and each of the
other 33 investment companies in the Delaware
Investments family.
Chairman and Director of Delaware Management
Holdings, Inc.
Prior to January 1, 1999, Mr. Stork was Chairman and
Director and/or Trustee of the Trust and each of the
other 33 investment companies in the Delaware
Investments family 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/Trustee of Delaware Management
Company, Inc. and Delaware Management Business
Trust; Chairman, President, Chief Executive Officer
and Chief Investment Officer of Delaware Management
Company (a series of Delaware Management Business
Trust); Chairman, Chief Executive Officer and Chief
Investment Officer of Delaware Investment Advisers
(a series of Delaware Management Business Trust);
Chairman, Chief Executive Officer and Director of
Delaware International Advisers Ltd., Delaware
International Holdings Ltd. and Delaware Management
Holdings, Inc.; President and Chief Executive
Officer of Delvoy, Inc.; Chairman of Delaware
Distributors, L.P.; Director of Delaware Service
Company, Inc. and Retirement Financial Services,
Inc.
In addition, during the five years prior to January
1, 1999, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
- ----------------------
*Director affiliated with the Trust's investment manager and considered an
"interested person" as defined in the 1940 Act.
<PAGE>
Richard G. Unruh, Jr. (59) Executive Vice President and Chief Investment
Officer, Equities of the Trust, each of the other 33
investment companies in the Delaware Investments
family and Delaware Management Company (a series of
Delaware Management Business Trust)
Executive Vice President and Director of Delaware
Management Business Trust
Executive Vice President of Delaware Management
Holdings, Inc. and Delaware Capital Management, Inc.
Executive Vice President/Chief Investment Officer,
Equities and Director of Delaware Management
Company, Inc. Chief Executive Officer/Chief
Investment Officer, Equities of Delaware Investment
Advisers (a series of Delaware Management Business
Trust);
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.
-64-
<PAGE>
David K. Downes (59) Executive Vice President, Chief Operating Officer
and Chief Financial Officer of the Trust and each of
the other 33 investment companies in the Delaware
Investments family, Delaware Management Holdings,
Inc., Founders CBO Corporation, Delaware Investment
Advisers (a series of Delaware Management Business
Trust) and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Director of DMH Corp,
Delaware Distributors, Inc., Founders Holdings, Inc.
and Delvoy, Inc.
Executive Vice President, Chief Financial Officer,
Chief Administrative Officer and Trustee of Delaware
Management Business Trust
President, Chief Executive Officer, Chairman and
Director of Delaware Service Company, Inc.
President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware International
Holdings Ltd.
President and Director of Delaware Management
Company, Inc.
President of Delaware Management Company (a series
of Delaware Management Business Trust)
President, Chief Executive Officer and Director of
Delaware Capital Management, Inc.
Chairman and Director of Retirement Financial
Services, Inc.
Chairman and Director of Delaware Management Trust
Company
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Downes has served in
various executive capacities at different times
within the Delaware organization.
-65-
<PAGE>
Richard J. Flannery (41) Executive Vice President of the Trust and each of
the other 33 investment companies in the Delaware
Investments family
Executive Vice President and General Counsel of
Delaware Management Holdings, Inc., Delaware
Distributors, L.P., Delaware Capital Management,
Inc., Delaware Service Company, Inc., Delaware
Management Company (a series of Delaware Management
Business Trust), Delaware Investment Advisers (a
series of Delaware Management Business Trust) and
Founders CBO Corporation
Executive Vice President/General Counsel and
Director of DMH Corp., Delaware Management Company,
Inc., Delaware Management Business Trust, Delaware
Distributors, Inc., Delaware Service Company, Inc.,
Delaware International Holdings Ltd., Founders
Holdings, Inc., Delvoy, Inc., Retirement Financial
Services, Inc., Delaware Capital Management, Inc.
and Delaware Management Trust Company
Director of Delaware International Advisers Ltd.
Director, HYPPCO Finance Company Ltd.
During the past five years, Mr. Flannery has served
in various executive capacities at different times
within the Delaware organization.
Walter P. Babich (71) Director and/or Trustee of the Trust and each of the
other 33 investment companies in the Delaware
Investments family
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.
-66-
<PAGE>
John H. Durham (61) Director and/or Trustee of the Trust and 18 other
investment companies in the Delaware Investments
family.
Partner, Complete Care Services.
120 Gilbraltar Road, Horsham, PA 19044.
Mr. Durham served as Chairman of the Board of each
fund in the Delaware Investments family from 1986 to
1991; President of each fund from 1977 to 1990; and
Chief Executive Officer of each fund from 1984 to
1990. Prior to 1992, with respect to Delaware
Management Holdings, Inc., Delaware Management
Company, Delaware Distributors, Inc. and Delaware
Service Company, Inc., Mr. Durham served as a
director and in various executive capacities at
different times.
Anthony D. Knerr (60) Director and/or Trustee of the Trust and each of the
33 other investment companies in the Delaware
Investments family
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 (58) Director and/or Trustee of the Trust and each of the
other 33 other investment companies in the Delaware
Investments family
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. [ ]
<PAGE>
W. Thacher Longstreth (78) Director and/or Trustee of the Trust each of the
other 33 other investment companies in the Delaware
Investments family
City Hall, Philadelphia, PA 19107
Philadelphia City Councilman
Thomas F. Madison (63) Director and/or Trustee of the Trust and each of the
other 33 investment companies in the Delaware
Investments family
200 South Fifth Street, Suite 2100, Minneapolis,
Minnesota 55402
President and Chief Executive Officer, MLM Partners,
Inc.
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 (73)
]Director and/or Trustee of the Trust and each of
the other 33 investment companies in the Delaware
Investments family
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.
Jan L. Yeomans (50) Director and/or Trustee of the Trust and 25 other
investment companies in the Delaware Investments
family
Building 220-13W-37, St. Paul, MN 55144
Vice President and Treasurer, 3M Corporation.
From 1987-1994, Ms. Yeomans was Director of Benefit
Funds and Financial Markets for the 3M Corporation;
Manager of Benefit Fund Investments for the 3M
Corporation, 1985-1987; Manager of Pension Funds for
the 3M Corporation, 1983-1985;
Consultant--Investment Technology Group of Chase
Econometrics, 1982-1983; Consultant for Data
Resources, 1980-1982; Programmer for the Federal
Reserve Bank of Chicago, 1970-1974
-68-
<PAGE>
George M. Chamberlain, Jr. (52) Senior Vice President, Secretary and General
Counsel of the Trust and each of the other 33
investment companies in the Delaware
Investments family
Senior Vice President and Secretary of
Delaware Distributors, L.P., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), Delaware
Management Holdings, Inc., DMH Corp., Delaware
Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company,
Inc., Retirement Financial Services, Inc.,
Delaware Capital Management, Inc., Delvoy,
Inc. and Delaware Management Business Trust
Senior Vice President, Secretary and Director
of Founders Holdings, Inc.
Executive Vice President, Secretary and
Director of Delaware Management Trust Company
Senior Vice President of Delaware
International Holdings Ltd.
During the past five years, Mr. Chamberlain
has served in various executive capacities at
different times within the Delaware
organization.
Joseph H. Hastings (49) Senior Vice President/Corporate Controller of
the Trust and each of the other 33 investment
companies in the Delaware Investments family
Senior Vice President/Corporate Controller and
Treasurer of Delaware Management Holdings,
Inc., DMH Corp., Delaware Management Company,
Inc., Delaware Management Company (a series of
Delaware Management Business Trust), Delaware
Distributors, L.P., Delaware Distributors,
Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc., Founders Holdings,
Inc., Delaware International Holdings Ltd.,
Retirement Financial Services, Inc., Delvoy,
Inc. and Delaware Management Business Trust
Executive Vice President/Chief Financial
Officer/Treasurer of Delaware Management Trust
Company
Senior Vice President/Assistant Treasurer of
Founders CBO Corporation
During the past five years, Mr. Hastings has
served in various executive capacities at
different times within the Delaware
organization.
-69-
<PAGE>
Michael P. Bishof (36) Senior Vice President and Treasurer of the
Trust and each of the other 33 investment
companies in the Delaware Investments family
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., Delaware Management
Company (a series of Delaware Management
Business Trust), Delaware Capital Management,
Inc. and Delaware Investment Advisers (a
series of Delaware Management Business Trust)
Senior Vice President and Assistant Treasurer
of Founders CBO Corporation
Senior Vice President and Manager of
Investment Accounting of Delaware
International Holdings Ltd.
Before joining Delaware Investments 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.
-70-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation received from the
Trust and the total compensation received from all investment companies in the
Delaware Investments family for which he or she serves as a director or trustee
for the fiscal year ended February 28, 1999 and an estimate of annual benefits
to be received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of February 28, 1999. Only the independent directors of
the Trust receive compensation from the Trust.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Total
Pension Compensation from
Retirement Estimated Delaware
Aggregate Benefits Accrued as Annual Investments
Compensation from Part of Trust Benefits Upon Investment
the Trust Expenses Retirement(1) Companies(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Walter B. Babich $3,149 None $38,500 $65,420
- ----------------------------------------------------------------------------------------------------------------
John H. Durham(3) $2,590 None $31,180 $40,217
- ----------------------------------------------------------------------------------------------------------------
Anthony D. Knerr $3,149 None $38,500 $65,420
- ----------------------------------------------------------------------------------------------------------------
Ann R. Leven $3,205 None $38,500 $66,465
- ----------------------------------------------------------------------------------------------------------------
W. Thacher Longstreth $2,864 None $38,500 $60,419
- ----------------------------------------------------------------------------------------------------------------
Thomas F. Madison $3,075 None $38,500 $64,170
- ----------------------------------------------------------------------------------------------------------------
Charles E. Peck $2,864 None $38,500 $60,419
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director/trustee 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 investment company in the
Delaware Investments family for which he or she serves as a director or
trustee for a period equal to the lesser of the number of years that
such person served as a director or trustee 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/trustees of each investment company at the time of such
person's retirement. If an eligible director/trustee retired as of
October 31, 1998 he or she would be entitled to annual payments
totaling the amount noted above, in the aggregate, from all of the
investment companies in the Delaware Investments family for which he or
she served as director or trustee, based on the number of investment
companies in the Delaware Investments family as of that date.
(2) Each independent director/trustee (other than John H. Durham) currently
receives a total annual retainer fee of $38,500 for serving as a
director or trustee for all 34 investment companies in Delaware
Investments, plus $3,145 for each Board Meeting attended. John H.
Durham currently receives a total annual retainer fee of $31,180 for
serving as a director or trustee for 19 investment companies in
Delaware Investments, plus $1,810 for each Board Meeting attended. Ann
R. Leven, Walter P. Babich, Anthony D. Knerr and Thomas F. Madison
serve on the Fund's audit committee; Ms. Leven is the chairperson.
Members of the audit committee currently receive additional annual
compensation of $5,000 from all investment companies, in the aggregate,
with the exception of the chairperson, who receives $6,000.
(3) John H. Durham joined the Board of Directors of the Trust and 18 other
investment companies in Delaware Investments on April 16, 1998.
-71-
<PAGE>
GENERAL INFORMATION
The Trust is an open-end management investment company. Each Fund's
portfolio of assets is nondiversified as defined by the 1940 Act. The Trust was
organized as a Pennsylvania business trust on November 23, 1976.
The Manager is the investment manager of the Funds. The Manager also
provides investment management services to certain of the other funds in the
Delaware Investments family. An affiliate of the Manager also manages private
investment accounts. While investment decisions of the Funds 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 Funds.
The Manager, or its affiliate Delaware International Advisers Ltd.,
manages the investment options for Delaware-Lincoln Choice Plus and Delaware
Medallion(sm) III Variable Annuities. 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 various 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 Investments mutual funds available outside the annuity.
The Manager or Delaware International Advisers also manage many of the
investment options for the Delaware-Lincoln Choice Plus Variable Annuity. Choice
Plus is issued and distributed by Lincoln National Life Insurance Company.
Choice Plus offers a variety of different investment styles managed by ten
leading money managers. See Delaware Group Premium Fund, Inc. in Appendix C.
Access persons and advisory persons of the Delaware Investments family
of funds, as those terms are defined in SEC Rule 17j-1 under the 1940 Act, who
provide services to the Manager, Delaware International Advisers Ltd. or their
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.
-72-
<PAGE>
The Distributor acts as national distributor for the Funds and for the
other mutual funds in the Delaware Investments family. The Distributor received
net commissions from each Fund on behalf of Class A Shares, after reallowances
to dealers, as follows:
<TABLE>
<CAPTION>
Tax-Free Pennsylvania Fund Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP/DDI
----------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
2/28/99 $706,030 $605,153 $100,877
2/28/98 $854,358 $720,774 $133,584
2/28/97 $1,327,771 $1,103,552 $224,219
Tax-Free New Jersey Fund Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP/DDI
----------------- ----------- ---------- -----------
2/28/99 $16,524 $14,793 $1,31
2/28/98* $1,217 $1,039 $178
*Date of initial public offering of New Jersey Fund Class A Shares was September
2, 1997.
Tax-Free Ohio Fund Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP/DDI
----------------- ----------- ---------- -----------
2/28/99 $2,854 $2,471 $383
2/28/98* $370 $325 $45
*Date of initial public offering of Ohio Fund Class A Shares was September 2,
1997.
</TABLE>
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The Distributor and, in its capacity as such, DDI received in the
aggregate Limited CDSC payments with respect to Class A Shares of each Fund as
follows:
<TABLE>
<CAPTION>
Tax-Free Pennsylvania Fund
Limited CDSC Payments
Fiscal Year Ended Class A Shares
----------------- --------------
<S> <C> <C>
2/28/99 $-0-
2/28/98 $-0-
2/28/97 $-0-
Tax-Free New Jersey Fund
Limited CDSC Payments
Fiscal Year Ended Class A Shares
----------------- --------------
2/28/99 $-0-
2/28/98* $-0-
*Date of initial public offering of New Jersey Fund Class A Shares was September
2, 1997.
Tax-Free Ohio Fund
Limited CDSC Payments
Fiscal Year Ended Class A Shares
----------------- --------------
2/28/99 $-0-
2/28/98* $-0-
*Date of initial public offering of Ohio Fund Class A Shares was September 3,
1997.
The Distributor and, in its capacity as such, DDI received in the
aggregate CDSC payments with respect to Class B Shares of Pennsylvania Fund and
New Jersey Fund as follows:
Tax-Free Pennsylvania Fund
CDSC Payments
Fiscal Year Ended Class B Shares
----------------- --------------
2/28/99 $91,889
2/28/98 $80,989
2/28/97 $41,770
Tax-Free New Jersey Fund
CDSC Payments
Fiscal Year Ended Class B Shares
----------------- --------------
2/28/99 $4,551.19
2/28/98* $-0-
</TABLE>
*Date of initial public offering of New Jersey Fund Class B Shares was September
3, 1997.
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The Distributor received CDSC payments with respect to Class C Shares
of Pennsylvania Fund as follows:
<TABLE>
<CAPTION>
Tax-Free Pennsylvania Fund
CDSC Payments
Fiscal Year Ended Class C Shares
----------------- --------------
<S> <C> <C>
2/28/99 $623
2/28/98 $2,620
2/28/97 $1,818
</TABLE>
*Date of initial public offering of Tax-Free Pennsylvania Fund Class C Shares
was November 29, 1995.
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for the Funds and for the
other mutual funds in the Delaware Investments family. The Transfer Agent is
paid a fee by the Funds for providing these services consisting of an annual per
account charge of $11.00 plus 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 unaffiliated trustees. The
Transfer Agent also provides accounting services to the Funds. Those services
include performing all functions related to calculating a Fund'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 Investments family
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 Funds, 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 name "Delaware Group." Under
certain circumstances, including the termination of the Trust's advisory
relationship with the Manager or its distribution relationship with the
Distributor, the Manager and its affiliates could cause the Trust to delete the
words "Delaware Group" 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
Fund, Chase maintains a separate account or accounts for the Fund; receives,
holds and releases portfolio securities on account of the Fund; receives and
disburses money on behalf of the Fund; and collects and receives income and
other payments and distributions on account of the Fund's portfolio securities.
Shareholder and Trustee Liability
Under Pennsylvania law, shareholders of a Fund may, under certain
circumstances, be held personally liable as partners for the obligations of a
Fund. The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of a Fund and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by a Fund or the trustees, but this disclaimer may not be effective in
some jurisdictions or as to certain types of claims. The Declaration of Trust
provides for indemnification out of a Fund property of any shareholder held
personally liable for the obligations of a Fund. The Declaration of Trust also
provides that a Fund shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of a Fund and satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which a Fund
itself would be unable to meet its obligations.
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The Declaration of Trust further 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 series of shares, Tax-Free
Pennsylvania Fund, Tax-Free New Jersey Fund and Tax-Free Ohio Fund. Each Fund
currently offers three 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 and Class C Shares represent a
proportionate interest in the assets of a Fund and have the same voting and
other rights and preferences, as the other classes of that Fund. 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, Class B Shares of a Fund may vote on any
proposal to increase materially the fees to be paid by that Fund under the Plan
relating to Class A Shares. General expenses of a Fund will be allocated on a
pro-rata basis to the Classes according to asset size, except that expenses of
the Rule 12b-1 Plans of Class A Shares, Class B Shares and Class C Shares will
be allocated solely to those classes.
Prior to September 2, 1997, Delaware Group State Tax-Free Income Trust
was known as DMC Tax-Free Income Trust - Pennsylvania. From May 18, 1992 to
August 29, 1997, DMC Tax-Free Income Trust-Pennsylvania was known as and did
business as Tax-Free Pennsylvania Fund. Prior to May 2, 1994, Tax-Free
Pennsylvania Fund A Class was known as Tax-Free Pennsylvania Fund.
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 directors can elect all the directors if they choose to do so, and, in such
event, the holders of the remaining shares will not be able to elect any
directors.
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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<PAGE>
APPENDIX A - INVESTING IN PENNSYLVANIA, NEW JERSEY AND OHIO TAX-EXEMPT
OBLIGATIONS
Investing in Pennsylvania Tax-Exempt Obligations
The following information constitutes only a brief summary, does not
purport to be a complete description, and is derived from official statements
prepared in connection with the issuance of bonds and notes of the Commonwealth
of Pennsylvania (the "Commonwealth") and other sources that are generally
available to investors. The information is provided as general information
intended to give a recent historical description and is not intended to indicate
future or continuing trends in the financial or other positions of the
Commonwealth or of local government units located in the Commonwealth. The Fund
has not independently verified this information.
Pennsylvania is the fifth most populous state, behind California, New
York, Texas and Florida. Pennsylvania is an established yet growing state with a
diversified economy.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
The period from fiscal 1993 through fiscal 1997 was a time of
steady, modest economic growth and low rates of inflation. These economic
conditions, together with tax reductions in the several years following the tax
rate increases and tax base expansions enacted in fiscal 1991 for the General
Fund, produced tax revenue gains averaging 4.1% per year during the period.
Total revenues during the same period] increased by an average annual rate of
4.7%. Intergovernmental revenues increased by an average annual rate of
[8.1%] due, in part, to an accounting change.
Expenditures and other uses during the fiscal 1993 through fiscal 1997
period rose at an average annual rate of 4.9%, led by increases of 13.8% for
protection of persons and property. Public health and welfare program costs
expanded an average 5.4% annually during this period. Efforts to control costs
for various social programs and the presence of favorable economic conditions
have helped restrain these costs.
The fund balance at June 30, 1997 totaled $1,364.9 million, an increase
of $729.7 million over the $635.2 million balance at June 30, 1996. The
fiscal 1997 unappropriated surplus of $187.3 million is the largest balance
recorded since 1987.
The unappropriated balance of Commonwealth revenues increased during
the 1997 fiscal year by $432.9 million to $591.4 million (prior to reserves for
transfer to the Tax Stabilization Reserve Fund) at the close of the fiscal year.
Higher than estimated revenues and slightly lower expenditures than budgeted
caused the increase. Transfers to the Tax Stabilization Reserve Fund for fiscal
1997 operations will be $88.7 million representing the normal fifteen percent of
the ending unappropriated balance, plus an additional $100 million authorized by
the General Assembly when it enacted the fiscal 1998 budget.
Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $17,320.6 million, $576.1 million (3.4%) above the estimate made at the
time the budget was enacted. Revenue from taxes was the largest contributor to
higher than estimated receipts. Tax revenue in fiscal 1997 grew 6.1% over tax
revenues in fiscal 1996. This rate of increase was not adjusted for legislated
tax reductions that affected receipts during both of those fiscal years and
therefor understates the actual underlying rate of growth of tax revenue during
fiscal 1997. Non-tax revenues were $19.8 million (5.8%) over estimate mostly due
to higher than anticipated interest earnings.
Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to the
estimate made in February 1997 with the presentation of the
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Governor's fiscal 1998 budget request. Total expenditures represent an increase
over fiscal 1996 expenditures of 1.7%. Lapses of appropriation authority during
the fiscal year totaled $200.6 million compared to an estimate of $100 million.
The higher amount of appropriation lapses was used to support an additional
$79.8 million in fiscal 1997 supplemental appropriations over the February 1997
estimates. Supplemental appropriations for fiscal 1997 totaled $169.3 million.
For GAAP purposes, assets in fiscal 1997 increased $563.4 million and
liabilities declined $166.3 million to produce a $729.7 million increase in the
fund balance at June 30, 1997. Total revenues and other sources rose 3.5% for
fiscal 1997. An increase of 5.5% in tax revenue aided by and improving state
economy was partially offset by a $175.2 million decline in intergovernmental
revenues. Expenditures and other uses increased by 1% for the fiscal year.
For GAAP purposes, assets increased $563.4 million and liabilities
declined $166.3 million to produce a $729.7 million increase in fund balance at
June 30, 1997. The fund balance increase during fiscal 1997 resulted in a
restoration of the undesignated-unreserved balance of $187.3 million (the first
such balance since fiscal 1994 and the largest since fiscal 1987). Total
revenues and other sources rose 3.5% for fiscal 1997. Expenditures and uses
increased by 1% for the fiscal year.
Operations during the 1998 fiscal year increased the unappropriated
balance of Commonwealth revenues by $86.4 million to $488.7 million at June 30,
1998 (prior to transfers). Higher than estimated revenues, offset in part by
increased reserves for tax refunds, and slightly lower expenditures than
budgeted were responsible for the increase. Transfers to the Tax Stabilization
Reserve Fund for fiscal 1998 operations will total $223.3 million consisting of
$73.3 million representing the normal 15% of the ending unappropriated surplus
balance, plus an additional $150 million authorized by the General Assembly when
it enacted the fiscal 1999 budget. With these transfers, the balance in the Tax
Stabilization Reserve Fund will exceed $664 million and represents 3.7% of
fiscal 1998 revenues.
Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $18,123.2 million, $676.1 million (3.9%) above the estimate made at the
time the budget was enacted. Tax revenue in fiscal 1998 grew 4.8% over tax
revenues during fiscal 1997. This rate of increase includes the effect
legislated tax reductions that affected receipts during both fiscal years and
therefore understates the actual underlying rate of growth of tax revenue for
fiscal 1998. Non-tax revenues were $27.5 (8.6%) over estimate, mostly due to
greater than anticipated interest earnings for the fiscal year.
Reserves established during 1998 for tax refunds totaled $910 million.
This amount is a $370 million increase of tax refund reserves for fiscal 1997
(representing a 68.5% increase). The fiscal 1998 amount includes a one-time
addition intended to fund all fiscal 1998 tax refund liabilities, including that
portion to be paid during fiscal 1999.
Expenditures from all fiscal 1998 appropriations (excluding pooled
financing expenditures and net of current year lapses) totaled $17,229.8
million. This represents an increase of 4.5% over fiscal 1997 appropriations
expenditures. Lapses of appropriation authority during the fiscal year totaled
$161.8 million including $58.8 million from fiscal 1998 appropriations. These
appropriation lapses were used to fund $120.5 million of supplemental fiscal
1998 appropriations.
The budget for fiscal 1999 was enacted in April 1998 at which time the
official revenue estimate for the 1999 fiscal year was established at $18,456.6
million. The estimate was reduced by $1.1 million in November 1998 due to the
passage of tax legislation. The official revenue estimate is based on an
economic forecast for national gross domestic product, on a year-over-year
basis, to slow from an estimated annualized 3.9% rate in the fourth quarter of
1997 to a projected 1.8% annualized growth rate by the second quarter of 1999.
The forecast of slowing economic activity is based on the expectation that
consumers will reduce their pace of spending, particularly on motor vehicles,
housing and other durable goods. Business is also expected to trim its spending
on fixed investments. Foreign demand for domestic goods is expected to decline
in
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<PAGE>
reaction to economic difficulties in Asia and Latin America, while an
economic recovery in Europe is expected to proceed slowly.
Appropriations enacted for fiscal 1999 are 4.1% ($705.1 million) above
appropriations enacted for fiscal 1998 (including supplemental appropriations).
Major increases in expenditures budgeted for fiscal 1999 include (i) funds for
direct support of local school district education costs, (ii) funds for higher
education, including scholarship grants, (iii) amounts to fund the correctional
system, (iv) funds for long-term care medical assistance costs, (v) funds for
technology and Year 2000 investments, (vi) amounts to fund the first year's cost
of a July 1, 1998 annuitant cost of living increase for state and school
district employees and, (vii) funds to replace bond funding for equipment loans
for volunteer fire and rescue companies. The balance of the increase is spread
over many departments and program operations.
The enacted fiscal 1999 budget assumes the drawn-down of the $265.4
million beginning budgetary balance by $143.9 million to an estimated closing
balance (prior to transfers) of $124.3 million. The amount of the anticipated
draw-down does not consider the availability of appropriation lapses normally
occurring during the fiscal year and used to fund supplemental appropriations or
increase unappropriated surplus.
Tax reductions included in the enacted 1999 fiscal year budget totaled
an estimated $241 million for fiscal 1999. The major tax changes were enacted
with January 1, 1998 effective dates. Consequently, the costs of these changes
during fiscal 1999 may be above the expected annualized cost. In addition, in
the fall 1998, Pennsylvania enacted the Keystone Opportunity Zone Act, which
provides for the creation of 12 "keystone opportunities zones" designed to spur
economic development by foregoing state and local taxes under certain
circumstances. The legislation provides for relief from, among other things,
corporate net income taxes, capital stock/foreign franchise taxes, personal
income taxes and sales and use taxes (on purchases used and consumed by
businesses in the zone).
Reserves for tax refunds for fiscal 1999 total $603.9 million. This
includes $33.1 million of tax refunds anticipated to be due to the enacted
fiscal 1999 tax changes and included in the estimated cost of those changes.
Reserves for tax refunds for fiscal 1999 are $306.1 million below the reserve
established for fiscal 1998. The fiscal 1998 amount includes a one-time addition
intended to fund all fiscal 1998 tax refund liabilities, including that portion
to be paid during fiscal 1999.
According to the Pennsylvania Secretary of Revenue, for the fiscal year
through January 1999, General Fund revenues totaled $9.8 billion.]
Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. The
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major source of growth in Pennsylvania are in the service sector, including
trade, medical and the health services, education and financial institutions.
Non-agricultural employment in Pennsylvania over the ten years ending in {}
[1997] increased at an annual rate of {} [0.76%]. This compares to a {} [0.17%]
for the Middle Atlantic region and {} [1.69%] for the United States as a whole
during the period {} [1988] through {} [1997.] For the {} [five] years ending {}
[with 1997], employment in the Commonwealth has increased {} [5.4%. The growth
in employment during this period is higher than the 4.8%] growth in the Middle
Atlantic region. The unemployment rate in Pennsylvania for {} [October 1998]
stood at a seasonably adjusted rate of {} [4.7% compared to 4.6% for the United
States].
The current Constitutional provisions pertaining to Commonwealth debt
permit the issuance of the following types of debt: (i) debt to suppress
insurrection or rehabilitate areas affected by disaster; (ii)
electorate-approved debt; (iii) debt for capital projects subject to an
aggregate debt limit of 1.75 times the annual average tax
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revenues of the preceding five fiscal years; and (iv) tax anticipation notes
payable in the fiscal year of issuance. All debt except tax anticipation notes
must be amortized in substantial and regular amounts.
Debt service on all bonded indebtedness of Pennsylvania, except that
issued for highway purposes or the benefit of other special revenue funds, is
payable from Pennsylvania's General Fund, which receives all Commonwealth
revenues that are not specified by law to be deposited elsewhere. As of June 30,
1998, the Commonwealth had $4,724.5 million of general obligation debt
outstanding.
Other state-related obligations include "moral obligations." Moral
obligation indebtedness may be issued by the Pennsylvania Housing Finance Agency
("PHFA"), a state-created agency that provides financing for housing for lower
and moderate income families, and The Hospitals and Higher Education Facilities
Authority of Philadelphia, a municipal authority organized by the City of
Philadelphia to, among other things, acquire and prepare various sites for use
as intermediate care facilities for the mentally handicapped. PHFA's bonds, but
not its notes, are partially secured by a capital reserve fund required to be
maintained by PHFA in an amount equal to the maximum annual debt service on its
outstanding bonds in any succeeding calendar year. PHFA is not permitted to
borrow additional funds as long as any deficiency exists in the capital reserve
fund.
The Commonwealth, through several of its departments and agencies, has
entered into various agreements to lease, as lessee, certain real property and
equipment, and to make lease payments for the use of such property and
equipment. Some of these leases and their respective lease payments are, with
Commonwealth approval, pledged as security for debt obligations issued by
certain public authorities or other entities within the state. All lease
payments due from Commonwealth departments and agencies are subject to and
dependent upon an annual spending authorization approved through the
Commonwealth's annual budget process. The Commonwealth is not required by law to
appropriate or otherwise provide monies from which the lease payments are to be
made. The obligations to be paid from such lease payments are not bonded debt of
the Commonwealth.
Certain state-created agencies have statutory authorization to incur
debt for which state appropriations to pay debt service thereon is not required.
The debt of these agencies is supported by assets of, or revenues derived from,
the various projects financed and is not a statutory or moral obligation of
the Commonwealth. Some of these agencies, however, are indirectly dependent on
Pennsylvania appropriations. In addition, the Commonwealth maintains pension
plans covering state employees, public school employees and employees of certain
state-related organizations. For their fiscal years ended in 1997 the State
Employees' Retirement System a total unfunded actuarial accrued surplus of
$1,277 million] and the Public School Employees' Retirement System had a total
unfunded actuarial accrued surplus of $1,663 million.
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The City of Philadelphia is the largest city in the Commonwealth with
an estimated population of 1,585,577 according to the 1990 Census. Legislation
providing for the establishment of Pennsylvania Intergovernmental Cooperation
Authority ("PICA") to assist Philadelphia in remedying fiscal emergencies was
enacted by the Pennsylvania General Assembly and approved by the Governor in
June 1991. PICA is designed to provide assistance through the issuance of
funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five year fiscal plan approved by PICA on [June 9, 1998].
PICA has issued $1.76 billion of its Special Tax Revenue Bonds. This
financial assistance has included the refunding of certain general obligation
bonds, funding of capital projects and the liquidation of the cumulative General
Fund balance deficit as of June 30, 1992 of $224.9 million. The audited General
Fund balance of Philadelphia as of June 30, 1997 showed a surplus of
approximately $128.8 million.
No further bonds are to be issued by PICA for the purpose of financing
a capital project or deficit as the authority for such bond sales expired
December 31, 1994. PICA's authority to issue debt for the purpose of financing a
cash flow deficit expired on December 31, 1996. Its ability to refund existing
outstanding debt is unrestricted. PICA had $1,055 million in special
revenue bonds outstanding as of June 30, 1998.
There is various litigation pending against the Commonwealth, its
officers and employees. In 1978, the Pennsylvania General Assembly approved a
limited waiver of sovereign immunity. Damages for any loss are limited to
$250,000 for each person and $1 million for each accident. The Supreme Court
held that this limitation is constitutional. Approximately 3,500 suits against
the Commonwealth are pending, some of which, if decided adversely to the
Commonwealth, could have a material adverse impact on governmental operations.
INVESTING IN NEW JERSEY TAX-EXEMPT OBLIGATIONS
The following information constitutes only a brief summary of some of
the many complex factors that may affect issuers of New Jersey obligations. This
information is derived from official statements published in connection with the
issuance of bonds and notes of the State of New Jersey and from other publicly
available information. It is believed to be accurate, although no independent
verification has been made of any of the following information. The information
is intended to provide a general recent historical description and is not
intended to indicate future or continuing trends in the positions of the State
of New Jersey or local governments.
New Jersey is located at the center of the megalopolis which extends
from Boston to Washington. The extensive facilities of the Port Authority of
New York and New Jersey, the Delaware River Port Authority and the South Jersey
Port Corporation across the Delaware River from Philadelphia augment the air,
land and water transportation complex which has influenced much of the State's
economy. This central location in the northeastern corridor, the transportation
and port facilities and proximity to New York City make the State an attractive
location for corporate headquarters and international business offices. A number
of Fortune Magazine's top 500 companies maintain headquarters or major
facilities in New Jersey, and many foreign-owned firms have located facilities
in the State.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey has the Atlantic seashore on
the east and lakes and mountains in the north and northwest, which provide
recreation for residents as well as for out-of-state visitors. In 1976, voters
approved casino gambling for Atlantic City, which has become an important State
tourist attraction.
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New Jersey's population grew rapidly in the years following World War
II, before slowing to an annual rate of 0.27 percent in the 1970s. Between 1980
and 1990, the annual growth rose to 0.49 percent and between 1990 and 1996,
accelerated to .53 percent.(1) While this rate of growth is less than that
for the United States, it compares favorably with other Middle Atlantic States.
New York has shown a 0.17 percent annual rate of increase since 1990 and
Pennsylvania's population has increased 0.23 percent per year.
The small increase in the State's total population during the past
quarter century masks the redistribution of population within the State. There
has been a significant shift from the northeastern industrial areas toward the
four coastal counties (Cape May, Atlantic, Ocean and Monmouth) and toward the
central New Jersey counties of Hunterdon, Somerset and Middlesex.
After enjoying an extraordinary boom during the mid-1980s, New Jersey
as well as the rest of the Northeast slipped into a slowdown well before the
onset of the national recession which officially began in July 1990 (according
to the National Bureau of Economic Research). By the beginning of the national
recession of 1990-1991, construction activity had already been declining in New
Jersey for nearly two years, growth had tapered off markedly in the service
sectors and the long-term downward trend of factory employment had accelerated,
partly because of a leveling off of industrial demand nationally. The onset of
recession caused an acceleration of New Jersey's job losses in construction and
manufacturing, as well as an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities, trucking and
warehousing. The net effect was a decline in the State's total nonfarm wage and
salary employment(2) from a peak of 3,689,800 in 1989 to a low of 3,457,900
in 1992. This loss was followed by an employment gain of 255,600 from May 1992
to June 1997, a recovery of 97.5% of the jobs lost during the recession.
{}----------------------
(1) U.S. Census Bureau, Population Division, 1996 estimates.
(2) New Jersey Department of Labor, Division of Labor Market and Demographic
Research.
The State has benefited from the national recovery. New Jersey's
recovery is in its seventh year and appears to be sustainable now that the
national economy has "soft landed."
Business investment expenditures and consumer spending have increased
substantially in the nation as well as in the State. Capital and consumer
spending may very well continue to rise due to the sustained character of the
recovery, although the interest-sensitive homebuilding industry may provide only
a moderate amount of stimulus both nationally and in New Jersey. It is expected
that the employment and income growth that has and is taking place will lead to
further growth in consumer outlays. Reasons for cautious optimism in New Jersey
include increasing employment levels, a low jobless rate, and a
higher-than-national level of per capita personal income.
Inflation-adjusted gross domestic product slowed significantly in the
second quarter of 1998 from the robust 5.9% growth in the first quarter of 1998.
However, the State's economy should have enough momentum to keep its trend line
pointing upwards. Its growth potential is not yet limited by the labor supply
constraints beginning to affect some other parts of the country.
Looking further ahead, prospects for New Jersey appear favorable. While
growth is likely to be slower than in the nation, the locational advantages that
have served New Jersey well for many years will still be there. Structural
changes that have been going on for years can be expected to continue, with job
creation concentrated most heavily in the service industries.
The Director of the Division of Budget and Accounting in the New Jersey
Department of the Treasury (the "Budget Director") prescribes and approves the
accounting policies of the State and directs their implementation.
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The State prepares its financial statements on a "modified accrual"
basis utilizing the fund method of accounting. The National Council on
Governmental Accounting in its publication entitled Statement I. - Governmental
Accounting and Financial Reporting Principles defines a fund as a fiscal and
accounting entity with a self-balancing set of accounts recording cash and other
financial resources together with all related liabilities and residual equities
or balances, and changes therein, which are segregated for the purpose of
carrying on specific activities or attaining certain objectives in accordance
with special regulations, restrictions or limitations. The State's financial
statements reflect financial reporting practices in accordance with that
definition. Accordingly, the State prepares separate statements for the General
Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Trust
and Agency Funds, Component Units-Authorities Funds, College and University
Funds, General Fixed Asset Account Group and its General Long-Term Debt Account
Group, and its component units.
The General Fund is the fund into which all State revenues not
otherwise restricted by statute are deposited and from which appropriations are
made. The largest part of the total financial operations of the State is
accounted for in the General Fund. Revenues received from taxes and unrestricted
by statute, most federal revenue and certain miscellaneous revenue items are
recorded in the General Fund. The appropriations act provides the basic
framework for the operation of the General Fund.
Special Revenue Funds are used to account for resources legally
restricted to expenditure for specified purposes. Special Revenue Funds include
the Casino Control Fund, the Casino Revenue Fund, the Gubernatorial Elections
Fund and the Property Tax Relief Fund. Other Special Revenue Funds have been
created which are either reported ultimately in the General Fund or are created
to hold revenues derived from private sources. Debt Service Funds are used to
account for the accumulation of resources for, and the payment of, principal and
redemption premium, if any, and interest on general obligation bonds. Capital
Project Funds are used to account for financial resources to be used for the
acquisition or construction of major State capital facilities. Trust and Agency
Funds are used to account for assets held in a trust capacity or as an agent for
individuals, private organizations, other governments and/or other funds. The
General Fixed Asset Account Group accounts for the State's fixed assets acquired
or constructed for general governmental purposes. The General Long-Term Debt
Account Group accounts for the unmatured general long-term liabilities of the
State.
For the fiscal 1997 year, the undesignated General Fund balance was
$281 million (the undesignated balances for fiscal years 1995 and 1996 was $569
million and $442 million, respectively). The undesignated balance for fiscal
1998 is estimated to be $144 million and the undesignated balance for fiscal
1999 is estimated to be $199 million.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such appropriation. In the
past when actual revenues have been less than the amount anticipated in the
budget, the Governor has exercised her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations were budgeted but not yet
spent.
Significant statutory limitations are on local appropriations. However,
proceeds from a number of state taxes are shared with New Jersey municipalities.
These funds are primarily used for local education programs, homestead rebates,
Medicaid and welfare programs.
The State finances certain capital projects through the sale of the
general obligation bonds of the State. These bonds are backed by the full faith
and credit of the State. Certain state tax revenues and certain other fees are
pledged to meet the principal payments, interest payments and if provided,
redemption premium payments, if any, required to fully pay the bonds. In
addition to payments from bond proceeds, capital construction can also be funded
by appropriation of current revenues on a pay-as-you-go basis.
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The following are cases presently pending or threatened in which the
State has the potential for either a significant loss of revenue or a
significant unanticipated expenditure.
At any given time, there are various numbers of claims and cases
pending against the State, State agencies and employees, seeking recovery of
monetary damages that are primarily paid out of the fund created pursuant to the
New Jersey Tort Claims Act (N.J.S.A. 59:1-1, et seq.). The State does not
formally estimate its reserve representing potential exposure for these claims
and cases. The State is unable to estimate its exposure for these claims and
cases.
The State routinely receives notices of claim seeking substantial sums
of money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract
and other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
At any given time, there are various numbers of claims and cases
pending against the University of Medicine and Dentistry and its employees,
seeking recovery of monetary damages that are primarily paid out of the Self
Insurance Reserve Fund created pursuant to the New Jersey Tort Claims Act
(N.J.S.A. 59:1-1, et seq.). An independent study estimated an aggregate
potential exposure of $85,300,000 for tort and medical malpractice claims
pending as of December 31, 1997. In addition, at any given time, there are
various numbers of contract and other claims against the University of Medicine
and Dentistry, seeking recovery of monetary damages or other relief which, if
granted, would require the expenditure of funds. The State is unable to estimate
its exposure for these claims.
INVESTING IN OHIO TAX-EXEMPT OBLIGATIONS
As described above, the Ohio Fund will invest most of its net
assets in securities issued by or on behalf of (or in certificates of
participation in lease-purchase obligations of) the State of Ohio, political
subdivisions of the State, or agencies or instrumentalities of the State or its
political subdivisions (Ohio Obligations). The Ohio Fund is therefore
susceptible to general or particular economic, political or regulatory factors
that may affect issuers of Ohio Obligations. The following information
constitutes only a brief summary of some of the many complex factors that may
have an effect. The information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in connection
with their issuance of securities and from other publicly available information,
and is believed to be accurate. No independent verification has been made of any
of the following information.
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as a
general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1997 is 11,186,000.
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While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5 % national figure. However, in
recent years the State rates were below the national rates 4.2% versus 4.5% in
1998. The unemployment rate and its effects vary among geographic areas of the
State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Ohio Fund or the ability of particular obligors to
make timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year (FY) or fiscal biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which the
personal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national
economic conditions, with the ending FY balance reduced during less favorable
and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
The 1992-93 biennium, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences an interim appropriations act was enacted effective July 1, 1991; it
included GRF debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11, 1991,
$200 million was transferred from the Budget Stabilization Fund (BSF, a cash and
budgetary management fund) to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both
in light of a continuing uncertain nationwide economic situation, there was
projected and then timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance and additional amounts from certain
other funds were transferred late in the FY to the GRF, and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative action
(a combination of tax revisions and additional spending reductions). The June
30, 1993 ending GRF fund balance was approximately $111 million, of which, as a
first step to replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed
for debt service or lease rentals relating to any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in the
BSF. The biennium ended June 30, 1995 with a GRF ending fund balance of $928
million, of which $535.2 million was transferred into the BSF. The significant
GRF fund balance, after leaving in the GRF an unreserved and undesignated
balance of $70 million, was transferred to the BSF and
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other funds including school assistance funds and, in anticipation of possible
federal program changes, a human services stabilization fund.
From a higher than forecast 1996-97 mid-biennium GRF fund balance, $100
million was transferred for elementary and secondary school computer network
purposes and $30 million to a new State transportation infrastructure fund.
Approximately $400.8 million served as a basis for temporary 1996 personal
income tax reductions aggregating that amount. The 1996-97 biennium-ending GRF
fund balance was $834.9 million. Of that, $250 million went to school
building construction and renovation, $94 million to the school computer
network, $44.2 million for school textbooks and instructional materials and a
distance learning program, and $34 million to the BSF, and the $263 million
balance to a State income tax reduction fund.
The GRF appropriations act for the 1998-99 biennium was passed on
June 25, 1997 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. Subsequent
legislation increased the fiscal year 1999 GRF appropriation level for
elementary and secondary education, with the increase {} funded in part by
mandated small percentage reductions in State appropriations for various State
agencies and institutions. Expressly exempt from those reductions are all
appropriations for debt service, including lease rental payments.
The BSF had a March 25, 1999 balance of over $906 million.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments approved from 1921 to date (the latest
adopted in 1995) Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At March 25, 1999, almost $1.11
billion (excluding certain highway bonds payable primarily from highway use
receipts) of this debt was outstanding. The only such State debt at that date
still authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($23.9 million outstanding);
(b) $240 million of obligations previously authorized for local infrastructure
improvements, no more than $120 million of which may be issued in any calendar
year (over $1 billion outstanding) and (c) up to $200 million in general
obligation bonds for parks, recreation and natural resources purposes which may
be outstanding at any one time ($82.7 million outstanding, with no more than
$50 million to be issued in any one year).
The electors in 1995 approved a constitutional amendment extending the
local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizing additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million outstanding authorization, and authorizes not more than $1.2 billion to
be outstanding at any time and not more than $220 million to be issued in a
fiscal year.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5.3 billion of
which were outstanding or awaiting delivery at March 25, 1999.
Aggregate FY 1998 rental payments under various capital lease and lease
purchase agreements were approximately $9.1 million. In recent years, State
agencies have also participated in transportation and office building projects
that may have some local as well as State use and benefits, in connection with
which
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the State enters into lease purchase agreements with terms ranging from 7
to 20 years. Certificates of participation, or special obligation bonds of the
State or local agency, are issued that represent fractionalized interests in or
are payable from the State's anticipated payments. The State estimates highest
future FY payments under those agreements (as of March 25, 1999) to be
approximately $25.8 million (of which $22 million is payable from sources other
than the GRF, such as federal highway money distributions). State payments under
all those agreements are subject to biennial appropriations, with the lease
terms being two years subject to renewal if appropriations are made.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing. The
General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of State
revenues or receipts (but not by a pledge of the State's full faith and credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State moneys has never
been implemented, apart from a "guarantee fund" approach funded essentially from
program revenues.)
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate approximately 46% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 119 districts
(as of March 25, 1999) from voter-authorized income taxes, for significant
portions of their budgets. Litigation, similar to that in other states, has been
pending questioning the constitutionality of Ohio's system of school funding.
The Ohio Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. After a further hearing, the trial court has
decided that steps taken to date by the State to enhance school funding have not
met the requirements of the Supreme Court decision; the State has filed a notice
of appeal with the Supreme Court, and the trial court has issued a stay, pending
appeal, of the implementation of much of its order. A small number of the
State's 612 local school districts have in any year required special assistance
to avoid year-end deficits. A program has provided for school district cash need
borrowing directly from commercial lenders, with diversion of State subsidy
distributions to repayment if needed. Recent borrowings under this program {}
totaled $71.1 million for 29 districts in FY 1995 (including $29.5 million for
one), and $87.2 million for 20 districts in FY 1996 (including $42.1 million for
one), $113.2 million for 12 districts in FY 1997 (including $90 million
to one for restructuring its prior loans) and $23.4 million for 10 districts in
FY 1998.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys distributed
by the State.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to
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counties and townships.) Since inception for municipalities in 1979, these
"fiscal emergency" procedures have been applied to 26 cities and villages; for
20 of them the fiscal situation was resolved and the procedures terminated (two
cities are in preliminary "fiscal watch" status). As of March 25, 1999, a school
district "fiscal emergency" provision was applied to eight districts, and 10
were on preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
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APPENDIX B--DESCRIPTION OF RATINGS
U.S. Growth Fund has the ability to invest up to 10% of its net assets
in high yield, high risk fixed-income securities. However, the Fund had no such
investments as of its fiscal year ended October 31, 1997. The following
paragraphs contain excerpts from Moody's and S&P's rating descriptions. These
credit ratings evaluate only the safety of principal and interest and do not
consider the market value risk associated with high yield securities.
General Rating Information
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than Aaa bonds because margins of protection may not be as
large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements which make the long-term risks appear somewhat larger
than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
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Caa: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger
with respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior obligations which have an original maturity not
exceeding one year.
P-1: Issuers rated "PRIME-1" or "P-1" (or supporting institutions)
have superior ability for repayment of senior short-term debt
obligations.
P-2: Issuers rated "PRIME-2" or "P-2" (or supporting institutions)
have a strong ability for repayment of senior short-term debt
obligations.
P-3: Issuers rated "PRIME-3" or "P-3" (or supporting institutions)
have an acceptable ability for repayment of senior short-term
debt obligations.
MUNICIPAL NOTE RATINGS
Issuers or the features associated with Moody's MIG or VMIG ratings are
identified by date of issue, date of maturity or maturities or rating expiration
date and description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issue's specific structural or
credit features.
MIG 1/VMIG 1: This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support, or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All
security elements are accounted for but there is
lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to
be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment
security is present and although not distinctly or
predominantly speculative, there is specific risk.
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STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P to a
debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest rated
issues only in a small degree.
A: Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest an repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated
categories.
BB, B, Debt rated BB, B, CCC or CC is regarded, on balance, as
CCC predominately speculative with respect to capacity to pay
and CC: interest and repay principal in accordance with the terms
of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation.
While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse
conditions.
C: This rating is reserved for income bonds on which no
interest is being paid.
D: Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.
A-1: The A-1 designation indicates that the degree of safety
regarding timely payment is either overwhelming or very
strong. A plus (+) designation is applied only to those
issues rated A-1 which possess an overwhelming degree of
safety.
A-2: Capacity for timely payment on issues with the designation
A-2 is strong. However, the relative degree of safely is
not as high as for issues designated A-1.
A-3: Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat
more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher
designations.
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MUNICIPAL NOTE RATINGS
An S&P municipal note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
Sources of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
SP-1: Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest.
SP-3: Speculative capacity to pay principal and interest.
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APPENDIX C--INVESTMENT OBJECTIVES OF THE OTHER FUNDS IN THE DELAWARE INVESTMENTS
FAMILY
Following is a summary of the investment objectives of the funds in the
Delaware Investments family:
DELAWARE BALANCED 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.
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 EQUITY 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. GROWTH AND INCOME 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. SOCIAL AWARENESS 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.
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. HIGH-YIELD OPPORTUNITIES FUND seeks to provide
investors with total return and, as a secondary objective, high current income.
CORPORATE BOND FUND seeks to provide investors with total return by investing
primarily in corporate bonds. EXTENDED DURATION BOND FUND seeks to provide
investors with total return by investing primarily in corporate bonds
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 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.
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.
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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.
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 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. TAX-FREE PENNSYLVANIA FUND seeks a high
level of current interest income exempt from federal income tax and Pennsylvania
state and local taxes, consistent with the preservation of capital.
FOUNDATION FUNDS are "fund of funds" which invest in other funds in the
Delaware Investments family (referred to as "Underlying Funds"). FOUNDATION
FUNDS INCOME PORTFOLIO seeks a combination of current income and preservation of
capital with capital appreciation by investing primarily in a mix of fixed
income and domestic equity securities, including fixed income and domestic
equity Underlying Funds. FOUNDATION FUNDS BALANCED PORTFOLIO seeks capital
appreciation with current income as a secondary objective by investing primarily
in domestic equity and fixed income securities, including domestic equity and
fixed income Underlying Funds. FOUNDATION FUNDS GROWTH PORTFOLIO seeks long term
capital growth by investing primarily in equity securities, including equity
Underlying Funds, and, to a lesser extent, in fixed income securities, including
fixed-income Underlying Funds.
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 EQUITY FUND seeks to achieve
long-term total return by investing in global securities that provide the
potential for capital appreciation and income. 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 17 funds available exclusively
as funding vehicles for certain insurance company separate accounts. GROWTH AND
INCOME 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
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potential for significant growth. DELAWARE BALANCED 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. SMALL CAP VALUE
SERIES seeks capital appreciation by investing primarily in small-cap common
stocks whose market values 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. SOCIAL AWARENESS 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. REIT SERIES seeks to achieve maximum long-term total return,
with capital appreciation as a secondary objective, by investing in securities
of companies primarily engaged in the real estate industry. AGGRESSIVE GROWTH
SERIES seeks long-term capital appreciation. The Series attempts to achieve its
investment objective by investing primarily in equity securities of companies
which the manager believes have the potential for high earnings growth.
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
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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 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 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.
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 funds in the Delaware
Investments family, 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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FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditor for Delaware Group
State Tax-Free Income Trust and, in its capacity as such, audits the annual
financial statements contained in the Funds' Annual Report. Each Fund's
Statement of Net Assets, Statement of Operations, Statements of Changes in Net
Assets, Financial Highlights and Notes to Financial Statements, as well as the
report of Ernst & Young LLP, independent auditors, for the fiscal year ended
February 28, 1999, are included in the Funds' Annual Report to shareholders. The
financial statements and financial highlights, the notes relating thereto and
the report of Ernst & Young LLP listed above are incorporated by reference from
the Annual Report into this Part B.
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Delaware Investments includes funds with a wide range of investment objectives.
Stock funds, income funds, national and state-specific tax-exempt 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 information, shareholders of the Fund Classes should contact their
financial adviser or call Delaware Investments at 800-523-1918.
DELAWARE GROUP STATE-TAX FREE INCOME TRUST
TAX-FREE PENNSYLVANIA FUND
TAX-FREE OHIO FUND
TAX-FREE NEW JERSEY FUND
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
INVESTMENT MANAGER
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc. PART B
1818 Market Street
Philadelphia, PA 19103 STATEMENT OF
ADDITIONAL INFORMATION
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103 April 29, 1999
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
DELAWARE
INVESTMENTS
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