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TABLE OF CONTENTS
Cover Page
Synopsis
Summary of Expenses
Financial Highlights
Investment Objective and Strategies
Suitability
Investment Strategy
Classes of Shares
How to Buy Shares
Redemption and Exchange
Dividends and Distributions
Taxes
Calculation of Net Asset Value Per Share
Management of the Fund
Other Investment Policies and Risk Considerations
Appendix A-Ratings
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DECATUR INCOME FUND PROSPECTUS
INSTITUTIONAL FEBRUARY 24, 1997
---------------------------------------------------------------------
1818 Market Street, Philadelphia, PA 19103
For more information about the
Decatur Income Fund Institutional Class
call the Delaware Group at 800-828-5052.
This Prospectus describes the shares of Decatur Income Fund series (the
"Fund") of Delaware Group Equity Funds II, Inc. ("Equity Funds II, Inc.")
(formerly, Delaware Group Decatur Fund, Inc.), a professionally-managed
mutual fund of the series type. The Fund's objective is to achieve 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.
The Fund offers Decatur Income Fund Institutional Class (the "Class").
Shares of the Class are available for purchase only by certain
enumerated investors and are offered at net asset value without the imposition
of a front-end or contingent deferred sales charge and without a 12b-1 charge.
See How To Buy Shares.
This Prospectus relates only to the Class and sets forth information
that you should read and consider before you invest. Please retain it for
future reference. The Fund's Statement of Additional Information ("Part B" of
Equity Funds II, Inc.'s registration statement), dated February 24, 1997, as
it may be amended from time to time, contains additional information about the
Fund and has been filed with the Securities and Exchange Commission. Part B is
incorporated by reference into this Prospectus and is available, without
charge, by writing to Delaware Distributors, L.P. at the above address or by
calling the above number. The Fund's financial statements appear in the Annual
Report, which will accompany any response to requests for Part B.
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The Fund also offers Decatur Income Fund A Class, Decatur Income Fund B
Class and Decatur Income Fund C Class. Shares of these classes are subject to
sales charges and other expenses, which may affect their performance. A
prospectus for these classes can be obtained by writing to Delaware
Distributors, L.P. at the above address or by calling 800-523-4640.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
BE SURE TO CONSULT YOUR FINANCIAL ADVISER WHEN MAKING INVESTMENTS. MUTUAL
FUNDS CAN BE A VALUABLE PART OF YOUR FINANCIAL PLAN; HOWEVER, SHARES OF THE
FUND ARE NOT FDIC OR NCUSIF INSURED, ARE NOT GUARANTEED BY ANY BANK OR ANY
CREDIT UNION, ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND INVOLVE
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. SHARES OF THE FUND
ARE NOT BANK OR CREDIT UNION DEPOSITS.
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SYNOPSIS
Investment Objective
The investment objective of the Fund is to achieve 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.
For further details, see Investment Objective and Strategies and Other
Investment Policies and Risk Considerations.
Risk Factors and Special Considerations
The Fund may invest up to 15% of its net assets in high-yield securities
(junk bonds) and, consequently, greater risks may be involved with an
investment in the Fund. See High Yield, High Risk Securities under Other
Investment Policies and Risk Considerations.
The Fund may enter into options and futures transactions for hedging
purposes to counterbalance portfolio volatility. While the Fund does not
engage in options and futures for speculative purposes, there are risks that
result from use of these instruments, and the investor should review the
descriptions of these risks in this Prospectus. See Futures Contracts and
Options under Other Investment Policies and Risk Considerations.
Investment Manager, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") furnishes investment
management services to the Fund, subject to the supervision and direction of
Equity Funds II, Inc.'s Board of Directors. The Manager also provides
investment management services to certain other funds in the Delaware Group.
Delaware Distributors, L.P. (the "Distributor") is the national distributor
for the Fund and for all of the other mutual funds in the Delaware Group.
Delaware Service Company, Inc. (the "Transfer Agent") is the shareholder
servicing, dividend disbursing, accounting services and transfer agent for the
Fund and for all of the other mutual funds in the Delaware Group. See Summary
of Expenses and Management of the Fund for further information regarding the
Manager and the fees payable under the Fund's Investment Management Agreement.
Purchase Price
Shares of the Class offered by this Prospectus are available at net
asset value, without a front-end or contingent deferred sales charge and are
not subject to distribution fees under a Rule 12b-1 distribution plan.
See Classes of Shares.
Redemption and Exchange
Shares of the Class are redeemed or exchanged at the net asset value
calculated after receipt of the redemption or exchange request. See Redemption
and Exchange.
Open-End Investment Company
Equity Funds II, Inc. is an open-end management investment company. The
Fund's portfolio of assets is diversified as defined by the Investment Company
Act of 1940 (the "1940 Act"). Equity Funds II, Inc. was first organized as a
Delaware corporation in 1956 and was subsequently reorganized as a Maryland
corporation on March 4, 1983. See Shares under Management of the Fund.
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SUMMARY OF EXPENSES
Shareholder Transaction Expenses
------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........ None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None
Exchange Fees.............................. None*
Annual Operating Expenses
(as a percentage of average daily net assets)
------------------------------------------------------------------
Management Fees............................ 0.49%
12b-1 Fees................................. None
Other Operating Expenses................... 0.20%
-----
Total Operating Expenses.......... 0.69%
=====
*Exchanges are subject to the requirements of each fund and a front-end
sales charge may apply.
For expense information about Decatur Income Fund A Class, Decatur
Income Fund B Class and Decatur Income Fund C Class, see the separate
prospectus relating to those classes.
The following example illustrates the expenses that an investor would
pay on a $1,000 investment over various time periods, assuming (1) a 5% annual
rate of return, and (2) redemption at the end of each time period. As noted in
the tables above, Equity Funds II, Inc. charges no redemption fees.
1 year 3 years 5 years 10 years
------ ------- ------- --------
$7 $22 $38 $86
The purpose of the above tables is to assist the investor in
understanding the various costs and expenses that an investor in the Class
will bear directly or indirectly.
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or less than those
shown.
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- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements
of Decatur Income Fund of Delaware Group Equity Funds II, Inc. (formerly known
as Delaware Group Decatur Fund, Inc.) and have been audited by Ernst & Young
LLP, independent auditors. The data should be read in conjunction with the
financial statements, related notes and the report of Ernst & Young LLP
covering such financial information and highlights, all of which are
incorporated by reference into Part B. Further information about the Fund's
performance is contained in the Annual Report to shareholders. A copy of the
Fund's Annual Report (including the report of Ernst & Young LLP) may be
obtained from Equity Funds II, Inc. upon request at no charge.
- ---------------------------------------------------------------------------
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DIF-CHT
<TABLE>
<CAPTION>
Decatur Income Fund Institutional Class
------------------------------------------------------------------------
Period
1/13/94
Year Ended through Year Ended
11/30/96 11/30/95(1) 1/30/94(2) 11/30/94(1) 11/30/93(1)
-------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $19.06 $15.59 $16.72 $18.24 $17.20
Income From Investment Operations
- ---------------------------------
Net Investment Income ....................... 0.69 0.71 0.59 0.67 0.78
Net Gains (Losses) on Securities ............
(both realized and unrealized) ........... 3.62 3.92 (1.10) (0.73) 1.79
------ ------ ------ ------ ------
Total From Investment Operations ..... 4.31 4.63 (0.51) (0.06) 2.57
------ ------ ------ ------ ------
Less Distributions
- ------------------
Dividends (from net investment income) ...... (0.72) (0.74) (0.62) (0.86) (0.68)
Distributions (from capital gains)........... (1.34) (0.42) none (1.75) (0.85)
Returns of Capital........................... none none none none none
------ ------ ------ ------ ------
Total Distributions..................... (2.06) (1.16) (0.62) (2.61) (1.53)
------ ------ ------ ------ ------
Net Asset Value, End of Period............... $21.31 $19.06 $15.59 $15.57 $18.24
====== ====== ====== ====== ======
- -------------------------------------------
Total Return................................. 24.65% 31.14% (0.45%) (0.57%)(3) 15.85%(3)
- ------------
- -------------------------------------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000's omitted) ... $244,048 $211,409 $182,105 $1,153,884 $1,512,194
Ratio of Expenses to Average Daily Net Assets 0.69% 0.74% 0.70% 0.81% 0.71%
Ratio of Net Investment Income to Average
Daily Net Assets.......................... 3.56% 4.16% 4.03% 3.92% 4.34%
Portfolio Turnover Rate...................... 101% 74% 92% 92% 80%
Average Commission Rate Paid................. $0.060 N/A N/A N/A N/A
</TABLE>
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<TABLE>
<CAPTION>
Decatur Income Fund Institutional Class
----------------------------------------------------------
Year Ended Year Ended
11/30/92(1) 11/30/91(1) 11/30/90(1) 11/30/89(1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period .......... $15.76 $14.53 $19.07 $16.89
Income From Investment Operations
- ---------------------------------
Net Investment Income ......................... 0.78 0.83 0.93 1.00
Net Gains (Losses) on Securities ..............
(both realized and unrealized) ............. 1.47 1.37 (2.93) 2.25
------ ------ ------ ------
Total From Investment Operations ....... 2.25 2.20 (2.00) 3.25
------ ------ ------ ------
Less Distributions
- ------------------
Dividends (from net investment income) ........ (0.81) (0.97) (1.05) (0.81)
Distributions (from capital gains)............. none none (1.49) (0.26)
Returns of Capital............................. none none none none
------ ------ ------ ------
Total Distributions....................... (0.81) (0.97) (2.54) (1.07)
------ ------ ------ ------
Net Asset Value, End of Period................. $17.20 $15.76 $14.53 $19.07
====== ====== ====== ======
- -------------------------------------------
Total Return................................... 14.55%(3) 15.46%(3) (12.04%)(3) 19.84%(3)
- ------------
- -------------------------------------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000's omitted) ..... $1,508,206 $1,579,521 1,560,641 $1,848,129
Ratio of Expenses to Average Daily Net Assets . 0.72% 0.70% 0.70% 0.67%
Ratio of Net Investment Income to Average
Daily Net Assets............................ 4.55% 5.18% 5.78% 5.48%
Portfolio Turnover Rate........................ 79% 78% 44% 38%
Average Commission Rate Paid................... N/A N/A N/A N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Decatur Income Fund Institutional Class
---------------------------------------
Year Ended
11/30/88(1) 11/30/87(1)
----------- -----------
<S> <C> <C>
Net Asset Value, Beginning of Period ............ $15.86 $19.32
Income From Investment Operations
- ---------------------------------
Net Investment Income ........................... 0.76 0.77
Net Gains (Losses) on Securities ................
(both realized and unrealized) ............... 2.75 (1.43)
------ ------
Total From Investment Operations ......... 3.51 (0.66)
------ ------
Less Distributions
- ------------------
Dividends (from net investment income) .......... (0.73) (0.80)
Distributions (from capital gains)............... (1.75) (2.00)
Returns of Capital............................... none none
------ ------
Total Distributions......................... (2.48) (2.80)
------ ------
Net Asset Value, End of Period................... $16.89 $15.86
====== ======
- -------------------------------------------
Total Return..................................... 25.20%(3) (4.48%)(3)
- ------------
- -------------------------------------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000's omitted) ..... $1,517,445 $1,346,411
Ratio of Expenses to Average Daily Net Assets . 0.73% 0.69%
Ratio of Net Investment Income to Average
Daily Net Assets............................ 4.80% 4.37%
Portfolio Turnover Rate........................ 39% 56%
Average Commission Rate Paid................... N/A N/A
</TABLE>
- ---------------
(1) Data for Decatur Income Fund Institutional Class are derived from data of
Decatur Income Fund A Class (formerly known as the Decatur Fund I class),
which prior to May 2, 1994 was not subject to Rule 12b-1 distribution
expenses.
(2) Data are derived from data for Decatur Income Fund Institutional Class
(formerly known as the Decatur Fund I (Institutional) class), which
commenced operations on January 13, 1994. Ratios and total return have
been annualized.
(3) Does not reflect current maximum sales charges that are or were in effect
applicable to Decatur Income Fund A Class.
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(DIF/DIFTR-IC)
INVESTMENT OBJECTIVE AND STRATEGIES
SUITABILITY
The Fund may be suitable for investors looking for current income with
the potential for capital appreciation. The Fund will invest in common stocks
and other income-producing securities, including high yield, higher risk
fixed-income securities, and investors should be willing to accept the risks
associated with such investments.
* * *
Naturally, the Fund cannot assure a specific rate of return or that
principal will be protected. The value of the Fund's shares can be expected to
move up and down depending upon market conditions. Consequently, appreciation
may be obtained in periods of generally rising markets, while in declining
markets, the value of its shares may, of course, decline. For this reason, the
Fund is not appropriate for short-term investors. However, through the
cautious selection and supervision of its portfolio, the Fund will strive to
achieve its objective set forth above.
Ownership of shares of the Fund reduces the bookkeeping and
administrative inconveniences that would be involved with direct purchases of
the securities held in the Fund's portfolio.
Investors should not consider a purchase of shares of the Fund as
equivalent to a complete investment program. The Delaware Group includes a
family of funds, generally available through registered investment dealers,
which may be used together to create a more complete investment program.
INVESTMENT STRATEGY
The objective of the Fund is to earn 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. This is a
fundamental policy and cannot be changed without shareholder approval. The
Fund primarily aims to earn and pay its shareholders dependable current
income. It seeks to accomplish this objective while attempting to limit risk
to principal through prudent investing. Although it is not a fundamental
policy, the Fund will normally invest at least 65% of its total assets in
income-producing securities. The Fund may invest up to 15% of its net assets
in high yield, higher risk fixed-income securities, which are generally
considered to be speculative. See High Yield, High Risk Securities under Other
Investment Policies and Risk Considerations.
The Manager carefully selects the Fund's diversified group of securities
for their high yields relative to risk involved.
The Fund generally invests in common stocks that the Manager believes
have better potential for income and appreciation than fixed-income
securities. It may, however, invest its assets in all classes of securities,
including bonds, preferred stocks, and common stocks, in any proportions
deemed prudent for defensive purposes under existing market and economic
conditions. All available types of securities, including foreign securities
(which may include American or European Depository Receipts), are under
continuous study, and the management regularly transfers investments between
securities or types of securities in carrying out its investment policy. It is
the Fund's policy not to purchase and sell securities with a view toward
obtaining short-term profits. However, the Fund may hold securities for any
period of time.
* * *
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For additional information about the Fund's investment policies and
certain risks associated with investments in certain types of securities, see
Other Investment Policies and Risk Considerations.
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CLASSES OF SHARES
The Distributor serves as the national distributor for the Fund. Shares
of the Class may be purchased directly by contacting the Fund or its agent or
through authorized investment dealers. All purchases of shares of the Class
are at net asset value. There is no front-end or contingent deferred sales
charge.
Investment instructions given on behalf of participants in an
employer-sponsored retirement plan are made in accordance with directions
provided by the employer. Employees considering purchasing shares of the Class
as part of their retirement program should contact their employer for details.
Shares of the Class are available for purchase only by: (a) retirement
plans introduced by persons not associated with brokers or dealers that are
primarily engaged in the retail securities business and rollover individual
retirement accounts from such plans; (b) tax-exempt employee benefit plans of
the Manager or its affiliates and securities dealer firms with a selling
agreement with the Distributor; (c) institutional advisory accounts of the
Manager, or its affiliates and those having client relationships with Delaware
Investment Advisers, a division of the Manager, or its affiliates and their
corporate sponsors, as well as subsidiaries and related employee benefit plans
and rollover individual retirement accounts from such institutional advisory
accounts; (d) a bank, trust company and similar financial institution
investing for its own account or for the account of its trust customers for
whom such financial institution is exercising investment discretion in
purchasing shares of the Class, except where the investment is part of a
program that requires payment to the financial institution of a Rule 12b-1
Plan fee; and (e) registered investment advisers investing on behalf of
clients that consist solely of institutions and high net-worth individuals
having at least $1,000,000 entrusted to the adviser for investment purposes,
but only if the adviser is not affiliated or associated with a broker or
dealer and derives compensation for its services exclusively from its clients
for such advisory services.
Decatur Income Fund A Class, Decatur Income Fund B Class and Decatur Income
Fund C Class
In addition to offering Decatur Income Fund Institutional Class, the
Fund also offers Decatur Income Fund A Class, Decatur Income Fund B Class and
Decatur Income Fund C Class, which are described in a separate prospectus.
Decatur Income Fund A Class carries a front-end sales charge and has annual
12b-1 expenses equal to a maximum of 0.30%. The maximum front-end sales charge
as a percentage of the offering price is 4.75% and is reduced on certain
transactions of $100,000 or more. Decatur Income Fund B Class and Decatur
Income Fund C Class have no front-end sales charge but are subject to annual
12b-1 expenses equal to a maximum of 1%. Shares of Decatur Income Fund B
Class, Decatur Income Fund C Class, and certain shares of Decatur Income Fund
A Class may be subject to a contingent deferred sales charge upon redemption.
To obtain a prospectus relating to such classes contact the Distributor by
writing to the address or by calling the phone numbers listed on the cover of
this Prospectus.
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HOW TO BUY SHARES
The Fund makes it easy to invest by mail, by wire, by exchange and by
arrangement with your investment dealer. In all instances, investors must
qualify to purchase shares of the Class.
Investing Directly by Mail
1. Initial Purchases--An Investment Application or, in the case of a
retirement account, an appropriate retirement plan application, must be
completed, signed and sent with a check payable to the specific Fund and Class
selected, to Delaware Group at 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to the specific Fund and Class selected. Your check
should be identified with your name(s) and account number.
Investing Directly by Wire
You may purchase shares by requesting your bank to transmit funds by
wire to CoreStates Bank, N.A., ABA #031000011, account number 1412893401
(include your name(s) and your account number for the Fund and Class in which
you are investing).
1. Initial Purchases--Before you invest, telephone the Client Services
Department at 800-828-5052 to get an account number. If you do not call first,
it may delay processing your investment. In addition, you must promptly send
your Investment Application or, in the case of a retirement account, an
appropriate retirement plan application, for the specific Fund and Class
selected by you, to Delaware Group at 1818 Market Street, Philadelphia, PA
19103.
2. Subsequent Purchases--You may make additional investments anytime by wiring
funds to CoreStates Bank, N.A., as described above. You must advise your
Client Services Representative by telephone at 800-828-5052 prior to sending
your wire.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware Group
and you qualify to purchase shares of the Class, you may write and authorize
an exchange of part or all of your investment into the Fund. However, shares
of Decatur Income Fund B Class, Decatur Income Fund C Class, and Class B
Shares and Class C Shares of the other funds in the Delaware Group offering
such a class of shares may not be exchanged into this Class. If you wish to
open an account by exchange, call your Client Services Representative at
800-828-5052 for more information. See Redemption and Exchange for more
complete information concerning your exchange privileges.
Investing through Your Investment Dealer
You can make a purchase of Fund shares through most investment dealers
who, as part of the service they provide, must transmit orders promptly to the
Fund. They may charge for this service.
Purchase Price and Effective Date
The purchase price (net asset value) of the Class is determined 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 effective date of a purchase made through an investment dealer is
the date the order is received by the Fund. The effective date of a direct
purchase is the day your wire, electronic transfer or check is received,
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(DIF/DIFTR-IC)
unless it is received after the time the share price is determined, as noted
above. Purchase orders received after such time will be effective the next
business day.
The Conditions of Your Purchase
The Fund reserves the right to reject any purchase order. If a purchase
is cancelled because your check is returned unpaid, you are responsible for
any loss incurred. The 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 Group. The Fund reserves the
right to reject purchases 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.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under $250 as a result of
redemptions.
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(DIF/DIFTR-IC)
REDEMPTION AND EXCHANGE
Redemption and exchange requests made on behalf of participants in an
employer-sponsored retirement plan are made in accordance with directions
provided by the employer. Employees should therefore contact their employer
for details.
Your shares will be redeemed or exchanged at a price based on the net
asset value next determined after the Fund receives your request in good
order. For example, redemption and exchange requests received in good order
after the time the net asset value of shares is determined, will be processed
on the next business day. See Purchase Price and Effective Date under How to
Buy Shares. Except as otherwise 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. With regard to
exchanges, you must also provide the name of the fund you want to receive 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 Fund at 800-828-5052. Redemption
proceeds will be distributed promptly, as described below, but not later than
seven days after receipt of a redemption request.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and
carefully read that fund's prospectus before buying shares in an exchange. The
prospectus contains more complete information about the fund, including
charges and expenses.
The Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor written redemption requests as to shares for
which a check was rendered as payment, but the Fund will not mail or wire the
proceeds until it is reasonably satisfied that the 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. The 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.
Shares of the Class may be exchanged into any other Delaware Group
mutual fund provided: (1) the investment satisfies the eligibility and other
requirements set forth in the prospectus of the fund being acquired, including
the payment of any applicable front-end sales charge; and (2) the shares of
the fund being acquired are in a state where that fund is registered. If
exchanges are made into other shares that are eligible for purchase only by
those permitted to purchase shares of the Class, such exchange will be
exchanged at net asset value. Shares of the Class may not be exchanged into
Class B Shares or Class C Shares of any of the funds in the Delaware Group.
The Fund may suspend, terminate, or amend the terms of the exchange privilege
upon 60 days' written notice to shareholders.
Various redemption and exchange methods are outlined below. No fee is
charged by the Fund or the Distributor for redeeming or exchanging your
shares. You may also have your investment dealer arrange to have your shares
redeemed or exchanged. Your investment dealer may charge for this service.
All authorizations given by shareholders, including selection of any of
the features described below, shall continue in effect until such time as a
written revocation or modification has been received by the Fund or its agent.
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Written Redemption and Exchange
You can write to the Fund at 1818 Market Street, Philadelphia, PA 19103
to redeem some or all of your shares or to request an exchange of any or all
your shares into another mutual fund in the Delaware Group, subject to the
same conditions and limitations as other exchanges noted above. 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 Fund requires a signature
by all owners of the account and may require a signature guarantee. Each
signature guarantee must be supplied by an eligible guarantor institution. The
Fund reserves the right to reject a signature guarantee supplied by an
eligible institution based on its creditworthiness. The Fund 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. Certificates are issued for shares only if you submit a
specific request. If your shares are in certificate form, the certificate must
accompany your request and also be in good order.
You also may submit your written request for redemption or exchange by
facsimile transmission at the following number: 215-255-8864.
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 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 writing that you do not
wish to have such services available with respect to your account. The 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 Fund by
telephone during periods when market or economic conditions lead to an
unusually large volume of telephone requests.
Neither the Fund nor its 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, the 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. 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.
Telephone Redemption-Check to Your Address of Record
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.
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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 submit a written authorization and you may need to 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 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 fees for this redemption method, but the mail time may delay getting
funds into your bank account. Simply call your Client Services Representative
prior to the time the net asset value is determined, as noted above.
Telephone Exchange
You or your investment dealer of record can exchange shares into any
fund in the Delaware Group under the same registration. As with the written
exchange service, telephone exchanges are subject to the same conditions and
limitations as other exchanges noted above. Telephone exchanges may be subject
to limitations as to amounts or frequency.
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DIVIDENDS AND DISTRIBUTIONS
Equity Funds II, Inc. currently intends to make monthly payments from
the Fund's net investment income. Payments from net realized securities
profits of the Fund, if any, will be made in the quarter following the close
of the fiscal year. Both dividends and distributions, if any, are
automatically reinvested in your account at net asset value.
Each class of the Fund will share proportionately in the investment
income and expenses of the Fund, except that the Class will not incur any
distribution fees under the 12b-1 Plans which apply to Decatur Income Fund A
Class, Decatur Income Fund B Class and Decatur Income Fund C Class.
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TAXES
The tax discussion set forth below is included for general information
only. Investors should contact their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in a fund.
The Fund has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"). As such, the Fund will not be subject to federal income tax, or
to any excise tax, to the extent its earnings are distributed as provided in
the Code.
The Fund intends to distribute substantially all of its net investment
income and net capital gains, if any. Dividends from net investment income or
net short-term capital gains will be taxable to those investors who are
subject to income taxes as ordinary income, even though received in additional
shares. For corporate investors, dividends from net investment income will
generally qualify in part for the corporate dividends-received deduction. The
portion of dividends paid by the Fund that so qualifies will be designated
each year in a notice from Equity Funds II, Inc. to the Fund's shareholders.
For the fiscal year ended November 30, 1996, 44% of the Fund's dividends from
net investment income qualified for the corporate dividends-received
deduction.
Distributions paid by the Fund from long-term capital gains, received in
additional shares, are taxable to those investors who are subject to income
taxes as long-term capital gains, regardless of the length of time an investor
has owned shares in the Fund. The Fund does not seek to realize any particular
amount of capital gains during a year; rather, realized gains are a by-product
of Fund management activities. Consequently, capital gains distributions may
be expected to vary considerably from year to year. Also, for those investors
subject to tax, if purchases of shares in the Fund are made shortly before the
record date for a dividend or capital gains distribution, a portion of the
investment will be returned as a taxable distribution.
Although dividends generally will be treated as distributed when paid,
dividends which are declared in October, November or December to shareholders
of record on a specified date in one of those months, but which, for
operational reasons, may not be paid to the shareholder until the following
January, will be treated for tax purposes as if paid by the Fund and received
by the shareholder on December 31 of the year declared.
The sale of shares of the Fund is a taxable event and may result in a
capital gain or loss to shareholders subject to tax. Capital gain or loss may
be realized from an ordinary redemption of shares or an exchange of shares
between the Fund and any other fund in the Delaware Group. Any loss incurred
on a sale or exchange of Fund shares that had been held for six months or less
will be treated as a long-term capital loss to the extent of capital gain
dividends received with respect to such shares.
In addition to federal taxes, shareholders may be subject to state and
local taxes on distributions. Distributions of interest income and capital
gains realized from certain types of U.S. government securities may be exempt
from state personal income taxes. Shares of the Fund are exempt from
Pennsylvania county personal property taxes.
Each year, Equity Funds II, Inc. will mail you information on the tax
status of the Fund's dividends and distributions paid by the Fund.
Shareholders will also receive each year information as to the portion of
dividend income, if any, that is derived from U.S. government securities that
are exempt from state income tax. Of course, shareholders who are not subject
to tax on their income would not be required to pay tax on amounts distributed
to them by the Fund.
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The Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this withholding
requirement by certifying on your Investment Application your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
See Accounting and Tax Issues and Distributions and Taxes in Part B for
additional information on tax matters relating to the Fund and its
shareholders.
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CALCULATION OF NET ASSET VALUE PER SHARE
The purchase and redemption price of the Class is the net asset value
("NAV") per share of Class shares next computed after the order is received.
The NAV is 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 NAV per share is computed by adding the value of all securities and
other assets in the portfolio, deducting any liabilities (expenses and fees
are accrued daily) and dividing by the number of shares outstanding. Portfolio
securities for which market quotations are available are priced at market
value. Short- term investments having a maturity of less than 60 days are
valued at amortized cost, which approximates market value. All other
securities are valued at their fair value as determined in good faith and in a
method approved by Equity Funds II, Inc.'s Board of Directors.
The net asset value of all outstanding shares of each class of the 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 the 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 will not incur any of the expenses under the Fund's
12b-1 Plans and Decatur Income Fund A, B and C Classes alone will bear the
12b-1 Plan fees payable under their respective Plans. Due to the specific
distribution expenses and other costs that will be allocable to each class,
the net asset value of and dividends paid to each class of the Fund will vary.
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MANAGEMENT OF THE FUND
Directors
The business and affairs of Equity Funds II, Inc. are managed under the
direction of its Board of Directors. Part B contains additional information
regarding Equity Funds II, Inc.'s directors and officers.
Investment Manager
The Manager furnishes investment management services to the Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On November 30, 1996, the Manager and its
affiliates within the Delaware Group, including Delaware International
Advisers Ltd., were managing in the aggregate more than $32 billion in assets
in the various institutional (approximately $20,311,204,000) and investment
company (approximately $11,765,348,000) accounts.
The Manager is an indirect, wholly owned subsidiary 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. In connection with
the merger, a new Investment Management Agreement between Equity Funds II,
Inc. on behalf of the Fund and the Manager was executed following shareholder
approval.
The Manager manages the Fund's portfolio and makes investment decisions
which are implemented by Equity Funds II, Inc.'s Trading Department. The
Manager also administers Equity Funds II, Inc.'s affairs and pays the salaries
of all the directors, officers and employees of Equity Funds II, Inc. who are
affiliated with the Manager. For these services, under the Investment
Management Agreement for the Fund, the Manager is paid an annual fee of 0.60%
on the first $100 million of average daily net assets, 0.525% on the next $150
million, 0.50% on the next $250 million and 0.475% on the average daily net
assets in excess of $500 million, less the Fund's proportionate share of all
directors' fees paid to the unaffiliated directors by Equity Funds II, Inc.
For the fiscal year ended November 30, 1996, investment management fees paid
by the Fund were 0.49% of its average daily net assets.
John B. Fields has primary responsibility for making day-to-day
investment decisions for the Fund. He has been the Senior Portfolio Manager
for the Fund since 1993. Mr. Fields, who has 26 years experience in investment
management, earned a bachelor's degree and an MBA from Ohio State University.
Before joining the Delaware Group in 1992, he was Director of Domestic Equity
Risk Management at DuPont. Prior to that, he was Director of Equity Research
at Comerica Bank. Mr. Fields is a member of the Financial Analysts Society of
Wilmington, Delaware.
In making investment decisions for the Fund, Mr. Fields works with a team
of 12 portfolio managers and analysts, each of whom specializes in a different
industry sector and makes recommendations accordingly. Mr. Fields also
regularly consults with Wayne A. Stork and Richard G. Unruh, Jr. Mr. Stork,
Chairman of the Manager's and of Equity Funds II, Inc.'s Board of Directors,
is a graduate of Brown University and attended New York University's Graduate
School of Business Administration. Mr. Stork joined the Delaware Group in 1962
and has served in various executive capacities at different times within the
Delaware organization. A
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graduate of Brown University, Mr. Unruh received his MBA from the University
of Pennsylvania's Wharton School and joined the Delaware Group in 1982 after
19 years of investment management experience with Kidder, Peabody & Co. Inc.
Mr. Unruh was named an Executive Vice President of Equity Funds II, Inc. in
1994. He is also a member of the Board of Directors of the Manager and was
named an executive vice president of the Manager in 1994.
Portfolio Trading Practices
The Fund normally will not invest for short-term trading purposes.
However, the Fund may sell securities without regard to the length of time
they have been held. The degree of portfolio activity will affect brokerage
costs of the Fund and may affect taxes payable by the Fund's shareholders to
the extent that net capital gains are realized. Given the Fund's investment
objective, its annual portfolio turnover rate is not expected to exceed 100%.
For the past two fiscal years, the Fund's portfolio turnover rates were 74%
for 1995 and 101% for 1996.
The Fund uses its best efforts to obtain the best available price and
most favorable execution for portfolio transactions. Orders may be placed with
brokers or dealers who provide brokerage and research services to the Manager
or its advisory clients. These services may be used by the Manager in
servicing any of its accounts. Subject to best price and execution, the Fund
may consider a broker/dealer's sales of Fund shares in placing portfolio
orders and may place orders with broker/dealers that have agreed to defray
certain Fund expenses such as custodian fees.
Performance Information
From time to time, the Fund may quote yield or total return performance
of the Class in advertising and other types of literature.
The current yield for the Class will be calculated by dividing the
annualized net investment income earned by the Class during a recent 30-day
period by the net asset value per share on the last day of the period. The
yield formula provides for semi-annual compounding which assumes that net
investment income is earned and reinvested at a constant rate and annualized
at the end of a six-month period.
Total return will be based on a hypothetical $1,000 investment,
reflecting the reinvestment of all distributions at net asset value. Each
presentation will include the average annual total return for one-, five- and
ten year or life-of-fund periods, as relevant. The Fund may also advertise
aggregate and average total return information concerning the Class over
additional periods of time.
Because securities prices fluctuate, investment results of the Class
will fluctuate over time and past performance should not be considered a
guarantee of future results.
Statements and Confirmations
You will receive quarterly statements of your account summarizing all
transactions during the period. A confirmation statement will be sent
following all transactions other than those involving a reinvestment of
distributions. You should examine statements and confirmations immediately and
promptly report any discrepancy by calling your Client Services
Representative.
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Financial Information about the Fund
Each fiscal year, you will receive an audited annual report and an
unaudited semi-annual report. These reports provide detailed information about
the Fund's investments and performance. Equity Funds II, Inc.'s fiscal year
ends on November 30.
Distribution and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor of the Fund's shares under a Distribution Agreement with Equity
Funds II, Inc. dated April 3, 1995, as amended on November 29, 1995. The
Distributor bears all of the costs of promotion and distribution.
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for the Fund
under an amended and restated agreement dated as of February 24, 1997. The
Transfer Agent also provides accounting services to the Fund pursuant to the
terms of a separate Fund Accounting Agreement. The directors annually review
service fees paid to the Transfer Agent. Certain recordkeeping services and
other shareholder services that otherwise would be performed by the Transfer
Agent may be performed by certain other entities and the Transfer Agent may
elect to enter into an agreement to pay such other entities for those
services. In addition, participant account maintenance fees may be assessed
for certain recordkeeping services provided as part of retirement plan and
administration service packages. These fees are based on the number of
participants in the plan and the various services selected. Fees will be
quoted upon request and are subject to change.
The Distributor and the Transfer Agent are also indirect, wholly owned
subsidiaries of DMH.
Expenses
The Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement. For the fiscal year ended
November 30, 1996, the ratio of operating expenses to average daily net assets
for the Class was 0.69%.
Shares
Equity Funds II, Inc. is an open-end management investment company. The
Fund's portfolio of assets is diversified as defined by the 1940 Act. Commonly
known as a mutual fund, Equity Funds II, Inc. was organized as a Maryland
corporation on March 4, 1983. Equity Funds II, Inc. was previously organized
as a Delaware corporation in 1956. Equity Funds II, Inc. currently offers four
series of shares - Decatur Income Fund series, Decatur Total Return Fund
series, Blue Chip Fund series and Quantum Fund series. Fund shares have a par
value of $1.00, equal voting rights, except as noted below, and are equal in
all other respects. The Fund will vote separately on any matter which affects
only this Fund. Shares of the Fund have priority over shares of any other fund
of Equity Funds II, Inc.
Equity Funds II, Inc.'s shares have noncumulative voting rights which
means that the holders of more than 50% of Equity Funds II, Inc.'s shares
voting for the election of directors can elect 100% of the directors if they
choose to do so. Under Maryland law, Equity Funds II, Inc. is not required,
and does not intend, to hold annual meetings of shareholders unless, under
certain circumstances, it is required to do so under the 1940 Act.
Shareholders of 10% or more of Equity Funds II, Inc.'s shares may request that
a special meeting be called to consider the removal of a director.
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In addition to this Class, the Fund also offers Decatur Income Fund A
Class, Decatur Income Fund B Class and Decatur Income Fund C Class. Shares of
each class represent proportionate interests in the assets of the Fund and
have the same voting and other rights and preferences as Decatur Income Fund
Institutional Class except that shares of the Class are not subject to, and
may not vote on matters affecting, the Distribution Plans under Rule 12b-1
relating to Decatur Income Fund A Class, Decatur Income Fund B Class and
Decatur Income Fund C Class.
Effective as of the close of business February 21, 1997, the name of
Delaware Group Decatur Fund, Inc. was changed to Delaware Group Equity Funds
II, Inc.
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OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
High Yield, High Risk Securities
The Fund may invest up to 15% of its net assets in high yield, high risk
fixed-income securities. These securities are rated lower than BBB by Standard
& Poor's Ratings Group ("S&P"), Baa by Moody's Investors Service, Inc.
("Moody's") and/or rated similarly by another rating agency, or, if unrated,
are considered by the Manager to be of equivalent quality. The Fund will not
invest in securities which are rated lower than C by S&P, Ca by Moody's or
similarly by another rating agency, or, if unrated, are considered by the
Manager to be of a quality that is lower than such ratings. See Appendix A -
Ratings to this Prospectus for more rating information. Fixed-income
securities of this type are considered to be of poor standing and
predominantly speculative. Such securities are subject to a substantial degree
of credit risk.
In the past, in the opinion of the Manager, the high yields from these
bonds have more than compensated for their higher default rates. There can be
no assurance, however, that yields will continue to offset default rates on
these bonds in the future. The Manager intends to maintain an adequately
diversified portfolio of these bonds. While diversification can help to reduce
the effect of an individual default on the Fund, there can be no assurance
that diversification will protect the Fund from widespread bond defaults
brought about by a sustained economic downturn.
Medium and low-grade bonds held by the Fund may be issued as a
consequence of corporate restructurings, such as leveraged buy-outs, mergers,
acquisitions, debt recapitalizations or similar events. Also these bonds are
often issued by smaller, less creditworthy companies or by highly leveraged
(indebted) firms, which are generally less able than more financially stable
firms to make scheduled payments of interest and principal. The risks posed by
bonds issued under such circumstances are substantial.
The economy and interest rates may affect these high yield, high risk
securities differently than other securities. Prices have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic changes or individual corporate
developments. Also, during an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial
stress which would adversely affect their ability to service principal and
interest payment obligations, to meet projected business goals and to obtain
additional financing. Changes by recognized rating agencies in their rating of
any security and in the ability of an issuer to make payments of interest and
principal will also ordinarily have a more dramatic effect on the values of
these investments than on the values of higher-rated securities. Such changes
in value will not affect cash income derived from these securities, unless the
issuers fail to pay interest or dividends when due. Such changes will,
however, affect the Fund's net asset value per share.
Restricted and Illiquid Securities
The Fund may invest in restricted securities, including securities
eligible for resale without registration pursuant to Rule 144A ("Rule 144A
Securities") under the Securities Act of 1933. Rule 144A permits many
privately placed and legally restricted securities to be freely traded among
certain institutional buyers such as the Fund. The Fund may invest no more
than 10% of the value of its net assets in illiquid securities.
While maintaining oversight, the Board of Directors of Equity Funds II,
Inc. has delegated to the Manager the day-to-day function of determining
whether or not individual Rule 144A Securities are liquid for purposes of the
Fund's 10% limitation on investments in illiquid assets. The Board has
instructed the Manager to consider the following factors in determining the
liquidity of a Rule 144A Security: (i) the frequency of
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trades and trading volume for the security; (ii) whether at least three
dealers are willing to purchase or sell the security and the number of
potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security that was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 10% limit on investments in
such securities, the Manager will determine what action to take to ensure that
the Fund continues to adhere to such limitation.
Portfolio Loan Transactions
The Fund may loan up to 25% of its assets to qualified broker/dealers or
institutional investors for their use relating to short sales or other
security transactions.
The major risk to which the Fund would be exposed on a loan transaction
is the risk that the borrower would go bankrupt at a time when the value of
the security goes up. Therefore, the Fund will only enter into loan
arrangements after a review of all pertinent facts by the Manager, subject to
overall supervision by the Board of Directors, including the creditworthiness
of the borrowing broker, dealer or institution and then only if the
consideration to be received from such loans would justify the risk.
Creditworthiness will be monitored on an ongoing basis by the Manager.
Futures Contracts
The Fund may enter into futures contracts on stocks, stock indices,
interest rates and foreign currencies, and purchase or sell options on such
futures contracts. These activities will not be entered into for speculative
purposes, but rather for hedging purposes and to facilitate the ability to
quickly deploy into the stock market the Fund's positions in cash, short-term
debt securities and other money market instruments, at times when the Fund's
assets are not fully invested in equity securities. Such positions will
generally be eliminated when it becomes possible to invest in securities that
are appropriate for the Fund.
A futures contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument, or for the
making and acceptance of a cash settlement, at a stated time in the future for
a fixed price. By its terms, a futures contract provides for a specified
settlement date on which the securities underlying the contract are delivered,
or in the case of securities index futures contracts, the difference between
the price at which the contract was entered into and the contract's closing
value is settled between the purchaser and seller in cash. Futures contracts
differ from options in that they are bilateral agreements, with both the
purchaser and the seller equally obligated to complete the transaction. In
addition, futures contracts call for settlement only on the expiration date,
and cannot be "exercised" at any other time during their term.
The purchase or sale of a futures contract also differs from the
purchase or sale of a security or the purchase of an option in that no
purchase price is paid or received. Instead, an amount of cash or cash
equivalents, which varies but may be as low as 5% or less of the value of the
contract, must be deposited with the broker as "initial margin" as a good
faith deposit. This amount is generally maintained in a segregated account at
the custodian bank. Subsequent payments to and from the broker, referred to as
"variation margin," are made on a daily basis as the value of the index or
instrument underlying the futures contract fluctuates, making positions in the
futures contract more or less valuable, a process known as "marking to the
market."
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Purchases or sales of stock or bond index futures contracts are used for
hedging purposes to attempt to protect the Fund's current or intended
investments from broad fluctuations in stock or bond prices. For example, the
Fund may sell stock or bond index futures contracts in anticipation of or
during a market decline to attempt to offset the decrease in market value of
the Fund's securities portfolio that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or
part, by gains on the futures position. When the Fund is not fully invested in
the securities market and anticipates a significant market advance, it may
purchase stock or bond index futures contracts in order to gain rapid market
exposure that may, in part or entirely, offset increases in the cost of
securities that the Fund intends to purchase. As such purchases are made, the
corresponding positions in stock or bond index futures contracts will be
closed out.
Interest rate futures contracts are purchased or sold for hedging
purposes to attempt to protect against the effects of interest rate changes on
the Fund's current or intended investments in fixed-income securities. For
example, if the Fund owned long-term bonds and interest rates were expected to
increase, the Fund might sell interest rate futures contracts. Such a sale
would have much the same effect as selling some of the long-term bonds in the
Fund's portfolio. However, since the futures market is more liquid than the
cash market, the use of interest rate futures contracts as a hedging technique
allows the Fund to hedge its interest rate risk without having to sell its
portfolio securities. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the Fund's
interest rate futures contracts would be expected to increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. On the other hand, if interest rates were
expected to decline, interest rate futures contracts could be purchased as a
hedge in anticipation of subsequent purchases of long-term bonds at higher
prices. Because the fluctuations in the value of the interest rate futures
contracts should be similar to those of long-term bonds, the Fund could
protect itself against the effects of the anticipated rise in the value of
long-term bonds without actually buying them until the necessary cash became
available or the market had stabilized. At that time, the interest rate
futures contracts could be liquidated, and the Fund's cash reserve could then
be used to buy long-term bonds on the cash market.
The Fund may purchase and sell foreign currency futures contracts for
hedging purposes to attempt to protect its current or intended investments
denominated in foreign currencies from fluctuations in currency exchange
rates. Such fluctuations could reduce the dollar value of portfolio securities
denominated in foreign currencies, or increase the cost of foreign-denominated
securities to be acquired, even if the value of such securities in the
currencies in which they are denominated remains constant. The Fund may sell
futures contracts on a foreign currency, for example, when it holds securities
denominated in such currency and it anticipates a decline in the value of such
currency relative to the dollar. In the event such decline occurs, the
resulting adverse effect on the value of foreign-denominated securities may be
offset, in whole or in part, by gains on the futures contracts. However, if
the value of the foreign currency increases relative to the dollar, the Fund's
loss on the foreign currency futures contract may or may not be offset by an
increase in the value of the securities because a decline in the price of the
security stated in terms of the foreign currency may be greater than the
increase in value as a result of the change in exchange rates.
Conversely, the Fund could protect against a rise in the dollar cost of
foreign-denominated securities to be acquired by purchasing futures contracts
on the relevant currency, which could offset, in whole or in part, the
increased cost of such securities resulting from a rise in the dollar value of
the underlying currencies. When the Fund purchases futures contracts under
such circumstances, however, and the price of securities to be acquired
instead declines as a result of appreciation of the dollar, the Fund will
sustain losses on its futures position which could reduce or eliminate the
benefits of the reduced cost of portfolio securities to be acquired.
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The Fund may also purchase and write options on the types of futures
contracts in which the Fund may invest, and enter into related closing
transactions. Options on futures are similar to options on securities, as
described below, 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 to actually purchase or sell the futures contract, at a specified
exercise price at any time during the period of the option. In the event that
an option written by the Fund is exercised, the Fund will be subject to all
the risks associated with the trading of futures contracts, such as payment of
variation margin deposits. In addition, the writer of an option on a futures
contract, unlike the holder, is subject to initial and variation margin
requirements on the option position.
At any time prior to the expiration of a futures contract, a trader may
elect to close out its position by taking an opposite position on the contract
market on which the position was entered into, subject to the availability of
a secondary market, which will operate to terminate the initial position.
Likewise, a position in an option on a futures contract may be terminated by
the purchaser or seller prior to expiration by effecting a closing purchase or
sale transaction, subject to availability of a secondary market, which is the
purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
Fund may realize a profit or a loss when closing out a futures contract or an
option on a futures contract.
To the extent that interest or exchange rates or securities prices move
in an unexpected direction, the Fund may not achieve the anticipated benefits
of investing in futures contracts and options thereon, or may realize a loss.
To the extent that the 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, the possible lack of a secondary market could
prevent the Fund from closing out its positions relating to futures. See Part
B for a further discussion of this investment technique.
Options
The Fund may write covered call options on individual issues. For the
option to be considered to be covered, the Fund writing the option must own
the common stock underlying the option or securities convertible into such
common stock. In addition, the Fund may write call options on stock indices.
The Fund may also purchase put options on individual issues and on stock
indices. The Manager will employ these techniques in an attempt to protect
appreciation attained, to offset capital losses and to take advantage of the
liquidity available in the option markets. The ability to hedge effectively
using options on stock indices will depend, in part, on the correlation
between the composition of the index and the Fund's portfolio as well as the
price movement of individual securities. The Fund does not currently intend to
write or purchase options on stock indices.
While there is no limit on the amount of the Fund's assets which may be
invested in covered call options, the Fund will not invest more than 2% of its
net assets in put options. The Fund will only use Exchange-traded options.
Call Options
Writing Covered Call Options--A covered call option obligates the Fund
to sell one of its securities for an agreed price up to an agreed date. When
the Fund writes a call, it receives a premium and agrees to sell the callable
securities to a purchaser of a corresponding call during the call period
(usually not more than nine months) at a fixed exercise price regardless of
market price changes during the call period. The advantage is that the Fund
receives premium income for the limited purpose of offsetting the costs of
purchasing put options
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or offsetting any capital loss or decline in market value of the security.
However, if the Manager's forecast is wrong, the Fund may not fully
participate in the market appreciation if the security's price rises.
Writing a Call Option on Stock Indices--Writing a call option on stock
indices is similar to the writing of a call option on an individual stock.
Stock indices used will include, but not be limited to, the S&P 500, the S&P
100 Index ("S&P 100") and the S&P Over-The-Counter ("OTC") 250.
Put Options
Purchasing a Put Option--A put option gives the Fund the right to sell
one of its securities for an agreed price up to an agreed date. The advantage
is that the Fund can be protected should the market value of the security
decline. However, the Fund must pay a premium for this right which would be
lost if the option is not exercised.
Purchasing a Put Option on Stock Indices--Purchasing a protective put
option on stock indices is similar to the purchase of protective puts on an
individual stock. Indices used will include, but not be limited to, the S&P
500, the S&P 100 and the S&P OTC 250.
Closing Transactions--Closing transactions essentially let the Fund
offset a put option or covered call option prior to its exercise or
expiration. If the Fund cannot effect a closing transaction, it may have to
hold a security it would otherwise sell or deliver a security it might want to
hold.
* * *
Borrowing
Although the Fund is permitted under certain circumstances to borrow
money, the Fund normally does not do so. The Fund will not purchase new
securities while any borrowings are outstanding.
Repurchase Agreements
The Fund may use repurchase agreements that are at least 100%
collateralized by securities in which the Fund can invest directly, including
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities. Repurchase agreements help the Fund to invest cash on a
temporary basis. Under a repurchase agreement, the Fund acquires ownership and
possession of a security, and the seller agrees to buy the security back at a
specified time and higher price. If the seller is unable to repurchase the
security, the Fund could experience delays in liquidating the securities. To
minimize this possibility, the Manager, pursuant to direction from Equity
Funds, II, Inc.'s Board of Directors, considers the creditworthiness of the
banks and dealers with whom it enters into repurchase agreements.
* * *
Part B sets forth more specific investment restrictions, some of which
limit the percentage of assets that may be invested in certain types of
securities.
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APPENDIX A--RATINGS
The Fund has the ability to invest up to 15% of its net assets in high
yield, high risk fixed-income securities. The table set forth below shows the
assets composition, based on rating categories, of such securities held by the
Fund. Certain securities may not be rated because the rating agencies were
either not asked to provide ratings (e.g., many issuers of privately placed
bonds do not seek ratings) or because the rating agencies declined to provide
a rating for some reason, such as insufficient data. The table below shows the
percentage of the Fund's high yield, high risk securities which are not rated.
The information contained in the table was prepared based on a dollar weighted
average of the Fund's portfolio composition based on month end data for the
fiscal year ended November 30, 1996. The paragraphs following the table
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.
Rating Moody's Average Weighted
and/or Percentage of
S&P Portfolio
-------------- ----------------
Baa/BBB 0.15%
Ba/BB 2.47%
B/B 6.99%
Not Rated/Other 0.20%
General Rating Information
Bonds
Excerpts from Moody's description of its bond ratings: Aaa--judged to be
the best quality. They carry the smallest degree of investment risk;
Aa--judged to be of high quality by all standards; A--possess favorable
attributes and are considered "upper medium" grade obligations;
Baa--considered as medium grade obligations. 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; Ba--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--generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small;
Caa--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--represent obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings; C--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.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal
and interest; AA--also qualify as high grade obligations, and in the majority
of instances differ from AAA issues only in a small degree; A--strong ability
to pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest
and repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such
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debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions; C--reserved for income bonds on which no interest is being paid;
D--in default, and payment of interest and/or repayment of principal is in
arrears.
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For more information contact the Delaware Group at 800-828-5052.
INVESTMENT MANAGER
Delaware Management Company, Inc.
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.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
Bankers Trust Company
One Bankers Trust Plaza
New York, NY 10006
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DECATUR INCOME FUND INSTITUTIONAL
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P R O S P E C T U S
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FEBRUARY 24, 1997
DELAWARE
GROUP
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