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DECATUR INCOME FUND PROSPECTUS
INSTITUTIONAL JANUARY 30, 1998
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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 investment 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 January 30, 1998, 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 ("SEC"). 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. The SEC also maintains a Web
site (http://www.sec.gov) that contains Part B, material incorporated by
reference into Equity Funds II, Inc.'s registration statement, and other
information regarding registrants that electronically file with the SEC.
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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.
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TABLE OF CONTENTS
Cover Page Redemption and Exchange
Synopsis Dividends and Distributions
Summary of Expenses Taxes
Financial Highlights Calculation of Net Asset Value Per Share
Investment Objective and Policies Management of the Fund
Suitability Other Investment Policies and Risk Considerations
Investment Strategy Appendix A-Ratings
Classes of Shares
How to Buy Shares
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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 THE PRINCIPAL AMOUNT INVESTED. 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 Policies 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.
The Fund may invest up to 20% of its assets in foreign securities,
although the Fund presently anticipates doing so. Such investments involve
certain risk and opportunity considerations not typically associated with
investing in United States companies. See Foreign Securities under Other
Investment Policies and Risk Considerations.
Investment Manager, Distributor and Transfer 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
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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
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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)
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Management Fees........................................... 0.49%
12b-1 Fees................................................ None
Other Operating Expenses.................................. 0.19%
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Total Operating Expenses......................... 0.68%
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*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 $85
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.
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.
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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. 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 its 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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Decatur Income Fund Institutional Class
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Period
1/13/94
Year Ended through
11/30/97 11/30/96 11/30/95 11/30/94(2) 11/30/94(1) 11/30/93(1)
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Net Asset Value, Beginning of Period $21.31 $19.06 $15.59 $16.72 $18.24 $17.20
Income From Investment Operations
Net Investment Income ................. 0.65 0.69 0.71 0.59 0.67 0.78
Net Gains (Losses) on Securities
(both realized and unrealized)...... 3.93 3.62 3.92 (1.10) (0.73) 1.79
------ ------ ------ ------ ------ ------
Total From Investment Operations 4.58 4.31 4.63 (0.51) (0.06) 2.57
------ ------ ------ ------ ------ ------
Less Distributions
Dividends (from net investment income) (0.64) (0.72) (0.74) (0.62) (0.86) (0.68)
Distributions (from capital gains) (2.68) (1.34) (0.42) none (1.75) (0.85)
------ ------ ------ ------ ------ ------
Total Distributions............... (3.32) (2.06) (1.16) (0.62) (2.61) (1.53)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period......... $22.57 $21.31 $19.06 $15.59 $15.57 $18.24
====== ====== ====== ====== ====== ======
Total Return........................... 25.02% 24.65% 31.14% (0.45%) (0.57%)(3) 15.85%(3)
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Ratios/Supplemental Data
Net Assets, End of Period (000's omitted) $278,384 $244,048 $211,409 $182,105 $1,153,884 $1,512,194
Ratio of Expenses to Average Daily Net Assets 0.68% 0.69% 0.74% 0.70% 0.81% 0.71%
Ratio of Net Investment Income to Average
Daily Net Assets.................... 3.07% 3.56% 4.16% 4.03% 3.92% 4.34%
Portfolio Turnover Rate................ 90% 101% 74% 92% 92% 80%
Average Commission Rate Paid (4)....... $0.060 $0.060 N/A N/A N/A N/A
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Decatur Income Fund Institutional Class
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Year Ended
11/30/92(1) 11/30/91(1) 11/30/90(1) 11/30/89(1) 11/30/88(1)
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Net Asset Value, Beginning of Period $15.76 $14.53 $19.07 $16.89 $15.86
Income From Investment Operations
Net Investment Income ................. 0.78 0.83 0.93 1.00 0.76
Net Gains (Losses) on Securities
(both realized and unrealized)...... 1.47 1.37 (2.93) 2.25 2.75
------ ------ ------ ------ ------
Total From Investment Operations 2.25 2.20 (2.00) 3.25 3.51
------ ------ ------ ------ ------
Less Distributions
Dividends (from net investment income) (0.81) (0.97) (1.05) (0.81) (0.73)
Distributions (from capital gains) none none (1.49) (0.26) (1.75)
------ ------ ------ ------ ------
Total Distributions............... (0.81) (0.97) (2.54) (1.07) (2.48)
------ ------ ------ ------ ------
Net Asset Value, End of Period......... $17.20 $15.76 $14.53 $19.07 $16.89
====== ====== ====== ====== ======
Total Return........................... 14.55%(3 15.46%(3) (12.04%)(3) 19.84%(3) 25.20%(3)
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Ratios/Supplemental Data
Net Assets, End of Period (000's omitted) $1,508,206 $1,579,521 $1,560,641 $1,848,129 $1,517,445
Ratio of Expenses to Average Daily Net Assets 0.72% 0.70% 0.70% 0.67% 0.73%
Ratio of Net Investment Income to Average
Daily Net Assets.................... 4.55% 5.18% 5.78% 5.48% 4.80%
Portfolio Turnover Rate................ 79% 78% 44% 38% 39%
Average Commission Rate Paid (4)....... N/A N/A N/A N/A N/A
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(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.
(4) Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period for which there was a
commission charged.
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INVESTMENT OBJECTIVE AND POLICIES
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 investment objective of Decatur Income 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,
Global and European Depositary Receipts), are under continuous study, and the
management regularly transfers investments between securities or types of
securities in carrying out its investment policy. Although the Fund may invest
up to 20% of its total assets in foreign securities, the Manager has no present
intention of doing so. See Foreign Securities under Other Investment Policies
and Risk Considerations.
The Fund may enter into options and futures transactions for hedging
purposes to attempt to counterbalance portfolio volatility. See Futures
Contracts and Option under Other Investment Policies and Risk Considerations.
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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. To the extent the Fund engages in short-term trading in
attempting to achieve its objective, it may increase the turnover rate and incur
larger brokerage commissions and other expenses than might otherwise be the
case.
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.
Although the Fund will constantly strive to attain its investment
objective, there can be no assurance that it will be attained.
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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. Class A,
Class B and Class C Shares of the Fund may be purchased through authorized
investment dealers or directly by contacting the Fund or its Distributor. Class
A Shares, Class B Shares and Class C Shares may have different sales charges and
other expenses which may affect performance. 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 is the date the order is received by the Fund, its agent
or designee. The effective date of a direct purchase is the day your wire,
electronic transfer or check is received, unless it is received after the
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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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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 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 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
although, in the case of an exchange, a sales charge may apply. 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(s)
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 certificate(s).
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 once a year 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.
On August 5, 1997, President Clinton signed into law the Taxpayer Relief
Act of 1997 (the "1997 Act"). This new law makes sweeping changes in the
Internal Revenue Code (the "Code"). Because many of these changes are complex,
and only indirectly affect each Fund and its distributions to you, they are
discussed in Part B. Changes in the treatment of capital gains, however, are
discussed in this section.
The Fund intends to qualify as a regulated investment company under
Subchapter M of 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, 1997, 34% 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.
The Treatment of Capital Gain Distributions under the Taxpayer Relief
Act of 1997
The 1997 Act creates a category of long-term capital gain for individuals
that will be taxed at new lower tax rates. For investors who are in the 28% or
higher federal income tax brackets, these gains will be taxed at a maximum rate
of 20%. For investors who are in the 15% federal income tax bracket, these gains
will be taxed at a maximum rate of 10%. Capital gain distributions will qualify
for these new maximum tax rates, depending on when the Fund's securities were
sold and how long they were held by the Fund before they were sold. Investors
who want more information on holding periods and other qualifying rules relating
to these new rates should review the expanded discussion in Part B, or should
contact their own tax advisers.
Equity Funds II, Inc. will advise you in its annual information reporting
at calendar year end of the amount of its capital gain distributions which will
qualify for these maximum federal tax rates.
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
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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 the federal taxes described above, shareholders may or may
not be subject to various state and local taxes. For example, distributions of
interest income and capital gains realized from certain types of U.S. government
securities may be exempt from state personal income taxes. Because investors'
state and local taxes may be different than the federal taxes described above,
investors should consult their own tax advisers.
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.
Equity Funds II, Inc. 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, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $39 billion in assets in the various
institutional (approximately $23,274,532,000) and investment company
(approximately $16,181,491,000) 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, 1997, investment management fees paid by the Fund were 0.49% of its
average daily net assets.
The directors of Equity Funds II, Inc. annually review fees paid to the
Manager.
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 27 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 Boards of Directors, is a graduate
of Brown University and attended
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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 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%.
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 shares of funds in the Delaware Group of funds in
placing portfolio orders and may place orders with broker/dealers that have
agreed to defray certain expenses of such funds, 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. 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 directors of Equity Funds II, Inc. annually review service fees
paid to the Distributor and the Transfer Agent. 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, 1997, the ratio of operating expenses to average daily net assets
for the Class was 0.68%.
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 Social Awareness 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 ("1933 Act"). Rule 144A exempts
many privately placed and legally restricted securities from the registration
requirements of the 1933 Act and permits such securities to be freely traded
among certain institutional buyers such as the Funds. The Fund may invest no
more than 10% of the value of its net assets in illiquid securities. Illiquid
securities, for purposes of this policy, include repurchase agreements maturing
in more than seven days.
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
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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 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.
Securities Lending Activities
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 management for the Fund.
Foreign Securities
The Fund may invest up to 20% of its assets in foreign securities
(which may include American, Global and European Depositary Receipts), although
the Manager does not presently anticipate doing so. Foreign markets may be more
volatile than U.S. markets. Such investments involve sovereign risk in addition
to the normal risks associated with American securities. These risks include
political risks, foreign taxes and exchange controls and currency fluctuations.
For example, foreign portfolio investments may fluctuate in value due to changes
in currency rates (i.e., the value of foreign investments would increase with a
fall in the value of the dollar, and decrease with a rise in the value of the
dollar) and control regulations apart from market fluctuations. The Fund may
also experience delays in foreign securities settlement.
Depositary Receipts
The Fund may make foreign investments through the purchase and sale of
sponsored or unsponsored American, European and Global Depositary Receipts
("Depositary Receipts"). Depositary Receipts are receipts typically issued by a
U.S. or foreign bank or trust company which evidence ownership of underlying
securities issued by a foreign corporation. "Sponsored" Depositary Receipts are
issued jointly by the issuer of the underlying security and a depository,
whereas "unsponsored" Depositary Receipts are issued without participation of
the issuer of the deposited security. Holders of unsponsored Depositary Receipts
generally bear all the costs of such facilities and the depository of an
unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through voting rights to the holders of such receipts in respect of the
deposited securities. Therefore, there may not be a correlation between
information concerning the issuer of the security and the market value of an
unsponsored Depositary Receipt. Investments in Depositary Receipts involve risks
similar to those accompanying direct investments in foreign securities.
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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."
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
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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.
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
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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 a Covered Call Option on Securities--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 or offsetting any capital loss or decline in the
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.
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(DIF/DIFTR-IC)
* * *
Borrowing from Banks
The Fund may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Fund will not borrow money in excess
of one-third of the value of its net assets. The Fund has no intention of
increasing its net income through borrowing. Any borrowing will be done from a
bank and, to the extent that such borrowing exceeds 5% of the value of the
Fund's net 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 Sundays or holidays, or such longer
period as the Securities and Exchange Commission 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
pledge more than 10% of its net assets, or issue senior securities as defined in
the 1940 Act, except for notes to banks. Investment securities will normally not
be purchased while the Fund has an outstanding borrowing.
Repurchase Agreements
In order to invest its short-term cash reserves or when in a temporary
defensive posture, the Fund may enter into repurchase agreements with banks or
broker/dealers deemed to be creditworthy by its Adviser, under guidelines
approved by the Board of Directors. A repurchase agreement is a short-term
investment in which the purchaser (i.e., the Fund) 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.
Generally, repurchase agreements are of short duration, often less than one week
but on occasion for longer periods. No more than 10% of the Fund's assets may be
invested in illiquid securities, including repurchase agreements of over seven
days' maturity. Should an issuer of a repurchase agreement fail to repurchase
the underlying security, the loss, if any, would be the difference between the
repurchase price and the market value of the security. The Fund will limit its
investments in repurchase agreements to those which its Adviser under guidelines
of the Board of Directors determines to present minimal credit risks and which
are of high quality. In addition, the Fund must have collateral of at least 102%
of the repurchase price, including the portion representing the Fund's yield
under such agreements, which is monitored on a daily basis.
* * *
Part B describes certain of these investment policies and risk
considerations. In addition, Part B sets forth other investment policies, risk
considerations and more specific investment restrictions.
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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, 1997. 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-%
Ba/BB 2.67%
B/B 10.46%
Not Rated/Other 0.43%
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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JANUARY 30, 1998
DELAWARE
INVESTMENTS
