<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
File No. 2-37707
-----
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----
-----
Pre-Effective Amendment No.
------- -----
-----
Post-Effective Amendment No. 54 X
------- -----
AND
-----
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-----
Amendment No. 54
------
DELAWARE GROUP DELCHESTER HIGH-YIELD BOND FUND, INC.
(to be renamed Delaware Group Income Funds, Inc.)
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
1818 Market Street, Philadelphia, Pennsylvania 19103
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (215) 255-2923
--------------
George M. Chamberlain, Jr., 1818 Market Street, Philadelphia, PA 19103
- -------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Public Offering: September 30, 1996
------------------
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
------
X on September 30, 1996 pursuant to paragraph (b)
------
60 days after filing pursuant to paragraph (a)(1)
------
on (date) pursuant to paragraph (a)(1)
------
75 days after filing pursuant to paragraph (a)(2)
------
on (date) pursuant to paragraph (a)(2) of Rule 485
------
Registrant has registered an indefinite amount of securities
under the Securities Act of 1933 pursuant to Section 24(f)
of the Investment Company Act of 1940. Registrant's 24f-2 Notice
for its most recent fiscal year will be filed on or about September 30, 1996.
<PAGE>
--- C O N T E N T S ---
This Post-Effective Amendment No. 54 to Registration File No. 2-37707 includes
the following:
1. Facing Page
2. Contents Page
3. Cross-Reference Sheet
4. Part A - Prospectuses and Supplement*
5. Part B - Statement of Additional Information*
6. Part C - Other Information*
7. Signatures
* This Post-Effective Amendment relates to the Registrant's Delchester Fund
series - Delchester Fund A Class, Delchester Fund B Class, Delchester Fund C
Class and Delchester Fund Institutional Class. This Post-Effective Amendment
also relates to the Registrant's Strategic Income Fund series - Strategic
Income Fund A Class, Strategic Income Fund B Class, Strategic Income Fund C
Class and Strategic Income Fund Institutional Class. Shares of each Series
are described in separate prospectuses, however, they share a common
Statement of Additional Information and Part C.
<PAGE>
CROSS-REFERENCE SHEET*
PART A
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Delchester Fund
<S> <C> <C> <C>
A Class/ Institutional
B Class/ Class
C Class
1 Cover Page...................................................... Cover Page Cover Page
2 Synopsis........................................................ Synopsis; Synopsis;
Summary of Summary of
Expenses Expenses
3 Condensed Financial Information................................. Financial Financial
Highlights Highlights
4 General Description of Registrant .............................. Investment Investment
Objective and Objective and
Policies; Policies; Shares;
Shares; Other Investment
Other Policies and Risk
Investment Considerations
Policies
and Risk
Considerations
5 Management of the Fund ......................................... Management of Management of the
the Fund Fund
6 Capital Stock and Other Securities ............................. The Delaware Dividends and
Difference; Distributions;
Dividends and Taxes; Shares
Distributions;
Taxes; Shares
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET*
PART A
(Continued)
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Delchester Fund
<S> <C> <C> <C>
A Class/ Institutional
B Class/ Class
C Class
7 Purchase of Securities Being Offered............................ Cover; Cover;
How to Buy How to Buy
Shares; Shares;
Calculation of Net Asset Value;
Offering Price Management of
and Net Asset the Fund
Value;
Management of
the Fund
8 Redemption or Repurchase........................................ How to Buy How to Buy
Shares; Shares;
Redemption Redemption
and Exchange and Exchange
9 Legal Proceedings............................................... None None
</TABLE>
* This filing relates to Registrant's Delchester Fund A Class, Delchester
Fund B Class, Delchester Fund C Class and Delchester Fund Institutional
Class of Delchester Fund and the Strategic Income Fund A Class, Strategic
Income Fund B Class, Strategic Income Fund C Class and Strategic Income
Fund Institutional Class of Strategic Income Fund. Shares of each Series
are described in separate prospectuses, however, they share a common
Statement of Additional Information and Part C.
<PAGE>
CROSS-REFERENCE SHEET*
PART A
(Continued)
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Strategic Income Fund
<S> <C> <C> <C>
A Class/ Institutional
B Class/ Class
C Class
1 Cover Page...................................................... Cover Page Cover Page
2 Synopsis........................................................ Synopsis; Synopsis;
Summary of Summary of
Expenses Expenses
3 Condensed Financial Information................................. N/A N/A
4 General Description of Registrant .............................. Investment Investment
Objective and Objective and
Policies; Policies; Shares;
Shares; Other Other Investment
Investment Policies and Risk
Policies and Considerations
Risk
Considerations
5 Management of the Fund ......................................... Management of Management of the
the Fund Fund
6 Capital Stock and Other Securities ............................. The Delaware Dividends and
Difference; Distributions;
Dividends and Taxes; Shares
Distributions;
Taxes; Shares
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET*
PART A
(Continued)
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Strategic Income Fund
<S> <C> <C> <C>
A Class/ Institutional
B Class/ Class
C Class
7 Purchase of Securities Being Offered............................ Cover; Cover;
How to How to
Buy Shares; Buy Shares;
Calculation of Calculation of
Offering Price Net Asset Value
and Net Asset Per Share;
Value Management of
Per Share; the Fund
Management of
the Fund
8 Redemption or Repurchase........................................ How to Buy How to Buy
Shares; Shares;
Redemption and Redemption and
Exchange Exchange
9 Legal Proceedings............................................... None None
</TABLE>
* This filing relates to Registrant's Delchester Fund A Class, Delchester
Fund B Class, Delchester Fund C Class and Delchester Fund Institutional
Class of Delchester Fund and the Strategic Income Fund A Class, Strategic
Income Fund B Class, Strategic Income Fund C Class and Strategic Income
Fund Institutional Class of Strategic Income Fund. Shares of each Series
are described in separate prospectuses, however, they share a common
Statement of Additional Information and Part C.
<PAGE>
CROSS REFERENCE SHEET
PART B
<TABLE>
<CAPTION>
Location in Statement
Item No. Description of Additional Information
- -------- ----------- -------------------------
<S> <C> <C>
10 Cover Page...................................................... Cover Page
11 Table of Contents............................................... Table of Contents
12 General Information and History................................. General Information
13 Investment Objectives and Policies.............................. Investment Objectives
and Policies
14 Management of the Registrant.................................... Officers and Directors
15 Control Persons and Principal Holders
of Securities................................................... Officers and Directors
16 Investment Advisory and Other Services.......................... Plans Under Rule 12b-1
for the Fund Classes
(under Purchasing Shares);
Investment Management
Agreements and
Sub-Advisory Agreement;
Officers and Directors;
General Information;
Financial Statements
17 Brokerage Allocation............................................ Trading Practices
and Brokerage
18 Capital Stock and Other Securities.............................. Capitalization and
Noncumulative Voting
(under General Information)
19 Purchase, Redemption and Pricing of
Securities Being Offered........................................ Purchasing Shares;
Determining Offering Price
and Net Asset Value;
Redemption and Repurchase;
Exchange Privilege
20 Tax Status...................................................... Taxes
21 Underwriters ................................................... Purchasing Shares
22 Calculation of Performance Data................................. Performance Information
23 Financial Statements............................................ Financial Statements
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
PART C
<TABLE>
<CAPTION>
Location in
Item No. Description Part C
- -------- ----------- -----------
<S> <C> <C>
24 Financial Statements and Exhibits............................... Item 24
25 Persons Controlled by or under Common
Control with Registrant......................................... Item 25
26 Number of Holders of Securities................................. Item 26
27 Indemnification................................................. Item 27
28 Business and Other Connections of
Investment Adviser.............................................. Item 28
29 Principal Underwriters.......................................... Item 29
30 Location of Accounts and Records................................ Item 30
31 Management Services............................................. Item 31
32 Undertakings.................................................... Item 32
</TABLE>
<PAGE>
- ------------------------
DELCHESTER FUND
- ------------------------
A CLASS
B CLASS
C CLASS
- ------------------------
PROSPECTUS
- ------------------------
SEPTEMBER 30, 1996
[Photo of a Waterwell]
DELAWARE
GROUP
---------
<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, tax-free funds, money market funds,
global and international funds and closed-end equity funds give investors the
ability to create a portfolio that fits their personal financial goals. For more
information, contact your financial adviser or call Delaware Group at
800-523-4640.
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
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
<PAGE>
DELCHESTER FUND
A CLASS SHARES
B CLASS SHARES PROSPECTUS
C CLASS SHARES SEPTEMBER 30, 1996
--------------------------------------------------
1818 Market Street, Philadelphia, PA 19103
For Prospectus and Performance:
Nationwide 800-523-4640
Information on Existing Accounts:
(SHAREHOLDERS ONLY)
Nationwide 800-523-1918
Dealer Services:
(BROKER/DEALERS ONLY)
Nationwide 800-362-7500
Representatives of Financial Institutions:
Nationwide 800-659-2259
This Prospectus describes the Delchester Fund series (the "Fund") of
Delaware Group Income Funds, Inc. ("Income Funds, Inc.") (formerly known as
Delaware Group Delchester High-Yield Bond Fund, Inc.), a professionally-managed
mutual fund of the series type. The Fund's objective is to seek as high a
current income as is consistent with providing reasonable safety.
THIS FUND INVESTS UP TO 100% OF ITS ASSETS IN LOWER RATED FIXED-INCOME
SECURITIES, COMMONLY KNOWN AS "JUNK BONDS," WHICH INVOLVE GREATER RISKS,
INCLUDING DEFAULT RISKS, THAN HIGHER RATED FIXED-INCOME SECURITIES. PURCHASERS
SHOULD CAREFULLY ASSESS THESE RISKS BEFORE INVESTING IN THIS FUND. SEE
INVESTMENT OBJECTIVE AND POLICIES, RISK FACTORS, AND APPENDIX B--RATINGS.
The Fund currently offers three retail classes of shares: Delchester
Fund A Class ("Class A Shares"), Delchester Fund B Class ("Class B Shares") and
Delchester Fund C Class ("Class C Shares") (individually, a "Class" and
collectively, the "Classes"). These alternatives permit an investor to choose
the method of purchasing shares that is most suitable for his or her needs.
-1-
<PAGE>
Class A Shares may be purchased at the public offering price, which is
equal to the next determined net asset value per share, plus a front-end sales
charge. Class A Shares are subject to a maximum front-end sales charge of 4.75%
and annual 12b-1 Plan expenses of up to .30%.
Class B Shares may be purchased at a price equal to the next determined
net asset value per share. Class B Shares are subject to a contingent deferred
sales charge ("CDSC") which may be imposed on redemptions made within six years
of purchase and annual 12b-1 Plan expenses of 1%, which are assessed against the
Class B Shares for approximately eight years after purchase. See Automatic
Conversion of Class B Shares under Classes of Shares.
Class C Shares may be purchased at a price equal to the next determined
net asset value per share. Class C Shares are subject to a CDSC which may be
imposed on redemptions made within 12 months of purchase and annual 12b-1 Plan
expenses of 1%, which are assessed against the Class C Shares for the life of
the investment.
In choosing the most suitable Class, an investor should consider the
differences among the Classes, including the effect of sales charges and 12b-1
Plan expenses, given the amount of the purchase and the length of time the
investor expects to hold the shares, among other circumstances. See Summary of
Expenses and Classes of Shares.
This Prospectus sets forth information that you should read and
consider before you invest. Please retain it for future reference. Part B of
Income Funds, Inc.'s registration statement, dated September 30, 1996, 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 numbers. The Fund's financial statements appear in its Annual Report,
which will accompany any response to requests for Part B.
The Fund also offers the Delchester Fund Institutional Class, which is
available for purchase only by certain investors. A prospectus for the
Delchester Fund Institutional Class can be obtained by writing to Delaware
Distributors, L.P. at the above address or by calling the above number.
-2-
<PAGE>
TABLE OF CONTENTS
Cover Page How to Buy Shares
Synopsis Redemption and Exchange
Summary of Expenses Dividends and
Financial Highlights Distributions
Investment Objective and Policies Taxes
Suitability Calculation of Offering
Investment Strategy Price and Net Asset
Risk Factors Value Per Share
Youth and Volatility of the Management of the Fund
High-Yield Market Other Investment
Redemptions Policies and Risk
Liquidity and Valuation Considerations
The Delaware Difference Appendix A -- Investment
Plans and Services Illustrations
Retirement Plannin Appendix B -- Ratings
Classes of Shares
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.
-3-
<PAGE>
SYNOPSIS
Investment Objective and Risk Factors
The objective of the Fund is to seek as high a current income as is
consistent with providing reasonable safety by investing principally in
corporate bonds, and also in U.S. government securities and commercial paper.
For further details, see Investment Objective and Policies. This Fund invests
primarily in high-yield securities (junk bonds) and greater risks may be
involved with an investment in the Fund than an investment in a mutual fund
comprised primarily of investment grade bonds. See Risk Factors.
Investment Manager, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") is the investment
manager for the Fund. The Manager furnishes investment management services to
the Fund, subject to the supervision and direction of Income Funds, Inc.'s Board
of Directors. Under the Investment Management Agreement, the annual compensation
paid to the Manager is equal to .60% on the first $500 million of average daily
net assets, .575% on the next $250 million and .55% on the average daily net
assets in excess of $750 million, less the Fund's proportionate share of all
directors' fees paid to the unaffiliated directors by Income Funds, Inc. See
Management of the Fund.
The Manager also provides investment management services to certain of
the 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 Management of the Fund.
Sales Charges
The price of Class A Shares includes a maximum front-end sales charge
of 4.75% of the offering price, which, based on the net asset value per share of
the Class A Shares as of the end of Income Funds, Inc.'s most recent fiscal
year, is equivalent to 5.05% of the amount invested. The front-end sales charge
is reduced on certain transactions of at least $100,000 but under $1,000,000.
There is no front-end sales charge on purchases of $1,000,000 or more. Class A
Shares are subject to annual 12b-1 Plan expenses.
-4-
<PAGE>
The price of Class B Shares is equal to the net asset value per share.
Class B Shares are subject to a CDSC of: (i) 4% if shares are redeemed within
two years of purchase; (ii) 3% if shares are redeemed during the third or fourth
year following purchase; (iii) 2% if shares are redeemed during the fifth year
following purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. Class B Shares are subject to annual 12b-1 Plan expenses for
approximately eight years after purchase. See Automatic Conversion of Class B
Shares under Classes of Shares.
The price of Class C Shares is equal to the net asset value per share.
Class C Shares are subject to a CDSC of 1% if shares are redeemed within 12
months of purchase. Class C Shares are subject to annual 12b-1 Plan expenses for
the life of the investment.
See Classes of Shares and Distribution (12b-1) and Service under
Management of the Fund.
Purchase Amounts
Generally, the minimum initial investment in any Class is $1,000.
Subsequent investments must generally be at least $100.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. An investor may exceed these maximum purchase
limitations for Class B Shares and Class C Shares by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and Class A Shares are subject to lower annual 12b-1 Plan expenses than
Class B and Class C Shares and generally are not subject to a CDSC. The minimum
and maximum purchase amounts for retirement plans may vary. See How to Buy
Shares.
Redemption and Exchange
Class A Shares of the Fund may be redeemed or exchanged at the net
asset value calculated after receipt of the redemption or exchange request.
Neither the Fund nor the Distributor assesses a charge for redemptions or
exchanges of Class A Shares, except for certain redemptions of shares purchased
at net asset value, which may be subject to a CDSC if a dealer's commission was
paid in connection with such purchases. See Front-End Sales Charge Alternative -
Class A Shares under Classes of Shares.
-5-
<PAGE>
Class B Shares and Class C Shares may be redeemed or exchanged at the
net asset value calculated after receipt of the redemption or exchange request
subject, in the case of redemptions, to any applicable CDSC. Neither the Fund
nor the Distributor assesses any charges other than the CDSC for redemptions or
exchanges of Class B or Class C Shares. There are certain limitations on an
investor's ability to exchange shares between the various classes of shares that
are offered. See Redemption and Exchange.
Open-End Investment Company
Income Funds, Inc., which was organized as a Maryland corporation in
1983, is an open-end management investment company and the Fund's portfolio of
assets is diversified as defined by the Investment Company Act of 1940 (the
"1940 Act"). Income Funds, Inc. was previously organized as a Delaware
corporation in 1970. See Shares under Management of the Fund.
-6-
<PAGE>
SUMMARY OF EXPENSES
A general comparison of the sales arrangements and other expenses
applicable to Class A, Class B and Class C Shares follows:
Class A Class B Class C
Shareholder Transaction Expenses Shares Shares Shares
- ------------------------------------------------------------------------
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price). . . . . . . . . 4.75% None None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of offering price) . . . None None None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds,
as applicable). . . . . . . . . . . None* 4.00%* 1.00%*
Redemption Fees. . . . . . . . . . . . None** None** None**
Annual Operating Expenses
(as a percentage of Class A Class B Class C
average daily net assets) Shares Shares Shares
- ------------------------------------------------------------------------
Management Fees . . . . . . . . . . . 0.57% 0.57% 0.57%
12b-1 Plan Expenses
(including service fees) . . . . . 0.25%+/++ 1.00%++ 1.00%++
Other Operating Expenses. . . . . . . 0.20% 0.20% 0.20%+++
----- ----- -----
Total Operating Expenses . . . . 1.02%+ 1.77% 1.77%
===== ===== =====
The purpose of the above tables is to assist the investor in
understanding the various costs and expenses that an investor in each Class will
bear directly or indirectly.
*Class A purchases of $1 million or more may be made at net asset
value. However, if in connection with any such purchase a dealer commission is
paid to the financial adviser through whom such purchase is effected, a CDSC of
1% will be imposed on certain redemptions within 12 months of purchase ("Limited
CDSC"). Class B Shares are subject to a CDSC of: (i) 4% if shares are redeemed
within two years of purchase; (ii) 3% if shares are redeemed during the third or
fourth year following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; (iv) 1% if
-7-
<PAGE>
shares are redeemed during the sixth year following purchase; and (v) 0%
thereafter. Class C Shares are subject to a CDSC of 1% if the shares are
redeemed within 12 months of purchase. See Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange; Deferred Sales Charge Alternative Class B Shares and
Level Sales Charge Alternative - Class C Shares under Classes of Shares.
**CoreStates Bank, N.A. currently charges $7.50 per
redemption for redemptions payable by wire.
+The actual 12b-1 Plan expenses to be paid and, consequently, the Total
Operating Expenses of the Class A Shares, may vary because of the formula
adopted by the Board of Directors for use in calculating the 12b-1 Plan expenses
for this Class beginning June 1, 1992, but the 12b-1 Plan expenses will not be
more than .30% nor less than .10%. See Distribution (12b- 1) and Service under
Management of the Fund and Part B.
++Class A Shares, Class B Shares and Class C Shares are subject to separate
12b-1 Plans. Long-term shareholders may pay more than the economic equivalent of
the maximum front-end sales charges permitted by rules of the National
Association of Securities Dealers, Inc. (the "NASD"). See Distribution (12b-1)
and Service under Management of the Fund.
+++"Other Operating Expenses" for Class C Shares are estimates based on the
actual expenses incurred by the Class B Shares for the fiscal year ended July
31, 1996.
For expense information about the Delchester Fund Institutional Class,
see the separate prospectus relating to that class.
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, (2) redemption and no redemption at the end of each time period
and (3) for Class B Shares and Class C Shares, payment of a CDSC at the time of
redemption, if applicable.
-8-
<PAGE>
<TABLE>
<CAPTION>
Assuming Redemption Assuming No Redemption
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A
Shares $57(1) $78 $101 $166 $57 $78 $101 $166
Class B
Shares $58 $86 $116 $189(2) $18 $56 $96 $189(2)
Class C
Shares $28 $56 $96 $208 $18 $56 $96 $208
</TABLE>
(1) Generally, no redemption charge is assessed upon
redemption of Class A Shares. Under certain
circumstances, however, a Limited CDSC, which has not
been reflected in this calculation, may be imposed on
certain redemptions within 12 months of purchase. See
Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange.
(2) At the end of approximately eight years after purchase,
Class B Shares will be automatically converted into
Class A Shares. The example above assumes conversion of
Class B Shares at the end of the eighth year. However,
the conversion may occur as late as three months after
the eighth anniversary of purchase, during which time
the higher 12b-1 Plan fees payable by Class B Shares
will continue to be assessed. Information for the ninth
and tenth years reflects expenses of the Class A Shares.
See Automatic Conversion of Class B Shares under Classes
of Shares for a description of the automatic conversion
feature.
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.
-9-
<PAGE>
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the
financial statements of Delaware Group Income Funds, Inc.
(formerly, Delaware Group Delchester High-Yield Bond 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, 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 Income Funds, Inc. upon
request at no charge.
- -------------------------------------------------------------
-10-
<PAGE>
Class A Shares
---------------------------------------------------------
Year Ended
7/31/96 7/31/95 7/31/94 7/31/93 7/31/92
Net Asset Value,
Beginning of
Period . . . . . . $6.280 $6.450 $7.070 $6.900 $6.260
Income From In-
- ---------------
vestment Operations
- -------------------
Net Investment
Income . . . . . . 0.628 0.668 0.744 0.774 0.781
Net Gains (Losses)
on Securities (both
realized and
unrealized). . . . (0.141) (0.167) (0.618) 0.165 0.640
------- ------- ------- ----- -----
Total From
Investment
Operations. . . 0.487 0.501 0.126 0.939 1.421
----- ----- ----- ----- -----
Less Distributions
- ------------------
Dividends from
Net Investment
Income . . . . . . (0.627) (0.671) (0.746) (0.769) (0.781)
Distributions
from Capital
Gains. . . . . . . none none none none none
Returns of
Capital. . . . . . none none none none none
---- ---- ---- ---- ----
Total Distri-
butions . . . . (0.627) (0.671) (0.746) (0.769) (0.781)
------- ------- ------- ------- -------
Net Asset Value,
End of Period. . . $6.140 $6.280 $6.450 $7.070 $6.900
====== ====== ====== ====== ======
- -------------------------------------------------------------
Total Return(3). . 8.10% 8.46% 1.60% 14.46% 23.94%
- ------------
- -------------------------------------------------------------
<PAGE>
Ratios/Supplemental
- -------------------
Data
- ----
Net Assets, End
of Period (000's
omitted)(4). . . . $973,939 $1,020,763 $983,569 $955,113 $760,290
Ratio of Expenses
to Average Daily
Net Assets . . . . 1.02% 1.09% 1.05% 1.04% 1.08%
Ratio of Net
Investment Income
to Average Daily
Net Assets . . . . 10.11% 10.77% 10.48% 11.17% 11.58%
Portfolio Turnover
Rate . . . . . . . 108% 92% 92% 72% 101%
-11-
<PAGE>
Class A Shares
----------------------------------------------------------
Year Ended
7/31/91(2) 7/31/90(2) 7/31/89(2) 7/31/88(1) 7/31/87(1)
Net Asset Value,
Beginning of
Period . . . . . . $6.300 $7.480 $7.750 $7.940 $8.070
Income From In-
- ---------------
vestment Operations
- -------------------
Net Investment
Income . . . . . . 0.805 0.880 0.911 0.923 0.948
Net Gains (Losses)
on Securities (both
realized and
unrealized). . . . (0.040) (1.180) (0.270) (0.188) (0.129)
------- ------- ------- ------- -----
Total From
Investment
Operations. . . 0.765 (0.300) 0.641 0.735 0.819
------- ----- ----- ----- -----
Less Distributions
- ------------------
Dividends from
Net Investment
Income . . . . . . (0.805) (0.880) (0.911) (0.925) (0.949)
Distributions
from Capital
Gains. . . . . . . none none none none none
Returns of
Capital. . . . . . none none none none none
---- ---- ---- ---- ----
Total Distri-
butions . . . . (0.805) (0.880) (0.911) (0.925) (0.949)
------- ------- ------- ------- -------
Net Asset Value,
End of Period. . . $6.260 $6.300 $7.480 $7.750 $7.940
====== ====== ====== ====== ======
- -------------------------------------------------------------
Total Return(3). . 14.51% (3.80%) 8.78% 10.04% 10.50%
- ------------
- -------------------------------------------------------------
<PAGE>
Ratios/Supplemental
- -------------------
Data
- ----
Net Assets, End
of Period (000's
omitted)(4). . . . $505,530 $531,802 $708,215 $572,690 $397,895
Ratio of Expenses
to Average Daily
Net Assets . . . . 1.20% 1.15% 1.15% 1.17% 1.23%
Ratio of Net
Investment Income
to Average Daily
Net Assets . . . . 14.15% 13.17% 12.00% 11.88% 11.29%
Portfolio Turnover
Rate . . . . . . . 38% 72% 66% 139% 149%
-12-
<PAGE>
- ---------------------------------------
(1) For the periods 1987-1988, the data are derived from
Delchester I class, restated to reflect the maximum 12b-
1 accrual of .30% payable by the Delchester Fund A Class
(formerly designated Delchester II class). Delchester I
class was converted into Delchester Fund class (known as
Delchester Fund A Class beginning May 2, 1994) on June
1, 1992, pursuant to a Plan of Recapitalization approved
by shareholders of Delchester I class.
(2) For the periods 1989-1991, the historical information
for Delchester Fund A Class has been shown. Delchester
Fund A Class was initially offered on November 2, 1987.
To simplify the presentation of fiscal year 1988 data,
for the period November 2, 1987 through July 31, 1988,
Delchester I class data have been substituted for that
of Delchester Fund A Class. With the exception of the
applicable 12b-1 payments, Delchester I class and
Delchester Fund A Class were identical for purposes of
data presentations.
(3) Does not reflect maximum front-end sales charge of 4.75%
nor the 1% Limited CDSC that would apply in the event of
certain redemptions within 12 months of purchase. See
Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange.
(4) All net assets of Delchester I class and Delchester Fund A Class have
been aggregated for the periods prior to June 1, 1992.
-13-
<PAGE>
Class B Shares Class C Shares
--------------------------------------- --------------
Period Period
5/2/94(1) 11/29/95(2)
Year Ended through through
7/31/96 7/31/95 7/31/94 7/31/96
Net Asset Value,
Beginning of
Period . . . . . . $6.280 $6.450 $6.730 $6.210
Income From In-
- ---------------
vestment Operations
- -------------------
Net Investment
Income . . . . . . 0.581 0.624 0.120 0.385
Net Gains (Losses)
on Securities (both
realized and
unrealized). . . . (0.141) (0.170) (0.280) (0.069)
------- ------- ------- -------
Total From
Investment
Operations. . . 0.440 0.454 (0.160) 0.316
----- ----- ------- -----
Less Distributions
- ------------------
Dividends from
Net Investment
Income . . . . . . (0.580) (0.624) (0.120) (0.386)
Distributions
from Capital
Gains. . . . . . . none none none none
Returns of
Capital. . . . . . none none none none
---- ---- ---- ----
Total Distri-
butions . . . . (0.580) (0.624) (0.120) (0.386)
------- ------- ------- -------
Net Asset Value,
End of Period. . . $6.140 $6.280 $6.450 $6.140
====== ====== ====== ======
- -------------------------------------------------------------
Total Return . . . 7.30%(3) 7.64%(3) (1) 5.20%(2)(3)
- ------------
- -------------------------------------------------------------
<PAGE>
Ratios/Supplemental
- -------------------
Data
- ----
Net Assets, End
of Period (000's
omitted) . . . . . $176,266 $111,860 $21,776 $4,953
Ratio of Expenses
to Average Daily
Net Assets . . . . 1.77% 1.82% 1.83%(1) 1.77%(2)
Ratio of Net
Investment Income
to Average Daily
Net Assets . . . . 9.36% 10.14% 9.70%(1) 9.36%(2)
Portfolio Turnover
Rate . . . . . . . 108% 92% 92% 108%
-14-
<PAGE>
- ------------------------------------------------------------------------------
(1) Date of initial public offering. Ratios have been annualized. Total
return has been omitted as management believes that such information
for this relatively short period is not meaningful.
(2) Date of initial public offering; ratios have been annualized but total
return has not been annualized. Total return for this short of a time
period may not be representative of longer-term results.
(3) Does not include any applicable CDSC. See Contingent
Deferred Sales Charge - Class B Shares and Class C
Shares.
-15-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
SUITABILITY
The Fund may be suitable for investors interested in high current
income flow. The net asset value of each Class may fluctuate in response to the
condition of individual companies and general market and economic conditions
and, as a result, the Fund is not appropriate for a short-term investor.
The types of securities in which the Fund invests are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as yield,
in making an investment decision. While investments in unrated, lower-rated and
restricted securities have the potential for higher yields, they are more
speculative and increase the credit risk of the Fund's portfolio. Changes in the
market value of portfolio securities will not affect interest income from such
securities, but will be reflected in the Fund's net asset value. Investors
should be willing to accept the risks, including the risk of net asset value
fluctuations, associated with investing in these securities.
The Fund's objective of high current income also may be suited for
longer term investments, such as tax-deferred retirement plans (e.g., IRA,
401(k), Profit Sharing, etc.), where the income stream can be left to compound
on a tax-deferred basis.
Ownership of Fund shares can reduce the bookkeeping and administrative
inconveniences that would be connected with direct purchases of the types of
securities in which the Fund invests. Investors should not consider a purchase
of Fund shares 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 in concert to create a more complete
investment program.
INVESTMENT STRATEGY
The objective of the Fund is to seek as high a current income as is
consistent with providing reasonable safety. The strategy is to invest primarily
in those securities having a liberal and consistent yield and those tending to
reduce the risk of market fluctuations. The Fund will invest at least 80% of its
assets at the time of purchase in:
(1) Corporate Bonds. The Fund will invest in both rated and unrated
bonds. Unrated bonds may be more speculative in nature than rated bonds; or
-16-
<PAGE>
(2) Government Securities. Securities of, or guaranteed by, the U.S.
government, its agencies or instrumentalities; or
(3) Commercial Paper. Commercial paper of companies having, at the time
of purchase, an issue of outstanding debt securities rated as described above or
commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group ("S&P") or
rated P-1 or P-2 by Moody's Investors Service, Inc. ("Moody's").
The Fund has consistently invested more than 80% of its assets in these
securities. The Fund must invest the remaining assets, if any, in
income-producing securities, including common stocks and preferred stocks, some
of which may have convertible features or attached warrants. Currently, the
Fund's assets are invested primarily in unrated corporate bonds and bonds rated
BB or lower by S&P or Ba or lower by Moody's.
The market values of fixed-income securities generally fall when
interest rates rise and, conversely, rise when interest rates fall. Lower-rated
and unrated fixed-income securities tend to reflect short-term corporate and
market developments to a greater extent than higher-rated fixed-income
securities, which react primarily to fluctuations in the general level of
interest rates. These lower-rated or unrated securities generally have higher
yields, but, as a result of factors such as reduced creditworthiness of issuers,
increased risks of default and a more limited and less liquid secondary market,
are subject to greater volatility and risk of loss of income and principal than
are higher-rated securities. The Manager will attempt to reduce such risk
through portfolio diversification, credit analysis, and attention to trends in
the economy, industries and financial markets.
The Fund may purchase privately-placed debt and other securities the
resale of which is restricted under applicable securities laws. Such securities
may be less liquid than securities that are not subject to resale restrictions.
The Fund will not purchase illiquid assets if more than 10% of its assets would
consist of such illiquid securities.
For temporary defensive purposes, the Fund may hold a substantial
portion of its assets in cash or short-term obligations. While the Fund is
permitted, it normally does not borrow money or invest in repurchase agreements,
except to invest cash balances.
-17-
<PAGE>
Although the Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained. The objective of the Fund may not
be changed without shareholder approval. For a description of the Fund's other
investment policies, see Other Investment Policies and Risk Considerations in
this Prospectus. Part B sets forth other investment restrictions.
RISK FACTORS
The Fund's assets may be invested primarily in bonds rated BBB or lower
by S&P or Baa or lower by Moody's and in unrated corporate bonds. See Appendix
B--Ratings to this Prospectus for more rating information. Investing in these
so-called "junk" or "high-yield" bonds entails certain risks, including the risk
of loss of principal, which may be greater than the risks involved in investment
grade bonds, and which should be considered by investors contemplating an
investment in the Fund. Such bonds are sometimes issued by companies whose
earnings at the time of issuance are less than the projected debt service on the
junk bonds. In addition to the considerations discussed elsewhere in this
Prospectus, those risks include the following:
YOUTH AND VOLATILITY OF THE HIGH-YIELD MARKET
Although the market for high-yield bonds has been in existence for many
years, including periods of economic downturns, the high-yield market grew
rapidly during the long economic expansion which took place in the United States
during the 1980s. During that economic expansion, the use of high-yield debt
securities to fund highly leveraged corporate acquisitions and restructurings
increased dramatically. As a result, the high-yield market grew substantially
during that economic expansion. Although experts disagree on the impact
recessionary periods have had and will have on the high-yield market, some
analysts believe a protracted economic downturn would severely disrupt the
market for high-yield bonds, would adversely affect the value of outstanding
bonds and would adversely affect the ability of high-yield issuers to repay
principal and interest. Those analysts cite volatility experienced in the
high-yield market in the past as evidence for their position. It is likely that
protracted periods of economic uncertainty would result in increased volatility
in the market prices of high-yield bonds, an increase in the number of
high-yield bond defaults and corresponding volatility in the Fund's net asset
value. At times in the past, uncertainty and volatility in the high-yield market
resulted in volatility in the Fund's net asset value.
-18-
<PAGE>
REDEMPTIONS
If, as a result of volatility in the high-yield market or other
factors, the Fund experiences substantial net redemptions of the Fund's shares
for a sustained period of time (i.e., more shares of the Fund are redeemed than
are purchased), the Fund may be required to sell securities without regard to
the investment merits of the securities to be sold. If the Fund sells a
substantial number of securities to generate proceeds for redemptions, the asset
base of the Fund will decrease and the Fund's expense ratio may increase.
LIQUIDITY AND VALUATION
The secondary market for high-yield securities is currently dominated
by institutional investors, including mutual funds and certain financial
institutions. There is generally no established retail secondary market for
high-yield securities. As a result, the secondary market for high-yield
securities is more limited and less liquid than other secondary securities
markets. The high-yield secondary market is particularly susceptible to
liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings and
loan crisis. A less liquid secondary market may have an adverse effect on the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. In addition, a less liquid
secondary market makes it more difficult for the Fund to obtain precise
valuations of the high-yield securities in its portfolio. During periods
involving such liquidity problems, judgment plays a greater role in valuing
high-yield securities than is normally the case. The secondary market for
high-yield securities is also generally considered to be more likely to be
disrupted by adverse publicity and investor perceptions than the more
established secondary securities markets. The Fund's privately placed high-yield
securities are particularly susceptible to the liquidity and valuation risks
outlined above.
-19-
<PAGE>
THE DELAWARE DIFFERENCE
PLANS AND SERVICES
The Delaware Difference is our commitment to provide you with superior
information and quality service on your investments in the Delaware Group of
funds.
SHAREHOLDER PHONE DIRECTORY
Investor Information Center
800-523-4640
Fund Information, Literature, Price, Yield and
Performance Figures
Shareholder Service Center
800-523-1918
Information on Existing Regular Investment Accounts and
Retirement Plan Accounts, Wire Investments, Wire
Liquidations, Telephone Liquidations and Telephone
Exchanges
Delaphone
800-362-FUND
(800-362-3863)
Performance Information
You can call the Investor Information Center at any time for current
yield information. Current yield and total return information may also be
included in advertisements and information given to shareholders. Yields are
computed on an annual basis over a 30-day period.
Shareholder Services
During business hours, you can call the Delaware Group's Shareholder
Service Center. Our representatives can answer any questions about your account,
the Fund, various service features and other funds in the Delaware Group.
Delaphone Service
Delaphone is an account inquiry service for investors with
Touch-Tone(R) phone service. It enables you to get information on your account
faster than the mailed statements and confirmations. Delaphone also provides
current performance information on the Fund, as well as other funds in the
Delaware Group. Delaphone is available seven days a week, 24 hours a day.
-20-
<PAGE>
Dividend Payments
Dividends, capital gains and other distributions are automatically
reinvested in your account, unless you elect to receive them in cash. You may
also elect to have the dividends earned in one fund automatically invested in
another Delaware Group fund with a different investment objective, subject to
certain exceptions and limitations. For more information, see Additional Methods
of Adding to Your Investment - Dividend Reinvestment Plan under How to Buy
Shares or call the Shareholder Service Center.
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 dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling the Shareholder Service Center.
Duplicate Confirmations
If your financial adviser or investment dealer is noted on your
investment application, we will send a duplicate confirmation to him or her.
This makes it easier for your adviser to help you manage your investments.
Tax Information
Each year, Income Funds, Inc. will mail to you information on the tax
status of your dividends and distributions.
MoneyLine Direct Deposit Service
If you elect to have your dividends and distributions paid in cash and
such dividends and distributions are in an amount of $25 or more, you may choose
the MoneyLine Direct Deposit Service and have such payments transferred from
your Fund account to your predesignated bank account. See Dividends and
Distributions. In addition, you may elect to have your Systematic Withdrawal
Plan payments transferred from your Fund account to your predesignated bank
account through this service. See Systematic Withdrawal Plans under Redemption
and Exchange. Your funds will normally be credited to your bank account two
business days after the payment date. There are no fees for this service. You
can initiate the MoneyLine Direct Deposit Service by completing an Authorization
Agreement. If your name and address are not identical to the name and address on
your Fund account, you must have your signature guaranteed. This service is not
available for retirement plans.
-21-
<PAGE>
Right of Accumulation
With respect to Class A Shares, the Right of Accumulation feature
allows you to combine the value of your current holdings of Class A Shares,
Class B Shares and Class C Shares of the Fund with the dollar amount of new
purchases of Class A Shares of the Fund to qualify for a reduced front-end sales
charge on such purchases of Class A Shares. Under the Combined Purchases
Privilege, you may also include certain shares that you own in other funds in
the Delaware Group. See Classes of Shares.
Letter of Intention
The Letter of Intention feature permits you to obtain a reduced
front-end sales charge on purchases of Class A Shares by aggregating certain of
your purchases of Delaware Group fund shares over a 13-month period. See Classes
of Shares and Part B.
12-Month Reinvestment Privilege
The 12-Month Reinvestment Privilege permits you to reinvest proceeds
from a redemption of Class A Shares, within one year of the date of the
redemption, without paying a front-end sales charge. See Part B.
Exchange Privilege
The Exchange Privilege permits shareholders to exchange all or part of
their shares into shares of the other funds in the Delaware Group, subject to
certain exceptions and limitations. For additional information on exchanges, see
Investing by Exchange under How to Buy Shares and Redemption and Exchange.
Wealth Builder Option
You may elect to invest in the Fund through regular liquidations of
shares in your accounts in other funds in the Delaware Group. Investments under
this feature are exchanges and are therefore subject to the same conditions and
limitations as other exchanges of Fund shares. See Additional Methods of Adding
to Your Investment - Wealth Builder Option and Investing by Exchange under How
to Buy Shares, and Redemption and Exchange.
Delaware Group Asset Planner
Delaware Group Asset Planner is an asset allocation service that gives
investors, working with a professional financial adviser, the ability to more
easily design and maintain investments in a diversified selection of Delaware
Group mutual funds. The Asset Planner service offers a
-22-
<PAGE>
choice of four predesigned allocation strategies (each with a different
risk/reward profile) made up of separate investments in predetermined
percentages of Delaware Group funds. With the guidance of a financial adviser,
investors may also tailor an allocation strategy that meets their personal needs
and goals. See How to Buy Shares.
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. Income Funds, Inc.'s fiscal year ends on
July 31.
-23-
<PAGE>
RETIREMENT PLANNING
An investment in the Fund may be suitable for tax-deferred retirement
plans. Among the retirement plans noted below, Class B Shares are available for
investment only by Individual Retirement Accounts, Simplified Employee Pension
Plans, 457 Deferred Compensation Plans and 403(b)(7) Deferred
Compensation Plans.
Retirement plans may be subject to plan establishment fees, annual
maintenance fees and/or other administrative or trustee fees. Fees are based
upon the number of participants in the plan as well as the services selected.
Additional information about fees is included in retirement plan materials. Fees
are quoted upon request. Certain shareholder investment services available to
non-retirement plan shareholders may not be available to retirement plan
shareholders. Certain retirement plans may qualify to purchase the Delchester
Fund Institutional Class. For additional information on any of the plans and
Delaware's retirement services, call the Shareholder Service Center or see
Part B.
Individual Retirement Account ("IRA")
Individuals, even if they participate in an employer-sponsored
retirement plan, may establish their own retirement program for investments in
each of the Classes. Contributions to an IRA may be tax-deductible and earnings
are tax-deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA
contributions is restricted, and in some cases eliminated, for individuals who
participate in certain employer-sponsored retirement plans and whose annual
income exceeds certain limits. Existing IRAs and future contributions up to the
IRA maximums, whether deductible or not, still earn on a tax-deferred basis.
Simplified Employee Pension Plan ("SEP/IRA")
A SEP/IRA may be established by an employer who wishes
to sponsor a tax-sheltered retirement program by making contributions on behalf
of all eligible employees. Each of the Classes is available for investment by a
SEP/IRA.
Salary Reduction Simplified Employee Pension Plan ("SAR/SEP")
Offers employers with 25 or fewer eligible employees the ability to
establish a SEP/IRA that permits salary deferral contributions. An employer may
also elect to make additional contributions to this plan. Class B Shares are not
available for purchase by such plans.
-24-
<PAGE>
403(b)(7) Deferred Compensation Plan
Permits employees of public school systems or of certain types of
non-profit organizations to enter into a deferred compensation arrangement for
the purchase of shares of each of the Classes.
457 Deferred Compensation Plan
Permits employees of state and local governments and certain other
entities to enter into a deferred compensation arrangement for the purchase of
shares of each of the Classes.
Prototype Profit Sharing or Money Purchase Pension Plan
Offers self-employed individuals, partnerships and
corporations a tax-qualified plan which provides for the investment of
contributions in Class A Shares or Class C Shares. Class B Shares are not
available for purchase by such plans.
Prototype 401(k) Defined Contribution Plan
Permits employers to establish a tax-qualified plan
based on salary deferral contributions for investment in Class A or Class C
Shares. Class B Shares are not available for purchase by such plans.
Allied Plans
Class A Shares are available for purchase by participants in certain
401(k) Defined Contribution Plans ("Allied Plans") which are made available
under a joint venture agreement between the Distributor and another institution
through which mutual funds are marketed and which allow investments in Class A
Shares of designated Delaware Group funds ("eligible Delaware Group fund
shares"), as well as shares of designated classes of non-Delaware Group funds
("eligible non-Delaware Group fund shares"). Class B Shares and Class C Shares
are not eligible for purchase by Allied Plans.
With respect to purchases made in connection with an Allied Plan, the
value of eligible Delaware Group and eligible non-Delaware Group fund shares
held by the Allied Plan may be combined with the dollar amount of new purchases
by that Allied Plan to obtain a reduced front-end sales charge on additional
purchases of eligible Delaware Group fund shares. See Front-End Sales Charge
Alternative - Class A Shares under Classes of Shares.
Participants in Allied Plans may exchange all or part of their eligible
Delaware Group fund shares for other eligible Delaware Group fund shares or for
eligible non-Delaware Group
-25-
<PAGE>
fund shares at net asset value without payment of a front-end sales charge.
However, exchanges of eligible fund shares, both Delaware Group and non-Delaware
Group, which were not subject to a front-end sales charge, will be subject to
the applicable sales charge if exchanged for eligible Delaware Group fund shares
to which a sales charge applies. No sales charge will apply if the eligible fund
shares were previously acquired through the exchange of eligible shares on which
a sales charge was already paid or through the reinvestment of dividends. See
Investing by Exchange.
A dealer's commission may be payable on purchases of eligible Delaware
Group fund shares under an Allied Plan. In determining a financial adviser's
eligibility for a dealer's commission on net asset value purchases of eligible
Delaware Group fund shares in connection with Allied Plans, all participant
holdings in the Allied Plan will be aggregated. See Front-End Sales Charge
Alternative - Class A Shares under Classes of Shares.
The Limited CDSC is applicable to redemptions of net asset value
purchases from an Allied Plan on which a dealer's commission has been paid.
Waivers of the Limited CDSC, as described under Waiver of Limited Contingent
Deferred Sales Charge - Class A Shares, apply to redemptions by participants in
Allied Plans except in the case of exchanges between eligible Delaware Group and
non-Delaware Group fund shares. When eligible Delaware Group fund shares are
exchanged into eligible non-Delaware Group fund shares, the Limited CDSC will be
imposed at the time of the exchange, unless the joint venture agreement
specifies that the amount of the Limited CDSC will be paid by the financial
adviser or selling dealer. See Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange.
-26-
<PAGE>
CLASSES OF SHARES
Alternative Purchase Arrangements
Shares may be purchased at a price equal to the next determined net
asset value per share, subject to a sales charge which may be imposed, at the
election of the purchaser, at the time of the purchase for Class A Shares
("front-end sales charge alternative"), or on a contingent deferred basis for
Class B Shares ("deferred sales charge alternative") or Class C Shares ("level
sales charge alternative").
Class A Shares. An investor who elects the front-end sales charge
alternative acquires Class A Shares, which incur a sales charge when they are
purchased, but generally are not subject to any sales charge when they are
redeemed. Class A Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of .30% of average daily net assets of such shares. Certain purchases of
Class A Shares qualify for reduced front-end sales charges. See Front-End Sales
Charge Alternative - Class A Shares. See also Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value and
Distribution (12b-1) and Service.
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B Shares, which do not incur a front-end sales charge
when they are purchased, but are subject to a contingent deferred sales charge
if they are redeemed within six years of purchase. Class B Shares are subject to
annual 12b-1 Plan expenses of up to a maximum of 1% (.25% of which are service
fees to be paid to the Distributor, dealers or others for providing personal
service and/or maintaining shareholder accounts) of average daily net assets of
such shares for approximately eight years after purchase. Class B Shares permit
all of the investor's dollars to work from the time the investment is made. The
higher 12b-1 Plan expenses paid by Class B Shares will cause such shares to have
a higher expense ratio and to pay lower dividends than Class A Shares. At the
end of approximately eight years after purchase, the Class B Shares will
automatically be converted into Class A Shares. See Automatic Conversion of
Class B Shares, below.
-27-
<PAGE>
Class C Shares. An investor who elects the level sales charge
alternative acquires Class C Shares, which do not incur a front-end sales charge
when they are purchased, but are subject to a contingent deferred sales charge
if they are redeemed within 12 months of purchase. Class C Shares are subject to
annual 12b-1 Plan expenses of up to a maximum of 1% (.25% of which are service
fees to be paid to the Distributor, dealers or others for providing personal
service and/or maintaining shareholder accounts) of average daily net assets of
such shares for the life of the investment. The higher 12b-1 Plan expenses paid
by Class C Shares will cause such shares to have a higher expense ratio and to
pay lower dividends than Class A Shares. Unlike Class B Shares, Class C Shares
do not convert to another class.
The alternative purchase arrangements described above permit investors
to choose the method of purchasing shares that is most suitable given the amount
of their purchase, the length of time they expect to hold their shares and other
relevant circumstances. Investors should determine whether, given their
particular circumstances, it is more advantageous to purchase Class A Shares and
incur a front-end sales charge, purchase Class B Shares and have the entire
initial purchase amount invested in the Fund with their investment being subject
to a CDSC if they redeem shares within six years of purchase, or purchase Class
C Shares and have the entire initial purchase amount invested in the Fund with
their investment being subject to a CDSC if they redeem shares within 12 months
of purchase. In addition, investors should consider the level of annual 12b-1
Plan expenses applicable to each Class. In comparing Class B Shares to Class C
Shares, investors should also consider the desirability of an automatic
conversion feature, which is available only for Class B Shares.
As an illustration, investors who qualify for significantly reduced
front-end sales charges on purchases of Class A Shares, as described below,
might choose the front-end sales charge alternative because similar sales charge
reductions are not available for purchases under either the deferred sales
charge alternative or the level sales charge alternative. Moreover, shares
acquired under the front-end sales charge alternative are subject to annual
12b-1 Plan expenses of up to .30%, whereas Class B Shares acquired under the
deferred sales charge alternative are subject to annual
-28-
<PAGE>
12b-1 Plan expenses of up to 1% for approximately eight years after purchase
(see Automatic Conversion of Class B Shares) and Class C Shares acquired under
the level sales charge alternative are subject to annual 12b-1 Plan expenses of
up to 1% for the life of the investment. However, because front-end sales
charges are deducted from the purchase amount at the time of purchase, investors
who buy Class A Shares would not have their full purchase amount invested in the
Fund.
Other investors might determine it to be more advantageous to purchase
Class B Shares and have all their money invested initially, even though they
would be subject to a CDSC for up to six years after purchase and annual 12b-1
Plan expenses of up to 1% until the shares are automatically converted into
Class A Shares. Still other investors might determine it to be more advantageous
to purchase Class C Shares and have all of their money invested initially,
recognizing that they would be subject to a CDSC for just 12 months after
purchase, but that Class C Shares do not offer a conversion feature, so their
shares would be subject to annual 12b-1 Plan expenses of up to 1% for the life
of the investment. The higher 12b-1 Plan expenses on Class B Shares and Class C
Shares will be offset to the extent a return is realized on the additional money
initially invested upon the purchase of such shares. However, there can be no
assurance as to the return, if any, that will be realized on such additional
money.
Prospective investors should refer to Appendix A-- Investment
Illustrations to this Prospectus for an illustration of the potential effect
that each of the purchase options may have on a long-term shareholder's
investment.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Fund, the Distributor and others will be paid, in the
case of the Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of the Class B Shares and the Class C Shares,
from the proceeds of the 12b-1 Plan fees and, if applicable, the CDSC incurred
upon redemption. Financial advisers may receive different compensation for
selling Class A, Class B and Class C Shares. Investors should understand that
the purpose and function of the respective 12b-1 Plans and the CDSCs applicable
to Class B
-29-
<PAGE>
Shares and Class C Shares are the same as those of the 12b-1 Plan and the
front-end sales charge applicable to Class A Shares in that such fees and
charges are used to finance the distribution of the respective Classes. See
12b-1 Distribution Plans - Class A, Class B and Class C Shares.
Dividends paid on Class A, Class B and Class C Shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount, except that the additional
amount of 12b-1 Plan expenses relating to Class B Shares and Class C Shares will
be borne exclusively by such shares. See Calculation of Offering Price and Net
Asset Value Per Share.
The NASD has adopted certain rules relating to
investment company sales charges. Income Funds, Inc. and the
Distributor intend to operate in compliance with these rules.
Front-EndSales Charge Alternative - Class A Shares
Class A Shares may be purchased at the offering price, which reflects a
maximum front-end sales charge of 4.75%. See Calculation of Offering Price and
Net Asset Value Per Share.
Purchases of $100,000 or more carry a reduced front-end sales charge as
shown in the following table.
-30-
<PAGE>
Delchester Fund A Class
- -------------------------------------------------------------------------------
Dealer's
Front-End Sales Charge Commission***
as % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- -------------------------------------------------------------------------------
Less than $100,000 4.75% 5.05% 4.00%
$100,000 but
under $250,000 3.75 3.91 3.00
$250,000 but
under $500,000 2.50 2.60 2.00
$500,000 but
under $1,000,000* 2.00 2.12 1.60
* There is no front-end sales charge on purchases of Class A Shares of $1
million or more but, under certain limited circumstances, a 1% Limited
CDSC may apply upon redemption of such shares.
** Based upon the net asset value per share of the Class A Shares as of
the end of Income Funds, Inc.'s most recent fiscal year.
*** Financial institutions or their affiliated brokers may
receive an agency transaction fee in the percentages set
forth above.
- --------------------------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify
for the reduced front-end sales charge on the basis of previous or
current purchases. The reduced front-end sales charge will be granted
upon confirmation of the shareholder's holdings by the Fund. Such
reduced front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers,
the Distributor may hold special promotions for specified
periods during which the Distributor may reallow to dealers
up to the full amount of the front-end sales charge shown
above. In addition, certain dealers who enter into an
agreement to provide extra training and information on
Delaware Group products and services and who increase sales
of Delaware Group funds may receive an additional commission
of up to .15% of the offering price. Dealers who receive 90%
or more of the sales charge may be deemed to be underwriters
under the Securities Act of 1933.
- --------------------------------------------------------------------------------
-31-
<PAGE>
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are made in accordance with the following schedule:
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million .75
Next $2 million up to $5 million .50
Amount over $5 million .25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies may be aggregated with those of the Class A Shares
of the Fund. Financial advisers also may be eligible for a dealer's commission
in connection with certain purchases made under a Letter of Intention or
pursuant to an investor's Right of Accumulation. Financial advisers should
contact the Distributor concerning the applicability and calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Redemptions of Class A Shares purchased at net asset value may result
in the imposition of a Limited CDSC if the dealer's commission described above
was paid in connection with the purchase of those shares. See Contingent
Deferred Sales Charge for Certain Redemptions of Class A Shares Purchased at Net
Asset Value under Redemption and Exchange.
Combined Purchases Privilege
By combining your holdings of Class A Shares with your holdings of
Class B Shares and/or Class C Shares of the Fund and shares of the other funds
in the Delaware Group, except those noted below, you can reduce the front-end
sales charges on any additional purchases of Class A Shares. Shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with ownership of
variable insurance products may be combined with other Delaware Group fund
holdings. Shares of other funds that do not carry a front-end sales charge or
-32-
<PAGE>
CDSC may not be included unless they were acquired through an exchange from a
Delaware Group fund that does carry a front-end sales charge or CDSC.
This privilege permits you to combine your purchases and holdings with
those of your spouse, your children under 21 and any trust, fiduciary or
retirement account for the benefit of such family members.
It also permits you to use these combinations under a Letter of
Intention. A Letter of Intention allows you to make purchases over a 13-month
period and qualify the entire purchase for a reduction in front-end sales
charges on Class A Shares.
Combined purchases of $1,000,000 or more, including certain purchases
made at net asset value pursuant to a Right of Accumulation or under a Letter of
Intention, may result in the payment of a dealer's commission and the
applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge Alternative - Class A Shares, above.
Buying Class A Shares at Net Asset Value
Class A Shares of the Fund may be purchased at net asset value under
the Delaware Group Dividend Reinvestment Plan and, under certain circumstances,
the Exchange Privilege and the 12-Month Reinvestment Privilege. See The Delaware
Difference and Redemption and Exchange for additional
information.
Purchases of Class A Shares may be made at net asset value by current
and former officers, directors and employees (and members of their families) of
the Manager, any affiliate, any of the funds in the Delaware Group, certain of
their agents and registered representatives and employees of authorized
investment dealers and by employee benefit plans for such entities. Individual
purchases, including those in retirement accounts, must be for accounts in the
name of the individual or a qualifying family member.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements
-33-
<PAGE>
between the bank and unaffiliated brokers or dealers concerning sales of shares
of Delaware Group funds. Officers, directors and key employees of institutional
clients of the Manager or any of its affiliates may purchase Class A Shares at
net asset value. Moreover, purchases may be effected at net asset value for the
benefit of the clients of brokers, dealers and registered investment advisers
affiliated with a broker or dealer, if such broker, dealer or investment adviser
has entered into an agreement with the Distributor providing specifically for
the purchase of Class A Shares in connection with special investment products,
such as wrap accounts or similar fee based programs.
Investments in Class A Shares made by plan level and/or participant
retirement accounts that are for the purpose of repaying a loan taken from such
accounts will be made at net asset value. Loan repayments made to a Delaware
Group account in connection with loans originated from accounts previously
maintained by another investment firm will also be invested at net asset value.
Investors who held shares in any class of any Delaware Group fund as of
December 1, 1995, may currently purchase Class A Shares at net asset value
through the Delaware Group Asset Planner service if such shares are being
purchased with proceeds from the redemption of shares of a fund (other than a
money market fund) outside of the Delaware Group of funds. The Delaware Group
Asset Planner Account Registration Form and check for such a transaction should
note that the investment is being made under the "NAV/Asset Planner
Accommodation Program." Prior notice will be given should this program be
discontinued. Class A Shares may also be purchased at net asset value in an IRA
through the Delaware Group Asset Planner service if the assets being invested
are being transferred from an existing IRA held outside of the Delaware Group or
are part of a distribution received from an employer-sponsored or other
retirement plan. See Delaware Group Asset Planner under How To Buy Shares.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
Group Investment Plans
Group Investment Plans (e.g., SEP/IRA, SAR/SEP, Prototype Profit
Sharing, Pension and 401(k) Defined Contribution Plans) may benefit from the
reduced front-end sales charges available on the Class A Shares set forth in the
table on page , based on total plan assets. In addition, 403(b)(7) and 457
Retirement Plan Accounts may benefit from a reduced front-end sales charge on
Class A
-34-
<PAGE>
Shares based on the total amount invested by all participants in the plan by
satisfying the following criteria: (i) the employer for which the plan was
established has 250 or more eligible employees and the plan lists only one
broker of record, or (ii) the plan includes employer contributions and the plan
lists only one broker of record. If a company has more than one plan investing
in the Delaware Group of funds, then the total amount invested in all plans will
be aggregated to determine the applicable front-end sales charge reduction on
each purchase, both initial and subsequent, if, at the time of each such
purchase, the company notifies the Fund that it qualifies for the reduction.
Employees participating in such Group Investment Plans may also combine the
investments held in their plan account to determine the front-end sales charge
applicable to purchases in non-retirement Delaware Group investment accounts
if, at the time of each such purchase, they notify the Fund that they are
eligible to combine purchase amounts held in their plan account.
For additional information on retirement plans, including plan forms,
applications, minimum investments and any applicable account maintenance fees,
contact your investment dealer or the Distributor.
For other retirement plans and special services, see Retirement
Planning.
Deferred Sales Charge Alternative - Class B Shares
Class B Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently anticipates
compensating dealers or brokers for selling Class B Shares at the time of
purchase from its own assets in an amount equal to no more than 4% of the dollar
amount purchased. In addition, from time to time, upon written notice to all of
its dealers, the Distributor may hold special promotions for specified periods
during which the Distributor may pay additional compensation to dealers or
brokers for selling Class B Shares at the time of purchase. As discussed below,
however, Class B Shares are subject to annual 12b-1 Plan expenses and, if
redeemed within six years of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares.
-35-
<PAGE>
These payments support the compensation paid to dealers or brokers for selling
Class B Shares. Payments to the Distributor and others under the Class B 12b-1
Plan may be in an amount equal to no more than 1% annually. The combination of
the CDSC and the proceeds of the 12b-1 Plan fees makes it possible for the Fund
to sell Class B Shares without deducting a front-end sales charge at the time of
purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class B Shares
described in this Prospectus, even after the exchange. Such CDSC schedule may be
higher than the CDSC schedule for the Class B Shares acquired as a result of the
exchange. See Redemption and Exchange.
Automatic Conversion of Class B Shares
Class B Shares, other than shares acquired through reinvestment of
dividends, held for eight years after purchase are eligible for automatic
conversion into Class A Shares. Conversions of Class B Shares into Class A
Shares will occur only four times in any calendar year, on the last business day
of the second full week of March, June, September and December (each, a
"Conversion Date"). If the eighth anniversary after a purchase of Class B Shares
falls on a Conversion Date, an investor's Class B Shares will be converted on
that date. If the eighth anniversary occurs between Conversion Dates, an
investor's Class B Shares will be converted on the next Conversion Date after
such anniversary. Consequently, if a shareholder's eighth anniversary falls on
the day after a Conversion Date, that shareholder will have to hold Class B
Shares for as long as three additional months after the eighth anniversary of
purchase before the shares will automatically convert into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute
tax-free exchanges for federal income tax purposes. See Taxes.
-36-
<PAGE>
Level Sales Charge Alternative - Class C Shares
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the Fund will invest the full amount of the
investor's purchase payment. The Distributor currently anticipates compensating
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount purchased.
As discussed below, however, Class C Shares are subject to annual 12b-1 Plan
expenses and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class C
Shares. Payments to the Distributor and others under the Class C 12b-1 Plan may
be in an amount equal to no more than 1% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class C Shares as
described in this Prospectus. See Redemption and Exchange.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares redeemed within six years of purchase may be subject to
a CDSC at the rates set forth below and Class C Shares redeemed within 12 months
of purchase may be subject to a CDSC of 1%. CDSCs are charged as a percentage of
the dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the net asset value at the time of purchase of the shares
being redeemed or the net asset value of those shares at the time of redemption.
No CDSC will be imposed on increases in net asset value above the initial
purchase price, nor will a CDSC be assessed on redemptions of shares acquired
through reinvestments of dividends or capital gains distributions. For purposes
of this formula, the "net asset value at the time of purchase" will be the net
asset value at purchase of the Class B Shares or the Class C Shares of the Fund,
even if those shares are later exchanged for shares of another Delaware Group
fund. In the event of an exchange of the shares, the "net asset value of such
shares at the time of redemption" will be the net asset value of the shares that
were acquired in the exchange.
-37-
<PAGE>
The following table sets forth the rates of the CDSC for the Class B
Shares of the Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ --------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. See Automatic Conversion of Class B Shares, above. Investors are
reminded that the Class A Shares into which the Class B Shares will convert are
subject to ongoing annual 12b-1 Plan expenses of up to a maximum of .30% of
average daily net assets of such shares.
In determining whether a CDSC applies to a redemption of Class B
Shares, it will be assumed that shares held for more than six years are redeemed
first, followed by shares acquired through the reinvestment of dividends or
distributions, and finally by shares held longest during the six-year period.
With respect to Class C Shares, it will be assumed that shares held for more
than 12 months are redeemed first followed by shares acquired through the
reinvestment of dividends or distributions, and finally by shares held for 12
months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares. See Waiver of Contingent Deferred Sales Charge - Class B Shares and
Class C Shares under Redemption and Exchange.
-38-
<PAGE>
12b-1 Distribution Plans - Class A, Class B and Class C Shares
Under the distribution plans adopted by Income Funds, Inc. in
accordance with Rule 12b-1 under the 1940 Act, Income Funds, Inc. is permitted
to pay the Distributor annual distribution fees of up to .30% of the average
daily net assets of the Class A Shares, and 1% of the average daily net assets
of each of the Class B Shares and the Class C Shares. These fees, which are
payable monthly, compensate the Distributor for providing distribution and
related services and bearing certain expenses of each Class. The 12b-1 Plans
applicable to Class B Shares and Class C Shares are designed to permit an
investor to purchase these shares through dealers or brokers without paying a
front-end sales charge while enabling the Distributor to compensate dealers and
brokers for the sale of such shares. For a more detailed discussion of the 12b-1
Plans relating to the Class A, Class B and Class C Shares, see Distribution
(12b-1) and Service under Management of the Fund.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits, as
set by the Distributor, may receive from the Distributor an additional payment
of up to .25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares.
Subject to pending amendments to the NASD's Rules of Fair Practice, in
connection with the promotion of Delaware Group fund shares, the Distributor
may, from time to time, pay to participate in dealer-sponsored seminars and
conferences, reimburse dealers for expenses incurred in connection with
preapproved seminars, conferences and advertising and may, from time to time,
pay or allow additional promotional incentives to dealers, which shall include
non-cash concessions, such as certain luxury merchandise or a trip to or
attendance at a business or investment seminar at a luxury resort, as part of
preapproved sales contests. Payment of non-cash compensation to dealers
-39-
<PAGE>
is currently under review by the NASD and the Securities and Exchange
Commission. It is likely that the NASD's Rules of Fair Practice will be amended
such that the ability of the Distributor to pay non-cash compensation as
described above will be restricted in some fashion. The Distributor intends to
comply with the NASD's Rules of Fair Practice as they may be amended.
Classes Offered
The following funds currently offer Class A, Class B and Class C
Shares: Enterprise Fund, U.S. Growth Fund, World Growth Fund, New Pacific Fund,
Federal Bond Fund and Corporate Income Fund of Delaware Group Adviser Funds,
Inc., Delaware Group Cash Reserve, Inc., Decatur Income Fund and Decatur Total
Return Fund of Delaware Group Decatur Fund, Inc., Delaware Fund and Devon Fund
of Delaware Group Delaware Fund, Inc., Delaware Group DelCap Fund, Inc.,
International Equity Series, Global Bond Series, Global Assets Series and
Emerging Markets Series of Delaware Group Global & International Funds, Inc.,
Delaware Group Government Fund, Inc., Limited-Term Government Fund of Delaware
Group Limited-Term Government Funds, Inc., Tax-Free USA Fund, Tax-Free Insured
Fund and Tax-Free USA Intermediate Fund of Delaware Group Tax-Free Fund, Inc.,
Delaware Group Trend Fund, Inc., Delaware Group Value Fund, Inc., DMC Tax-Free
Income Trust-Pennsylvania, Strategic Income Fund of Income Funds, Inc., and the
Fund. In addition, Delaware Group Cash Reserve, Inc.
offers Consultant Class shares.
U.S. Government Money Series of Delaware Group Limited-Term Government
Funds, Inc. and Delaware Group Tax-Free Money Fund, Inc. offer only Class A and
Consultant Class shares.
Delchester Fund Institutional Class
In addition to offering the Class A, Class B and Class C Shares, the
Fund also offers the Delchester Fund Institutional Class, which is described in
a separate prospectus and is available for purchase only by certain investors.
Delchester Fund Institutional Class shares generally are distributed directly by
the Distributor and do not have a front-end sales charge, a CDSC or a Limited
CDSC, and are not subject to 12b-1 Plan distribution expenses. To obtain the
prospectus that describes the Delchester Fund Institutional Class, contact the
Distributor by writing to the address or by calling the telephone number listed
on the back of this Prospectus.
-40-
<PAGE>
HOW TO BUY SHARES
Purchase Amounts
Generally, the minimum initial purchase is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases of shares of any Class
generally must be $100 or more. For purchases under a Uniform Gifts to Minors
Act or Uniform Transfers to Minors Act or through an Automatic Investing Plan,
there is a minimum initial purchase of $250 and a minimum subsequent purchase of
$25. Minimum purchase requirements do not apply to retirement plans other than
IRAs for which there is a minimum initial purchase of $250, and a minimum
subsequent purchase of $25, regardless of which Class is selected.
There is a maximum purchase limitation of $250,000 on each purchase of
Class B Shares. For Class C Shares, each purchase must be in an amount that is
less than $1,000,000. An investor may exceed these maximum purchase limitations
by making cumulative purchases over a period of time. In doing so, an investor
should keep in mind that reduced front-end sales charges are available on
investments of $100,000 or more in Class A Shares, and that Class A Shares (i)
are subject to lower annual 12b-1 Plan expenses than Class B Shares and Class C
Shares and (ii) generally are not subject to a CDSC. For retirement plans, the
maximum purchase limitations apply only to the initial purchase of Class B
Shares or Class C Shares by the plan.
Investing through Your Investment Dealer
You can make a purchase of shares of the Fund through most investment
dealers who, as part of the service they provide, must transmit orders promptly.
They may charge for this service. If you want a dealer but do not have one, we
can refer you to one.
Investing 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 Delchester Fund A Class, Delchester Fund B
Class or Delchester Fund C Class, to 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 Class selected. Your check should be identified
with your name(s) and account number. An investment slip (similar to a deposit
slip) is provided at the bottom of transaction confirmations and dividend
statements that you will receive from Income Funds, Inc. Use of this investment
slip can
-41-
<PAGE>
help expedite processing of your check when making additional purchases. Your
investment may be delayed if you send additional purchases by certified mail.
Investing 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 Class in which you are
investing).
1. Initial Purchases--Before you invest, telephone the Shareholder Service
Center to get an account number. If you do not call first, processing of your
investment may be delayed. In addition, you must promptly send your Investment
Application or, in the case of a retirement account, an appropriate retirement
plan application, to the specific Class selected, to 1818 Market Street,
Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments at any time by
wiring funds to CoreStates Bank, N.A., as described above. You should advise the
Shareholder Service Center by telephone of each wire you send.
If you want to wire investments to a retirement plan account, call the
Shareholder Service Center for special wiring instructions.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware Group,
you may write and authorize an exchange of part or all of your investment into
shares of the Fund. If you wish to open an account by exchange, call the
Shareholder Service Center for more information. All exchanges are subject to
the eligibility and minimum purchase requirements set forth in each fund's
prospectus.
Holders of Class A Shares may exchange all or part of their shares for
certain of the shares of other funds in the Delaware Group, including other
Class A Shares, but may not exchange their Class A Shares for Class B Shares or
Class C Shares of the Fund or of any other fund in the Delaware Group. Holders
of Class B Shares of the Fund are permitted to exchange all or part of their
Class B Shares only into Class B Shares of other Delaware Group funds.
Similarly, holders of Class C Shares of the Fund are permitted to exchange all
or part of their Class C Shares only into
-42-
<PAGE>
Class C Shares of other Delaware Group funds. Class B Shares of the Fund and
Class C Shares of the Fund acquired by exchange will continue to carry the CDSC
and, in the case of Class B Shares, the automatic conversion schedule of the
fund from which the exchange is made. The holding period of the Class B Shares
of the Fund acquired by exchange will be added to that of the shares that were
exchanged for purposes of determining the time of the automatic conversion into
Class A Shares of the Fund.
Permissible exchanges into Class A Shares of the Fund will be made
without a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares of the Fund will be made without the imposition of a
CDSC by the fund from which the exchange is being made at the time of the
exchange.
See Allied Plans under Retirement Planning for information on exchanges
by participants in an Allied Plan.
Additional Methods of Adding to Your Investment
Call the Shareholder Service Center for more information
if you wish to use the following services:
1. Automatic Investing Plan
The Automatic Investing Plan enables you to make regular monthly
investments without writing or mailing checks. You may authorize Income Funds,
Inc. to transfer a designated amount monthly from your checking account to your
Fund account. Many shareholders use this as an automatic savings plan.
Shareholders should allow a reasonable amount of time for initial purchases and
changes to these plans to become effective.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, 403(b)(7) Deferred Compensation Plans or 457
Deferred Compensation Plans.
2. Direct Deposit
You may have your employer or bank make regular investments directly to
your Fund account for you (for example: payroll deduction, pay by phone, annuity
payments). The Fund also accepts preauthorized recurring government and private
payments by Electronic Fund Transfer, which avoids
-43-
<PAGE>
mail time and check clearing holds on payments such as socialsecurity, federal
salaries, Railroad Retirement benefits, etc.
* * *
Should investments through an automatic investing plan or by direct
deposit be reclaimed or returned for some reason, Income Funds, Inc. has the
right to liquidate your shares to reimburse the government or transmitting bank.
If there are insufficient funds in your account, you are obligated to reimburse
the Fund.
3. Wealth Builder Option
You can use our Wealth Builder Option to invest in the Fund through
regular liquidations of shares in your accounts in other funds in the Delaware
Group. You may also elect to invest in other mutual funds in the Delaware Group
through the Wealth Builder Option through regular liquidations of shares in your
Fund account.
Under this automatic exchange program, you can authorize regular
monthly amounts (minimum of $100 per fund) to be liquidated from your account in
one or more funds in the Delaware Group and invested automatically into any
other Delaware Group account that you may specify. If in connection with the
election of the Wealth Builder Option, you wish to open a new account to receive
the automatic investment, such new account must meet the minimum initial
purchase requirements described in the prospectus of the fund that you select.
All investments under this option are exchanges and are therefore subject to the
same conditions and limitations as other exchanges noted above. You can
terminate your participation at any time by written notice to the fund from
which the exchanges are made. See Redemption and Exchange.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, 403(b)(7) Deferred Compensation Plans or 457
Deferred Compensation Plans.
4. Dividend Reinvestment Plan
You can elect to have your distributions (capital gains and/or dividend
income) paid to you by check or reinvested in your Fund account. Or, you may
invest your distributions in certain other funds in the Delaware Group, subject
to the exceptions noted below as well as the eligibility and minimum purchase
requirements set forth in each fund's prospectus.
-44-
<PAGE>
Reinvestments of distributions into Class A Shares of the Fund or of
other Delaware Group funds are made without a front-end sales charge.
Reinvestments of distributions into Class B Shares of the Fund or of other
Delaware Group funds or into Class C Shares of the Fund or of other Delaware
Group funds are also made without any sales charge and will not be subject to a
CDSC if later redeemed. See Automatic Conversion of Class B Shares under Classes
of Shares for information concerning the automatic conversion of Class B Shares
acquired by reinvesting dividends.
Holders of Class A Shares of the Fund may not reinvest their
distributions into Class B Shares or Class C Shares of any fund in the Delaware
Group. Holders of Class B Shares of the Fund may reinvest their distributions
only into Class B Shares of the funds in the Delaware Group which offer that
class of shares (the "Class B Funds"). Similarly, holders of Class C Shares of
the Fund may reinvest their distributions only into Class C Shares of the funds
in the Delaware Group which offer that class of shares (the "Class C Funds").
See Classes Offered under Classes of Shares for a list of the funds offering
those classes of shares. For more information about reinvestments, call the
Shareholder Service Center.
Delaware Group Asset Planner
To invest in Delaware Group funds using the Delaware Group Asset
Planner asset allocation service, you should complete a Delaware Group Asset
Planner Account Registration Form, which is available only from a financial
adviser or investment dealer. As previously described, the Delaware Group Asset
Planner service offers a choice of four predesigned asset allocation strategies
(each with a different risk/reward profile) in predetermined percentages in
Delaware Group funds. Or, with the help of a financial adviser, you may design a
customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Group accounts into the Asset Planner service may be made at net asset value
under the circumstances described under Investing by Exchange, above. Also see
Buying Class A Shares at Net Asset Value under Classes of Shares. The minimum
initial investment per Strategy is $2,000; subsequent investments must be at
least $100. Individual fund minimums do not apply to investments made using the
Asset Planner service. Class A, Class B and Class C Shares are available through
the Asset Planner service. Generally, only shares
-45-
<PAGE>
within the same class may be used within the same Strategy. However, Class A
Shares of the Fund and of other funds in the Delaware Group may be used in the
same Strategy with consultant class shares that are offered by certain other
Delaware Group funds. See Classes Offered under Classes of Shares for the funds
in the Delaware Group that offer consultant class shares.
An annual maintenance fee, currently $35 per Strategy, is due at the
time of initial investment and by September 30th of each subsequent year.
However, for all IRA accounts established with the same Social Security number
under the Asset Planner service, the annual maintenance fee will be limited to
$35 irrespective of the number of Strategies selected. For example, if you
transfer regular IRA assets and rollover assets from a qualified plan into an
IRA through the Delaware Group Asset Planner service and, to avoid commingling,
maintain more than one Strategy registered under the same Social Security
number, only one $35 annual fee needs to be paid. The fee, payable to Delaware
Service Company, Inc. to defray extra costs associated with administering the
Asset Planner service, will be deducted automatically from one of the funds
within your Asset Planner account if not paid by September 30th. See Part B.
Investors will receive a customized quarterly Strategy Report
summarizing all Delaware Group Asset Planner investment performance and account
activity during the prior period. Confirmation statements will be sent following
all transactions other than those involving a reinvestment of
distributions.
Certain shareholder services are not available to investors using the
Asset Planner service, due to its special design. These include Delaphone,
Checkwriting, Wealth Builder Option and Letter of Intention. Systematic
Withdrawal Plans are available after the account has been open for two years.
Purchase Price and Effective Date
The offering price and net asset value of the Class A, Class B and
Class C Shares are 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, unless
it is received after the time the offering price or net asset value of shares is
determined, as noted above. Purchase orders received after such time will be
effective the next business day.
-46-
<PAGE>
The Conditions of Your Purchase
The Fund reserves the right to reject any purchase order. If a purchase
is canceled 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
purchase orders paid by third-party checks or checks that are not drawn on a
domestic branch of a United States financial institution. If a check drawn on a
foreign financial institution is accepted, you may be subject to additional bank
charges for clearance and currency conversion.
The Fund also reserves the right, following shareholder notification,
to charge a service fee on non-retirement accounts that have remained below the
minimum stated account balance for a period of three or more consecutive months.
Holders of such accounts may be notified of their insufficient account balance
and advised that they have until the end of the current calendar quarter to
raise their balance to the stated minimum. If the account has not reached the
minimum balance requirement by that time, the Fund will charge a $9 fee for that
quarter and each subsequent calendar quarter until the account is brought up to
the minimum balance. The service fee will be deducted from the account during
the first week of each calendar quarter for the previous quarter, and will be
used to help defray the cost of maintaining low-balance accounts. No fees will
be charged without proper notice, and no CDSC will apply to such assessments.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
-47-
<PAGE>
REDEMPTION AND EXCHANGE
You can redeem or exchange your shares in a number of different ways.
The exchange service is useful if your investment requirements change and you
want an easy way to invest in other bond funds, equity funds, tax-advantaged
funds or money market funds. This service is also useful if you are anticipating
a major expenditure and want to move a portion of your investment into a fund
that has the checkwriting feature. Exchanges are subject to the requirements of
each fund and all exchanges of shares constitute taxable events. See Taxes.
Further, in order for an exchange to be processed, shares of the fund being
acquired must be registered in the state where the acquiring shareholder
resides. You may want to consult your financial adviser or investment dealer to
discuss which funds in the Delaware Group will best meet your changing
objectives, and the consequences of any exchange transaction. You may also call
the Delaware Group directly for fund information.
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.
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,
subject, in the case of a redemption, to any applicable CDSC or Limited CDSC.
Redemption or exchange requests received in good order after the time the
offering price and net asset value of shares are determined, as noted above,
will be processed on the next business day. See Purchase Price and Effective
Date under How to Buy Shares. A shareholder submitting a redemption request may
indicate that he or she wishes to receive redemption proceeds of a specific
dollar amount. In the case of such a request, and in the case of certain
redemptions from retirement plan accounts, the Fund will redeem the number of
shares necessary to deduct the applicable CDSC in the case of Class B and Class
C Shares, and, if applicable, the Limited CDSC in the case of Class A Shares and
tender to the shareholder the requested amount, assuming the shareholder holds
enough shares in his or her account for the redemption to be processed in this
manner. Otherwise, the amount tendered to the shareholder upon redemption will
be reduced by the amount of the applicable CDSC or Limited CDSC.
-48-
<PAGE>
Except as noted below, for a redemption request to be in "good order,"
you must provide your account number, account registration, and the total number
of shares or dollar amount of the transaction. For exchange requests, you must
also provide the name of the fund 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 Shareholder Service Center at 800-523-1918. The Fund may
suspend, terminate, or amend the terms of the exchange privilege upon 60 days'
written notice to shareholders.
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 redemption requests as to shares for which a check
was tendered 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.
There is no front-end sales charge or fee for exchanges made between
shares of funds which both carry a front-end sales charge. Any applicable
front-end sales charge will apply to exchanges from shares of funds not subject
to a front-end sales charge, except for exchanges involving assets that were
previously invested in a fund with a front-end sales charge and/or exchanges
involving the reinvestment of dividends.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for Class B shares of other Class B Funds or Class C shares
of other Class C Funds, as applicable (in each case, "New Shares"), will not be
subject to a CDSC that might otherwise be due upon redemption of the Original
Shares. However, such shareholders will continue to be subject to the CDSC and,
in the case of Class B Shares, the automatic conversion schedule of the Original
Shares as described in this Prospectus and any CDSC assessed upon redemption
will be charged by the Fund from which the Original Shares were exchanged. In an
exchange of Class B Shares from the Fund, the Fund's CDSC schedule may be higher
than the CDSC schedule relating to the New Shares acquired as a result of the
exchange. For purposes of computing the CDSC that may be payable upon a
disposition of the New Shares, the period of time that an
-49-
<PAGE>
investor held the Original Shares is added to the period of time that an
investor held the New Shares. With respect to Class B Shares, the automatic
conversion schedule of the Original Shares may be longer than that of the New
Shares. Consequently, an investment in New Shares by exchange may subject an
investor to the higher 12b-1 fees applicable to Class B Shares of the Fund for a
longer period of time than if the investment in New Shares were made directly.
Various redemption and exchange methods are outlined below. Except for
the CDSC applicable to certain redemptions of Class B and Class C Shares and the
Limited CDSC applicable to certain redemptions of Class A Shares purchased at
net asset value, there is no fee charged by the Fund or the Distributor for
redeeming or exchanging your shares, but such fees could be charged in the
future. You may 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.
Written Redemption
You can write to the Fund at 1818 Market Street, Philadelphia, PA 19103
to redeem some or all of your shares. The request must be signed by all owners
of the account or your investment dealer of record. For redemptions of more than
$50,000, or when the proceeds are not sent to the shareholder(s) at the address
of record, the Fund requires a signature by all owners of the account and a
signature guarantee for each owner. 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, but no later than
seven days, after receipt of your redemption request. If your Class A Shares are
in certificate form, the certificate must accompany your request and also be in
good order. Certificates are issued for Class A Shares only if a shareholder
submits a specific request. Certificates are not issued for Class B Shares or
Class C Shares.
-50-
<PAGE>
Written Exchange
You may also write to the Fund (at 1818 Market Street, Philadelphia, PA
19103) to request an exchange of any or all of your shares into another mutual
fund in the Delaware Group, subject to the same conditions and limitations as
other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption--Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in 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, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Instructions received by telephone are
generally tape recorded, and a written confirmation will be provided for all
purchase, exchange and redemption transactions initiated by telephone. By
exchanging shares by telephone, you are acknowledging prior receipt of a
prospectus for the fund into which your shares are being exchanged.
Telephone Redemption--Check to Your Address of Record
The Telephone Redemption feature is a quick and easy method to redeem
shares. You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your address of record. Checks will be payable
to the shareholder(s) of record. Payment is normally mailed the next business
day, but no later than seven days, after
-51-
<PAGE>
receipt of the request. This service is only available to individual, joint and
individual fiduciary-type accounts.
Telephone Redemption--Proceeds to Your Bank
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must complete an Authorization Form and have your signature
guaranteed. For your protection, your authorization must be on file. If you
request a wire, your funds will normally be sent the next business day.
CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted from your
redemption. If you ask for a check, it will normally be mailed the next business
day, but no later than seven days, after receipt of your request to your
predesignated bank account. Except for any CDSC which may be applicable to Class
B and Class C Shares and the Limited CDSC which may be applicable to certain
Class A Shares, there are no fees for this redemption method, but the mail time
may delay getting funds into your bank account. Simply call the Shareholder
Service Center prior to the time the offering price and net asset value are
determined, as noted above.
If expedited payment by check or wire could adversely affect the Fund,
the Fund may take up to seven days to pay.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to
adjust your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in the Delaware Group under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
Systematic Withdrawal Plans
1. Regular Plans
This plan provides shareholders with a consistent monthly (or
quarterly) payment. This is particularly useful to shareholders living on fixed
incomes, since it can provide them with a stable supplemental amount. With
accounts of at least $5,000, you may elect monthly withdrawals of $25 (quarterly
$75) or more. The Fund does not recommend any particular monthly amount, as each
shareholder's situation and needs vary. Payments are normally made by check. In
the alternative, you may elect to have your payments transferred from your Fund
account to your predesignated bank
-52-
<PAGE>
account through the MoneyLine Direct Deposit Service. Your funds will normally
be credited to your bank account two business days after the payment date.
Except for the Limited CDSC which may be applicable to Class A Shares and the
CDSC which may be applicable to Class B Shares and Class C Shares as noted
below, there are no fees for this redemption method. See MoneyLine Direct
Deposit Service under The Delaware Difference for more information about this
service.
2. Retirement Plans
For shareholders eligible under the applicable retirement plan to
receive benefits in periodic payments, the Systematic Withdrawal Plan provides
you with maximum flexibility. A number of formulas are available for calculating
your withdrawals depending upon whether the distributions are required or
optional. Withdrawals must be for $25 or more; however, no minimum account
balance is required. The MoneyLine Direct Deposit Service described above is not
available for retirement plans.
* * *
Shareholders should not purchase additional shares while participating
in a Systematic Withdrawal Plan.
Redemptions of Class A Shares via a Systematic Withdrawal Plan may be
subject to a Limited CDSC if the original purchase was made at net asset value
within the 12 months prior to the withdrawal and a dealer's commission was paid
on that purchase. See Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value, below.
The applicable CDSC for Class B Shares and Class C Shares redeemed via
a Systematic Withdrawal Plan will be waived if, on the date that the Plan is
established, the annual amount selected to be withdrawn is less than 12% of the
account balance. If the annual amount selected to be withdrawn exceeds 12% of
the account balance on the date that the Systematic Withdrawal Plan is
established, all redemptions under the Plan will be subject to the applicable
CDSC. Whether a waiver of the CDSC is available or not, the first shares to be
redeemed for each Systematic Withdrawal Plan payment will be those not subject
to a CDSC because they have either satisfied the required holding period or were
acquired through the reinvestment of distributions. The 12% annual limit will be
reset on the date that any Systematic Withdrawal Plan is modified (for example,
a change in the amount selected to be withdrawn or the frequency or date of
-53-
<PAGE>
withdrawals), based on the balance in the account on that date. See Waiver of
Contingent Deferred Sales Charge - Class B and Class C Shares, below.
For more information on Systematic Withdrawal Plans, call the
Shareholder Service Center.
Contingent Deferred Sales Charge for Certain Redemptions of
Class A Shares Purchased at Net Asset Value
A Limited CDSC will be imposed on certain redemptions of Class A Shares
(or shares into which such Class A Shares are exchanged) made within 12 months
of purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission
previously described. See Classes of Shares.
The Limited CDSC will be paid to the Distributor and will be equal to
the lesser of 1% of: (1) the net asset value at the time of purchase of the
Class A Shares being redeemed; or (2) the net asset value of such Class A Shares
at the time of redemption. For purposes of this formula, the "net asset value at
the time of purchase" will be the net asset value at purchase of the Class A
Shares even if those shares are later exchanged for shares of another Delaware
Group fund and, in the event of an exchange of Class A Shares, the "net asset
value of such shares at the time of redemption" will be the net asset value of
the shares acquired in the exchange.
Redemptions of such Class A Shares held for more than 12 months will
not be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Group fund will not trigger the imposition of the Limited CDSC
at the time of such exchange. The period a shareholder owns shares into which
Class A Shares are exchanged will count towards satisfying the 12-month holding
period. The Limited CDSC is assessed if such 12-month period is not satisfied
irrespective of whether the redemption triggering its payment is of Class A
Shares of the Fund or Class A Shares acquired in the exchange.
In determining whether a Limited CDSC is payable, it will be assumed
that shares not subject to the Limited CDSC are the first redeemed followed by
other shares held for the longest period of time. The Limited CDSC will not be
imposed upon shares representing reinvested dividends or capital gains
distributions, or upon amounts representing share appreciation. All investments
made during a calendar month, regardless of what day of the month the investment
occurred,
-54-
<PAGE>
will age one month on the last day of that month and each subsequent
month.
Waiver of Limited Contingent Deferred Sales Charge - Class A Shares
The Limited CDSC for Class A Shares on which a dealer's commission has
been paid will be waived in the following instances: (i) redemptions that result
from the Fund's right to liquidate a shareholder's account if the aggregate net
asset value of the shares held in the account is less than the then-effective
minimum account size; (ii) distributions to participants from a retirement plan
qualified under section 401(a) or 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"), or due to death of a participant in such a plan; (iii)
redemptions pursuant to the direction of a participant or beneficiary of a
retirement plan qualified under section 401(a) or 401(k) of the Code with
respect to that retirement plan; (iv) distributions from a section 403(b)(7)
Plan or an IRA due to death, disability, or attainment of age 59 1/2; (v)
returns of excess contributions to an IRA; (vi) distributions by other employee
benefit plans to pay benefits; (vii) distributions described in (ii), (iv), and
(vi) above pursuant to a systematic withdrawal plan; and (viii) redemptions by
the classes of shareholders who are permitted to purchase shares at net asset
value, regardless of the size of the purchase (see Buying Class A Shares at Net
Asset Value under Classes of Shares).
Waiver of Contingent Deferred Sales Charge - Class B and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares in
connection with the following redemptions: (i) redemptions that result from the
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the then-effective minimum
account size; (ii) returns of excess contributions to an IRA or 403(b)(7)
Deferred Compensation Plan; (iii) required minimum distributions from an IRA,
403(b)(7) Deferred Compensation Plan or 457 Deferred Compensation Plan; and (iv)
distributions from an account if the redemption results from the death of all
registered owners of the account (in the case of accounts established under the
Uniform Gifts to Minors or Uniform Transfers to Minors Acts or trust accounts,
the waiver applies upon the death of all beneficial owners) or a total and
permanent disability (as defined in Section 72 of the Code) of all registered
owners occurring after the purchase of the shares being redeemed.
The CDSC on Class C Shares is waived in connection with the following
redemptions: (i) redemptions that result from
-55-
<PAGE>
the Fund's right to liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the then-effective minimum
account size; (ii) returns of excess contributions to an IRA, 403(b)(7) Deferred
Compensation Plan, Profit Sharing Plan, Money Purchase Pension Plan or 401(k)
Defined Contribution Plan; (iii) required minimum distributions from an IRA,
403(b)(7) Deferred Compensation Plan, 457 Deferred Compensation Plan, Profit
Sharing Plan, Money Purchase Pension Plan or 401(k) Defined Contribution Plan;
(iv) distributions from a 403(b)(7) Deferred Compensation Plan, 457 Deferred
Compensation Plan, Profit Sharing Plan, or 401(k) Defined Contribution Plan,
under hardship provisions of the plan; (v) distributions from a 403(b)(7)
Deferred Compensation Plan, 457 Deferred Compensation Plan, Profit Sharing Plan,
Money Purchase Pension Plan or a 401(k) Defined Contribution Plan upon
attainment of normal retirement age under the plan or upon separation from
service; (vi) distributions from an IRA on or after attainment of age 59 1/2;
and (vii) distributions from an account if the redemption results from the death
of all registered owners of the account (in the case of accounts established
under the Uniform Gifts to Minors or Uniform Transfers to Minors Acts or trust
accounts, the waiver applies upon the death of all beneficial owners) or a total
and permanent disability (as defined in Section 72 of the Code) of all
registered owners occurring after the purchase of the shares being redeemed.
In addition, the CDSC will be waived on Class B and Class C Shares
redeemed in accordance with a Systematic Withdrawal Plan if the annual amount
selected to be withdrawn under the Plan does not exceed 12% of the value of the
account on the date that the Systematic Withdrawal Plan was established or
modified.
-56-
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund declares a dividend to all shareholders of record at the time
the offering price of shares is determined. See Purchase Price and Effective
Date under How to Buy Shares. Thus, when redeeming shares, dividends continue to
be credited up to and including the date of redemption.
The Fund's dividends are declared daily and paid monthly. Payment by
check of cash dividends will ordinarily be mailed within three business days
after the payable date. Distributions from net realized securities profits, if
any, will be distributed twice a year. The first payment normally would be made
during the first quarter of the next fiscal year. The second payment would be
made near the end of the calendar year to comply with certain requirements of
the Code.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if the Fund is given prior notice of Federal Funds wire
and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Purchases by check earn dividends upon
conversion to Federal Funds, normally one business day after receipt.
Each class of the Fund will share proportionately in the investment
income and expenses of the Fund, except that the per share dividends from net
investment income on the Class A Shares, the Class B Shares and the Class C
Shares will vary due to the expenses under the 12b-1 Plan applicable to each
Class. Generally, the dividends per share on Class B Shares and Class C Shares
can be expected to be lower than the dividends per share on Class A Shares
because the expenses under the 12b-1 Plans relating to Class B and Class C
Shares will be higher than the expenses under the 12b-1 Plan relating to Class A
Shares. See Distribution (12b-1) and Service under Management of the Fund.
Both dividends and distributions, if any, are automatically reinvested
in your account at net asset value unless you elect otherwise. Any check in
payment of dividends or other distributions which cannot be delivered by the
United States Post Office or which remains uncashed for a period of more than
one year may be reinvested in your account at the then-current net asset value
and the dividend option may be changed from cash to reinvest. If you elect to
-57-
<PAGE>
take your dividends and distributions in cash and such dividends and
distributions are in an amount of $25 or more, you may choose the MoneyLine
Direct Deposit Service and have such payments transferred from your Fund account
to your predesignated bank account. This service is not available for retirement
plans. See MoneyLine Direct Deposit Service under The Delaware Difference for
more information about this service.
-58-
<PAGE>
TAXES
The tax discussion set forth below is included for general information
only. Investors should consult their own advisers concerning the federal, state,
local or foreign tax consequences of an investment in the Fund.
The Fund has qualified, and intends to continue 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, whether received in cash or in additional
shares. No portion of the Fund's distributions will be eligible for the
dividends-received deduction for corporations.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or 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 byproduct 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.
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 calendar year in which they are 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.
-59-
<PAGE>
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. All or a portion of
the sales charge incurred in acquiring Fund shares will be excluded from the
federal tax basis of any of such shares sold or exchanged within 90 days of
their purchase (for purposes of determining gain or loss upon the sale of such
shares) if the sale proceeds are reinvested in the Fund or in another fund in
the Delaware Group of funds and a sales charge that would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge excluded
from the tax basis of the shares sold will be added to the tax basis of the
shares acquired in the reinvestment.
The automatic conversion of Class B Shares into Class A Shares at the
end of approximately eight years after purchase will be tax-free for federal tax
purposes. See Automatic Conversion of Class B Shares under Classes of 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, Income Funds, Inc. will mail to you information on the tax
status of the Fund's dividends and distributions. Shareholders will also receive
each year information as to the portion of dividend income 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.
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 Taxes in Part B for additional information on tax matters relating
to the Fund and its shareholders.
-60-
<PAGE>
CALCULATION OF OFFERING PRICE AND NET ASSET VALUE PER SHARE
The net asset value ("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. Debt securities are priced on the basis of valuations provided by
an independent pricing service using methods approved by the Fund's Board of
Directors. 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 Income Funds, Inc.'s Board of Directors.
Class A Shares are purchased at the offering price per share, while
Class B Shares and Class C Shares are purchased at the NAV per share. The
offering price per share of Class A Shares consists of the NAV per share next
computed after the order is received, plus any applicable front-end sales
charges.
The offering price and NAV are computed as of the close of regular
trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern time) on
days when the Exchange is open.
The net asset values 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 Delchester Fund Institutional Class will not incur any of the
expenses under the Fund's 12b-1 Plans and the Class A, Class B and Class C
Shares alone will bear the 12b-1 Plan expenses payable under their respective
Plans. Due to the specific distribution expenses and other costs that may be
allocable to each class, the dividends paid to each class of the Fund may vary.
However, the NAV per share of each class is expected to be equivalent.
-61-
<PAGE>
MANAGEMENT OF THE FUND
Directors
The business and affairs of the Fund are managed under the direction of
Income Funds, Inc.'s Board of Directors. Part B contains additional information
regarding the 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 July 31, 1996, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
supervising in the aggregate more than $28 billion in assets in the various
institutional or separately managed (approximately $17,646,238,000) and
investment company (approximately $10,764,119,000) 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 Income Funds, 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 Income Funds, Inc.'s Trading Department. The Manager
also administers Income Funds, Inc.'s affairs and pays the salaries of all the
directors, officers and employees of Income Funds, Inc. who are affiliated with
the Manager. For these services, the Manager is paid an annual fee of .60% on
the first $500 million of average daily net assets of the Fund, .575% on the
next $250 million and .55% on the average daily net assets in excess of $750
million, less the Fund's proportionate share of all directors' fees paid to the
unaffiliated directors by Income Funds, Inc. Investment management fees paid by
the Fund for the fiscal year ended July 31, 1996 were .57% of average daily net
assets.
-62-
<PAGE>
Paul A. Matlack and Gerald T. Nichols have primary responsibility for
making day-to-day investment decisions for the Fund. Mr. Matlack and Mr. Nichols
have been members of the Fund's management team since 1990, and were named co-
managers of the Fund in January 1993. A Chartered Financial Analyst, Mr. Matlack
is a graduate of the University of Pennsylvania with an MBA in Finance from
George Washington University. He began his career at Mellon Bank as a credit
specialist, and later served as a corporate loan officer for Mellon Bank and
then Provident National Bank.
Mr. Nichols is a graduate of the University of Kansas, where he
received a BS in Business Administration and an MS in Finance. Prior to joining
the Delaware Group, he was a high-yield credit analyst at Waddell & Reed, Inc.
and subsequently the investment officer for a private merchant banking firm. He
is a Chartered Financial Analyst.
In making investment decisions for the Fund, Mr. Matlack and Mr.
Nichols regularly consult with Paul E. Suckow. Mr. Suckow is Executive Vice
President/Chief Investment Officer, Fixed Income of Income Funds, Inc. A
Chartered Financial Analyst, he is a graduate of Bradley University with an MBA
from Western Illinois University. Mr. Suckow was a fixed- income portfolio
manager at the Delaware Group from 1981 to 1985. He returned to the Delaware
Group in 1993 after eight years with Oppenheimer Management Corporation where he
served as Executive Vice President and Director of Fixed Income.
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. Given the
Fund's investment objective, its annual portfolio turnover rate is not expected
to exceed 150%. A turnover rate of 100% would occur, for example, if all the
investments in the Fund's portfolio at the beginning of the year were replaced
by the end of the year. During the past two fiscal years, the Fund's portfolio
turnover rates were 92% for 1995 and 108% 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
-63-
<PAGE>
Manager in servicing any of its accounts. Subject to best price and execution,
the Fund may consider a broker/dealer's sales of its 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 Classes in advertising and other types of literature.
The current yield for each Class will be calculated by dividing the
annualized net investment income earned by that Class during a recent 30-day
period by the maximum offering price 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 and: (i) in
the case of Class A Shares, the impact of the maximum front-end sales charge at
the beginning of each specified period; and (ii) in the case of Class B Shares
and Class C Shares, the deduction of any applicable CDSC at the end of the
relevant period. Each presentation will include the average annual total return
for one-, five- and ten-year periods, as relevant. The Fund may also advertise
aggregate and average total return information concerning a Class over
additional periods of time. In addition, the Fund may present total return
information that does not reflect the deduction of the maximum front-end sales
charge or any applicable CDSC. In this case, such total return information would
be more favorable than total return information that includes the deductions of
the maximum front-end sales charge or any applicable CDSC.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not a guarantee of future results.
Distribution (12b-1) and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor of the Fund's shares under a Distribution Agreement with Income
Funds, Inc. dated April 3, 1995, as amended on November 29, 1995.
Income Funds, Inc. has adopted a separate distribution plan under Rule
12b-1 for each of the Class A Shares, Class B Shares and Class C Shares (the
"Plans"). The Plans permit
-64-
<PAGE>
the Fund to pay the Distributor from the assets of the respective Classes a
monthly fee for the Distributor's services and expenses in distributing and
promoting sales of shares. These expenses include, among other things, preparing
and distributing advertisements, sales literature, and prospectuses and reports
used for sales purposes, compensating sales and marketing personnel, holding
special promotions for specified periods of time, and paying distribution and
maintenance fees to brokers, dealers and others. In connection with the
promotion of Class A, Class B and Class C Shares, the Distributor may, from time
to time, pay to participate in dealer-sponsored seminars and conferences, and
reimburse dealers for expenses incurred in connection with preapproved seminars,
conferences, and advertising. The Distributor may pay or allow additional
promotional incentives to dealers as part of preapproved sales contests and/or
to dealers who provide extra training and information concerning a Class and who
increase sales of the Class. In addition, the Fund may make payments from the
assets of the respective Class directly to others, such as banks, who aid in the
distribution of Class shares or provide services in respect of a Class, pursuant
to service agreements with Income Funds, Inc.
The 12b-1 Plan expenses relating to each of the Class B Shares and
Class C Shares are also used to pay the Distributor for advancing the commission
costs to dealers with respect to the initial sale of such shares.
The aggregate fees paid by the Fund from the assets of the respective
Classes to the Distributor and others under the Plans may not exceed .30% of the
Class A Shares' average daily net assets in any year, and 1% (.25% of which are
service fees to be paid to the Distributor, dealers and others for providing
personal service and/or maintaining shareholder accounts) of each of the Class B
Shares' and Class C Shares' average daily net assets in any year. The actual
12b-1 expenses assessed against the Class A Shares may be less than .30%, but
may not be less than .10%, because of the formula for calculating the fee
adopted by Income Funds, Inc.'s Board of Directors. See Part B. The Class A,
Class B and Class C Shares will not incur any distribution expenses beyond these
limits, which may not be increased without shareholder approval.
While payments pursuant to the Plans may not exceed .30% annually with
respect to the Class A Shares, and 1% annually with respect to each of the Class
B Shares and the Class C Shares, the Plans do not limit fees to amounts actually
expended by the Distributor. It is therefore possible that the Distributor may
realize a profit in any
-65-
<PAGE>
particular year. However, the Distributor currently expects that its
distribution expenses will likely equal or exceed payments to it under the
Plans. The Distributor may incur such additional expenses and make additional
payments to dealers from its own resources to promote the distribution of shares
of the Classes. The monthly fees paid to the Distributor under the Plans are
subject to the review and approval of Income Funds, Inc.'s unaffiliated
directors, who may reduce the fees or terminate the Plans at any time.
Income Funds, Inc.'s Plans do not apply to the Delchester Fund
Institutional Class of shares. Those shares are not included in calculating the
Plans' fees, and the Plans are not used to assist in the distribution and
marketing of Delchester Fund Institutional Class shares.
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 September 30, 1996. 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.
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. The ratios of expenses to
average daily net assets were 1.02% and 1.77% for the Class A Shares and the
Class B Shares, respectively, for the fiscal year ended July 31, 1996. The Fund
anticipates that the expense ratio for Class C Shares will be identical to the
expense ratio for Class B Shares. The expense ratio of each Class reflects the
impact of its 12b-1 Plan.
-66-
<PAGE>
Shares
Income Funds, 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, Income Funds, Inc. was organized as a Maryland
corporation on March 4, 1983. Income Funds, Inc. was previously organized as a
Delaware corporation in 1970. In addition to the Fund, Income Funds, Inc.
presently offers one other series of shares, the Strategic Income Fund series.
Income Funds, Inc. shares have a par value of $1.00, equal voting
rights, except as noted below, and are equal in all other respects. All Fund
shares have noncumulative voting rights which means that the holders of more
than 50% of Income Funds, Inc.'s shares voting for the election of directors can
elect 100% of the directors if they choose to do so. Under Maryland law, Income
Funds, 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 Income Funds, Inc.'s outstanding
shares may request that a special meeting be called to consider the removal of a
director.
In addition to Class A Shares, Class B Shares and Class C Shares, the
Fund also offers the Delchester Fund Institutional Class shares. Shares of each
class represent proportionate interests in the assets of the Fund and have the
same voting and other rights and preferences as the other classes of the Fund,
except that shares of the Delchester Fund Institutional Class are not subject
to, and may not vote on matters affecting, the Distribution Plans under Rule
12b-1 relating to the Class A, Class B and Class C Shares. Similarly, as a
general matter, the shareholders of Class A Shares, Class B Shares and Class C
Shares may vote only on matters affecting the 12b-1 Plan that relates to the
class of shares that they hold. However, the Class B Shares may vote on any
proposal to increase materially the fees to be paid by the Fund under the Rule
12b-1 Plan relating to the Class A Shares.
Prior to September 30, 1996, Delaware Group Income Funds, Inc. was
known as Delaware Group Delchester High-Yield Bond Fund, Inc. Prior to September
30, 1996, Delaware Group Delchester High-Yield Bond Fund, Inc. offered a single
series of shares, the Common Stock Series, which was known as and did business
as Delchester Fund.
-67-
<PAGE>
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
Rule 144A 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 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 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; (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 which 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.
Zero Coupon Bonds and Pay-in-Kind Bonds
The Fund may acquire zero coupon bonds and, to a lesser extent,
pay-in-kind (PIK) bonds. Zero coupon bonds and PIK bonds are generally
considered to be more interest-sensitive than income bearing bonds, to be more
speculative than interest-bearing bonds, and to have certain tax consequences
which could, under certain circumstances, be adverse to the Fund. For example,
the Fund accrues, and is required to distribute to shareholders, income on its
zero coupon bonds. However, the Fund may not receive the cash associated with
this income until the bonds are sold or mature. If the Fund did not have
sufficient cash to make the required distribution of accrued income, the Fund
could be required to sell other securities in its portfolio or to borrow to
generate the cash required.
-68-
<PAGE>
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.
-69-
<PAGE>
<TABLE>
<CAPTION>
APPENDIX A - INVESTMENT ILLUSTRATIONS
Illustrations of the Potential Impact on Investment Based on Purchase Option
$10,000 Purchase
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
--------------------------------------- ----------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 9,525 10,000 10,000 9,525 10,000 10,000
1 10,192 10,630 10,630 10,192 10,230 10,530+
2 10,905 11,300 11,300
3 11,669 12,012 12,012
4 12,485 12,768 12,768
5 13,359 13,573 13,573
6 14,294 14,428 14,428
7 15,295 15,337 15,337
8 16,366+ 16,303 16,303
9 17,511 17,444* 17,330
10 18,737 18,665* 18,422
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
--------------------------------------- ---------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
0 9,525 10,000 10,000 9,525 10,000 10,000
1 10,192 10,630 10,630 10,192 10,630 10,630
2 10,905 11,300 11,300 10,905 11,300 11,300
3 11,669 11,712 12,012+ 11,669 12,012 12,012
4 12,485 12,768 12,768
5 13,359 13,373 13,573+
6
7
8
9
10
</TABLE>
*This assumes that Class B Shares were converted to Class A
Shares at the end of the eighth year.
<PAGE>
<TABLE>
<CAPTION>
$250,000 Purchase
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
----------------------------------------- --------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ----
<C> <C> <C> <C> <C> <C> <C>
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,750 265,750 260,813 255,750 263,250+
2 279,069 282,492 282,492
3 298,604 300,289 300,289
4 319,507+ 319,207 319,207
5 341,872 339,318 339,318
6 365,803 360,695 360,695
7 391,409 383,418 383,418
8 418,808 407,574 407,574
9 448,124 436,104* 433,251
10 479,493 466,631* 460,546
Scenario 3 Scenario 4
Year Redeem 3rd Year Redeem 5th Year
- ---- ----------------------------------------- --------------------------------------
0 Class A Class B Class C Class A Class B Class C
1
2 243,750 250,000 250,000 243,750 250,000 250,000
3 260,813 265,750 265,750 260,813 265,750 265,750
4 279,069 282,492 282,492 279,069 282,492 282,492
5 298,604 292,789 300,289+ 298,604 300,289 300,289
6 319,507+ 319,207 319,207
7 341,872 334,318 339,318
8
9
10
</TABLE>
*This assumes that Class B Shares were converted to Class A
Shares at the end of the eighth year.
Assumes a hypothetical return for Class A of 7% per year, a hypothetical return
for Class B of 6.3% for years 1-8 and 7% for years 9-10, and a hypothetical
return for Class C of 6.3% per year. Hypothetical returns vary due to the
different expense structure for each Class and do not represent actual
performance.
Class A purchase subject to appropriate sales charge breakpoint (4.75% @
$10,000; 3.75% @ $100,000; 2.50% @ $250,000).
- -Class B purchase assessed appropriate CDSC upon redemption (4%-4%-3%-3%-2%-1%
in years 1-2-3-4-5-6). Class C purchase assessed 1% CDSC upon redemption in
year 1. Figures marked "+" identify which Class offers the greater return
potential based on investment amount, the holding period and the expense
structure of each Class.
<PAGE>
APPENDIX B--RATINGS
The Fund's assets are invested primarily in bonds rated BBB or lower by
S&P or Baa or lower by Moody's and in unrated corporate bonds. These credit
ratings evaluate only the safety of principal and interest and do not consider
the market value risk associated with high-yield securities. The table set forth
below shows the percentage of the Fund's securities included in each of the
specified rating categories and shows the percentage of the Fund's assets held
in U.S. government securities. 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 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
Fund's fiscal year ended July 31, 1996. The paragraphs following the table
contain excerpts from Moody's and S&P's rating descriptions.
Rating Moody's Average Weighted
and/or Percentage of
S&P Portfolio
- ---------------------------------- -------------------
United States Treasury Obligations 9.75%
Aaa/AAA 0.00%
Aa/AA 0.00%
A/A 0.00%
Baa/BBB 0.00%
Ba/BB 12.24%
B/B 72.40%
Caa/CCC 0.00%
Not Rated/Other 5.61%
The Fund tends to invest primarily in bonds rated Ba or B by Moody's or
similarly rated by S&P or another rating agency. During the fiscal year ended
July 31, 1996, the Fund increased its exposure to bonds rated B from 45.64% to
72.40% and reduced its exposure to bonds rated Ba from 33.25% to 12.24%. The
Fund tends to emphasize B-rated bonds during periods of economic expansion.
During periods of economic slowdown, the Fund tends to emphasize bonds rated Ba,
which are generally considered to be of higher quality but lower yielding than
bonds rated B. In response to signs of economic growth in the spring of 1996,
the Fund's managers increased the Fund's holdings of B-rated bonds in an effort
to increase investment income while maintaining a prudent
-70-
<PAGE>
risk profile, consistent with their view of economic and market conditions at
that time.
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 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.
-71-
<PAGE>
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
-72-
<PAGE>
- ---------------------------------
DELCHESTER FUND
- ---------------------------------
INSTITUTIONAL
- ---------------------------------
- ---------------------------------
P R O S P E C T U S
- ---------------------------------
SEPTEMBER 30, 1996
- ------------------
[Photo of various
Philadelphia sites]
DELAWARE
GROUP
---------
<PAGE>
For more information, contact 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
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
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
<PAGE>
DELCHESTER FUND INSTITUTIONAL PROSPECTUS
SEPTEMBER 30, 1996
----------------------------------------------------------------------
1818 Market Street, Philadelphia, PA 19103
For more information about
the Delchester Fund Institutional Class
call Delaware Group at 800-828-5052.
The Prospectus describes the Delchester Fund series (the "Fund") of
Delaware Group Income Funds, Inc. ("Income Funds, Inc.") (formerly known as
Delaware Group Delchester High-Yield Bond Fund, Inc.), a professionally-managed
mutual fund of the series type. The Fund's objective is to seek as high a
current income as is consistent with providing reasonable safety.
THIS FUND INVESTS UP TO 100% OF ITS ASSETS IN LOWER RATED FIXED-INCOME
SECURITIES, COMMONLY KNOWN AS "JUNK BONDS," WHICH INVOLVE GREATER RISKS,
INCLUDING DEFAULT RISKS, THAN HIGHER RATED FIXED-INCOME SECURITIES. PURCHASERS
SHOULD CAREFULLY ASSESS THESE RISKS BEFORE INVESTING IN THIS FUND. SEE
INVESTMENT OBJECTIVE AND POLICIES, RISK FACTORS, AND APPENDIX A-RATINGS.
The Fund offers the Delchester Fund Institutional Class (the "Class")
of shares. Shares of this 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 Classes of 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. Part B of Income Funds, Inc.'s registration statement, dated
September 30, 1996, 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 its Annual Report, which will accompany any response to requests for
Part B.
-1-
<PAGE>
The Fund also offers Delchester Fund A Class, Delchester Fund B Class
and Delchester 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.
TABLE OF CONTENTS
Cover Page Classes of Shares
Synopsis How to Buy Shares
Summary of Expenses Redemption and Exchange
Financial Highlights Dividends and Distributions
Investment Objective Taxes
and Policies Calculation of Net Asset
Suitability Value Per Share
Investment Strategy Management of the Fund
Risk Factors Other Investment Policies
Youth and Volatility of and Risk Considerations
the High-Yield Market Appendix A - Ratings
Redemptions
Liquidity and Valuation
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.
-2-
<PAGE>
SYNOPSIS
Investment Objective and Risk Factors
The objective of the Fund is to seek as high a current income as is
consistent with providing reasonable safety by investing principally in
corporate bonds, and also in U.S. government securities and commercial paper.
For further details, see Investment Objective and Policies. This Fund invests
primarily in high-yield securities (junk bonds) and greater risks may be
involved with an investment in the Fund than an investment in a mutual fund
comprised primarily of investment grade bonds. See Risk Factors.
Investment Manager, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") is the investment
manager for the Fund. The Manager furnishes investment management services to
the Fund, subject to the supervision and direction of Income Funds, Inc.'s Board
of Directors. Under the Investment Management Agreement, the annual compensation
paid to the Manager is equal to .60% on the first $500 million of average daily
net assets, .575% on the next $250 million and .55% on the average daily net
assets in excess of $750 million, less the Fund's proportionate share of all
directors' fees paid to the unaffiliated directors by Income Funds, Inc. See
Management of the Fund.
The Manager also provides investment management services to certain of
the 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 Management of the Fund.
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.
-3-
<PAGE>
Open-End Investment Company
Income Funds, Inc., which was organized as a Maryland corporation in
1983, is an open-end management investment company and the Fund's portfolio of
assets is diversified as defined by the Investment Company Act of 1940 (the
"1940 Act"). Income Funds, Inc. was previously organized as a Delaware
corporation in 1970. See Shares under Management of the Fund.
-4-
<PAGE>
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
Redemption Fees . . . . . . . . . . . . . . . . . . . . . . None*
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . . None**
Annual Operating Expenses
(as a percentage of
average daily net assets)
- --------------------------------------------------------------------------
Management Fees . . . . . . . . . . . . . . . . . . . . . . 0.57%
12b-1 Fees. . . . . . . . . . . . . . . . . . . . . . . . . None
Other Operating Expenses. . . . . . . . . . . . . . . . . . 0.20%
----
Total Operating Expenses . . . . . . . . . . . . . . . 0.77%
====
The purpose of this table is to assist the investor in understanding
the various costs and expenses that an investor in the Class will bear directly
or indirectly.
*CoreStates Bank, N.A. currently charges $7.50 per redemption
for redemptions payable by wire.
**Exchanges are subject to the requirements of each fund and
a front-end sales charge may apply.
For expense information about Delchester Fund A Class, Delchester Fund
B Class and Delchester 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 table above, the Fund charges no redemption fees.
1 year 3 years 5 years 10 years
------ ------- ------- --------
$8 $25 $43 $95
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.
-5-
<PAGE>
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
Delaware Group Income Funds, Inc. (formerly, Delaware Group Delchester
High-Yield Bond 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, 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 Income Funds, Inc. upon request at no charge.
- -------------------------------------------------------------
-6-
<PAGE>
<TABLE>
<CAPTION>
Year Ended
7/31/96 7/31/95 7/31/94 7/31/93 7/31/92(1)(2)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period . . . . . . $6.280 $6.450 $7.070 $6.900 $6.260
Income From In-
- ---------------
vestment Operations
- -------------------
Net Investment
Income . . . . . . 0.644 0.685 0.758 0.787 0.798
Net Gains or Losses
on Securities (both
realized and
unrealized). . . . (0.142) (0.169) (0.617) 0.165 0.640
------ ------ ------ ----- -----
Total From
Investment
Operations. . . 0.502 0.516 0.141 0.952 1.438
------ ------ ------ ----- -----
Less Distributions
- ------------------
Dividends (from
net investment
income). . . . . . (0.642) (0.686) (0.761) (0.782) (0.798)
Distributions
(from capital
gains) . . . . . . none none none none none
Returns of
Capital. . . . . . none none none none none
------ ------ ------ ----- -----
Total Distri-
butions . . . . (0.642) (0.686) (0.761) (0.782) (0.798)
------ ------ ------ ------ ------
Net Asset Value,
End of Period. . . $6.140 $6.280 $6.450 $7.070 $6.900
====== ====== ====== ====== ======
- -------------------------------------------------------------
Total Return . . . 8.37% 8.72% 1.82% 14.67% 24.28%
- ------------
- -------------------------------------------------------------
Ratios/Supplemental
- -------------------
Data
- ----
Net Assets, End
of Period (000's
omitted) . . . . . $59,513 $61,742 $71,122 $35,909 $18,746
Ratio of Expenses
to Average Daily
Net Assets . . . . 0.77% 0.82% 0.83% 0.86% 0.86%
Ratio of Net
Investment Income
to Average Daily
Net Assets . . . . 10.36% 11.14% 10.70% 11.35% 12.17%
Portfolio Turnover
Rate . . . . . . . 108% 92% 92% 72% 101%
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Year Ended
7/31/96 7/31/95 7/31/94 7/31/93 7/31/92(1)(2)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period . . . . . . $6.300 $7.480 $7.750 $7.940 $8.070
Income From In-
- ---------------
vestment Operations
- -------------------
Net Investment
Income . . . . . . 0.822 0.900 0.934 0.946 0.973
Net Gains or Losses
on Securities (both
realized and
unrealized). . . . (0.040) (1.180) (0.270) (0.188) (0.129)
------ ------ ------ ------ ------
Total From
Investment
Operations. . . 0.782 (0.280) 0.664 0.758 0.844
------ ------ ------ ------ ------
Less Distributions
- ------------------
Dividends (from
net investment
income). . . . . . (0.822) (0.900) (0.934) (0.948) (0.974)
Distributions
(from capital
gains) . . . . . . none none none none none
Returns of
Capital. . . . . . none none none none none
------ ------ ------ ------ ------
Total Distri-
butions . . . . (0.822) (0.900) (0.934) (0.948) (0.974)
------ ------ ------ ------ ------
Net Asset Value,
End of Period. . . $6.260 $6.300 $7.480 $7.750 $7.940
====== ====== ====== ====== ======
- -------------------------------------------------------
Total Return . . . 14.85% (3.58%) 9.10% 10.37% 10.84%
- ------------
- -------------------------------------------------------
Ratios/Supplemental
- -------------------
Data
- ----
Net Assets, End
of Period (000's
omitted) . . . . . $113,414 96,161 $84,800 $37,639 ---
Ratio of Expenses
to Average Daily
Net Assets . . . . 0.90% 0.85% 0.85% 0.87% 0.93%
Ratio of Net
Investment Income
to Average Daily
Net Assets . . . . 14.45% 13.47% 12.30% 12.18% 11.59%
Portfolio Turnover
Rate . . . . . . . 38% 72% 66% 139% 149%
</TABLE>
-8-
<PAGE>
- ---------------------------------------
(1) The financial highlights for the period prior to June 1, 1992 (the date
Delchester Fund Institutional Class was first offered for public sale)
are derived from data of the Delchester I class, which like the
Delchester Fund Institutional Class, was not subject to Rule 12b-1
distribution expenses. Shares of Delchester I class were converted into
shares of Delchester II class (now referred to as Delchester Fund A
Class) on June 1, 1992, pursuant to a Plan of Recapitalization approved
by shareholders of Delchester I class. Prior to May 2, 1994, Delchester
Fund A Class was known as Delchester Fund class and Delchester Fund
Institutional Class was known as Delchester Fund (Institutional) class.
(2) The data for Delchester I class and Delchester Fund Institutional Class
have been combined for 1992. For the ten months ended May 31 1992, the
Delchester I class' operating expenses and net investment income per
share were $0.047 and $0.666, respectively. For the two months ended
July 31, 1992, the Delchester Fund Institutional Class' operating
expenses and net investment income per share were $0.009 and $0.132,
respectively. All net investment income was distributed to
shareholders.
-9-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
SUITABILITY
The Fund may be suitable for investors interested in high current
income flow. The net asset value of each Class may fluctuate in response to the
condition of individual companies and general market and economic conditions
and, as a result, the Fund is not appropriate for a short-term investor.
The types of securities in which the Fund invests are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as yield,
in making an investment decision. While investments in unrated, lower-rated and
restricted securities have the potential for higher yields, they are more
speculative and increase the credit risk of the Fund's portfolio. Changes in the
market value of portfolio securities will not affect interest income from such
securities, but will be reflected in the Fund's net asset value. Investors
should be willing to accept the risks, including the risk of net asset value
fluctuations, associated with investing in these securities.
The Fund's objective of high current income also may be suited for
longer term investments, such as tax-deferred retirement plans (e.g., IRA,
401(k), Profit Sharing, etc.), where the income stream can be left to compound
on a tax-deferred basis.
Ownership of Fund shares can reduce the bookkeeping and administrative
inconveniences that would be connected with direct purchases of the types of
securities in which the Fund invests. Investors should not consider a purchase
of Fund shares 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 in concert to create a more complete
investment program.
INVESTMENT STRATEGY
The objective of the Fund is to seek as high a current income as is
consistent with providing reasonable safety. The strategy is to invest primarily
in those securities having a liberal and consistent yield and those tending to
reduce the risk of market fluctuations. The Fund will invest at least 80% of its
assets at the time of purchase in:
(1) Corporate Bonds. The Fund will invest in both
rated and unrated bonds. Unrated bonds may be more speculative in nature than
rated bonds; or
-10-
<PAGE>
(2) Government Securities. Securities of, or guaranteed by, the
U.S. government, its agencies or instrumentalities; or
(3) Commercial Paper. Commercial paper of companies having, at
the time of purchase, an issue of outstanding debt securities rated as
described above or commercial paper rated A-1 or A-2 by Standard & Poor's
Ratings Group ("S&P") or rated P-1 or P-2 by Moody's Investors Service, Inc.
("Moody's").
The Fund has consistently invested more than 80% of its assets in these
securities. The Fund must invest the remaining assets, if any, in
income-producing securities, including common stocks and preferred stocks, some
of which may have convertible features or attached warrants. Currently, the
Fund's assets are invested primarily in unrated corporate bonds and bonds rated
BB or lower by S&P or Ba or lower by Moody's.
The market values of fixed-income securities generally fall when
interest rates rise and, conversely, rise when interest rates fall. Lower-rated
and unrated fixed-income securities tend to reflect short-term corporate and
market developments to a greater extent than higher-rated fixed-income
securities, which react primarily to fluctuations in the general level of
interest rates. These lower-rated or unrated securities generally have higher
yields, but, as a result of factors such as reduced creditworthiness of issuers,
increased risks of default and a more limited and less liquid secondary market,
are subject to greater volatility and risk of loss of income and principal than
are higher-rated securities. The Manager will attempt to reduce such risk
through portfolio diversification, credit analysis, and attention to trends in
the economy, industries and financial markets.
The Fund may purchase privately-placed debt and other securities the
resale of which is restricted under applicable securities laws. Such securities
may be less liquid than securities that are not subject to resale restrictions.
The Fund will not purchase illiquid assets if more than 10% of its assets would
consist of such illiquid securities.
For temporary defensive purposes, the Fund may hold a substantial
portion of its assets in cash or short-term obligations. While the Fund is
permitted, it normally does not borrow money or invest in repurchase agreements,
except to invest cash balances.
-11-
<PAGE>
Although the Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained. The objective of the Fund may not
be changed without shareholder approval. For a description of the Fund's other
investment policies, see Other Investment Policies and Risk Considerations in
this Prospectus. Part B sets forth other investment restrictions.
RISK FACTORS
The Fund's assets may be invested primarily in bonds rated BBB or lower
by S&P or Baa or lower by Moody's and in unrated corporate bonds. See Appendix
B--Ratings to this Prospectus for more rating information. Investing in these
so-called "junk" or "high-yield" bonds entails certain risks, including the risk
of loss of principal, which may be greater than the risks involved in investment
grade bonds, and which should be considered by investors contemplating an
investment in the Fund. Such bonds are sometimes issued by companies whose
earnings at the time of issuance are less than the projected debt service on the
junk bonds. In addition to the considerations discussed elsewhere in this
Prospectus, those risks include the following:
YOUTH AND VOLATILITY OF THE HIGH-YIELD MARKET
Although the market for high-yield bonds has been in existence for many
years, including periods of economic downturns, the high-yield market grew
rapidly during the long economic expansion which took place in the United States
during the 1980s. During that economic expansion, the use of high-yield debt
securities to fund highly leveraged corporate acquisitions and restructurings
increased dramatically. As a result, the high-yield market grew substantially
during that economic expansion. Although experts disagree on the impact
recessionary periods have had and will have on the high-yield market, some
analysts believe a protracted economic downturn would severely disrupt the
market for high-yield bonds, would adversely affect the value of outstanding
bonds and would adversely affect the ability of high-yield issuers to repay
principal and interest. Those analysts cite volatility experienced in the
high-yield market in the past as evidence for their position. It is likely that
protracted periods of economic uncertainty would result in increased volatility
in the market prices of high-yield bonds, an increase in the number of
high-yield bond defaults and corresponding volatility in the Fund's net asset
value. At times in the past, uncertainty and volatility in the high-yield market
resulted in volatility in the Fund's net asset value.
-12-
<PAGE>
REDEMPTIONS
If, as a result of volatility in the high-yield market or other
factors, the Fund experiences substantial net redemptions of the Fund's shares
for a sustained period of time (i.e., more shares of the Fund are redeemed than
are purchased), the Fund may be required to sell securities without regard to
the investment merits of the securities to be sold. If the Fund sells a
substantial number of securities to generate proceeds for redemptions, the asset
base of the Fund will decrease and the Fund's expense ratio may increase.
LIQUIDITY AND VALUATION
The secondary market for high-yield securities is currently dominated
by institutional investors, including mutual funds and certain financial
institutions. There is generally no established retail secondary market for
high-yield securities. As a result, the secondary market for high-yield
securities is more limited and less liquid than other secondary securities
markets. The high-yield secondary market is particularly susceptible to
liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings and
loan crisis. A less liquid secondary market may have an adverse effect on the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. In addition, a less liquid
secondary market makes it more difficult for the Fund to obtain precise
valuations of the high-yield securities in its portfolio. During periods
involving such liquidity problems, judgment plays a greater role in valuing
high-yield securities than is normally the case. The secondary market for
high-yield securities is also generally considered to be more likely to be
disrupted by adverse publicity and investor perceptions than the more
established secondary securities markets. The Fund's privately placed high-yield
securities are particularly susceptible to the liquidity and valuation risks
outlined above.
-13-
<PAGE>
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 plans 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) banks, trust companies and similar financial institutions
investing for their own account or for the account of their trust customers for
whom such financial institution is exercising investment discretion in
purchasing shares of the Class; 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.
Delchester Fund A Class, Delchester Fund B Class and
Delchester Fund C Class
In addition to offering the Delchester Fund Institutional Class, the
Fund also offers the Delchester Fund A Class, the Delchester Fund B Class and
the Delchester Fund C Class, which are described in a separate prospectus.
Shares of the Delchester Fund A Class, the Delchester Fund B Class and the
Delchester Fund C Class may be purchased through authorized investment dealers
or directly by
-14-
<PAGE>
contacting the Fund or the Distributor. The Delchester Fund A Class carries a
front-end sales charge and has annual 12b-1 expenses equal to a maximum of .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. The Delchester
Fund B Class and the Delchester 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 the
Delchester Fund B Class and the Delchester Fund C Class and certain shares of
the Delchester 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.
-15-
<PAGE>
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 Delchester Fund Institutional Class, to 1818
Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by mailing
a check payable to Delchester Fund Institutional Class. 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).
1. Initial Purchases--Before you invest, telephone the Fund's 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, to Delchester Fund Institutional Class,
to 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments at any time 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 the
Delchester Fund B Class and Delchester Fund C Class and the 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 the Class. If you wish to open an account by
exchange, call your Client Services Representative at 800-828-5052 for more
information.
-16-
<PAGE>
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. They
may charge for this service.
Purchase Price and Effective Date
The purchase price (net asset value) 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, 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 canceled 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
purchase orders paid by third-party checks or checks that are not drawn on a
domestic branch of a United States financial institution. If a check drawn on a
foreign financial institution is accepted, you may be subject to additional bank
charges for clearance and currency conversion.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under $250 as a result of redemptions.
-17-
<PAGE>
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 based on the net asset value
next determined after we receive your request in good order. Redemption and
exchange requests received in good order after the time the net asset value of
shares is determined, as noted above, 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.
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 redemption requests as to shares for which a check
was tendered 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
-18-
<PAGE>
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 the Class B
Shares or Class C Shares 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, 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.
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 of
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, but no later than
seven days, 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.
-19-
<PAGE>
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 service 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, the 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 record address. Checks will be payable
to the shareholder(s) of record. Payment is normally mailed the next business
day, but no later than seven days, after receipt of the request.
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
-20-
<PAGE>
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.
CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted from your
redemption. If you ask for a check, it will normally be mailed the next business
day, but no later than seven days, after receipt of your 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.
-21-
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund declares a dividend to all shareholders of record at the time
the net asset value per share is determined. See Purchase Price and Effective
Date under How to Buy Shares. Thus, when redeeming shares, dividends continue to
be credited up to and including the date of redemption.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if the Fund is given prior notice of a Federal Funds
wire and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Purchases by check earn dividends upon
conversion to Federal Funds, normally one business day after receipt.
Each class of the Fund will share proportionately in the investment
income and expenses of the Fund, except that the Class will not incur
distribution fees under the Rule 12b-1 Plans which apply to the Delchester Fund
A Class, the Delchester Fund B Class and the Delchester Fund C Class.
The Fund's dividends are declared daily and paid monthly. Dividends and
distributions, if any, will be automatically reinvested in a shareholder's
account at net asset value. Distributions from net realized securities profits,
if any, will be distributed twice a year. The first payment normally would be
made during the first quarter of the next fiscal year. The second payment would
be made near the end of the calendar year to comply with certain requirements of
the Internal Revenue Code (the "Code").
-22-
<PAGE>
TAXES
The tax discussion set forth below is included for general information
only. Investors should consult their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in the Fund.
The Fund has qualified, and intends to continue 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 investors who are subject to
income taxes as ordinary income, even though received in additional shares. No
portion of the Fund's distributions will be eligible for the dividends-received
deduction for corporations.
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 byproduct 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.
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 calendar year in which they are 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.
-23-
<PAGE>
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, Income Funds, Inc. will mail to you information on the tax
status of the Fund's dividends and distributions. Shareholders will also receive
each year information as to the portion of dividend income 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.
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 Taxes in Part B for additional information on tax matters relating
to the Fund and its shareholders.
-24-
<PAGE>
CALCULATION OF NET ASSET VALUE PER SHARE
The purchase and redemption price of Class shares is the net asset
value ("NAV") per share of the Class 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 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. Debt securities
are priced on the basis of valuations provided by an independent pricing service
using methods approved by the Fund's Board of Directors. 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 Income Funds, Inc.'s
Board of Directors.
The net asset values 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 Delchester 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 may be allocable to each class, the dividends paid to each
class of the Fund may vary. However, the NAV per share of each class is expected
to be equivalent.
-25-
<PAGE>
MANAGEMENT OF THE FUND
Directors
The business and affairs of the Fund are managed under the direction of
Income Funds, Inc.'s Board of Directors. Part B contains additional information
regarding the Fund'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 July 31, 1996, the Manager and its affiliates in
the Delaware Group, including Delaware International Advisers Ltd., were
supervising in the aggregate more than $28 billion in assets in the various
institutional or separately managed (approximately $17,646,238,000) and
investment company (approximately $10,764,119,000) 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 Income Funds, 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 Income Funds, Inc.'s Trading Department. The Manager
also administers Income Funds, Inc.'s affairs and pays the salaries of all the
directors, officers and employees of Income Funds, Inc. who are affiliated with
the Manager. For these services, the Manager is paid an annual fee of .60% on
the first $500 million of average daily net assets of the Fund, .575% on the
next $250 million and .55% on the average daily net assets in excess of $750
million, less the Fund's proportionate share of all directors' fees paid to the
unaffiliated directors by Income Funds, Inc. Investment management fees paid by
the Fund for the fiscal year ended July 31, 1996 were .57% of average daily net
assets.
-26-
<PAGE>
Paul A. Matlack and Gerald T. Nichols have primary responsibility for
making day-to-day investment decisions for the Fund. Mr. Matlack and Mr. Nichols
have been members of the Fund's management team since 1990, and were named co-
managers of the Fund in January 1993. A Chartered Financial Analyst, Mr. Matlack
is a graduate of the University of Pennsylvania with an MBA in Finance from
George Washington University. He began his career at Mellon Bank as a credit
specialist, and later served as a corporate loan officer for Mellon Bank and
then Provident National Bank.
Mr. Nichols is a graduate of the University of Kansas, where he
received a BS in Business Administration and an MS in Finance. Prior to joining
the Delaware Group, he was a high-yield credit analyst at Waddell & Reed, Inc.
and subsequently the investment officer for a private merchant banking firm. He
is a Chartered Financial Analyst.
In making investment decisions for the Fund, Mr. Matlack and Mr.
Nichols regularly consult with Paul E. Suckow. Mr. Suckow is Executive Vice
President/Chief Investment Officer, Fixed Income of Income Funds, Inc. A
Chartered Financial Analyst, he is a graduate of Bradley University with an MBA
from Western Illinois University. Mr. Suckow was a fixed income portfolio
manager at the Delaware Group from 1981 to 1985. He returned to the Delaware
Group in 1993 after eight years with Oppenheimer Management Corporation where he
served as Executive Vice President and Director of Fixed Income.
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. Given the
Fund's investment objective, its annual portfolio turnover rate is not expected
to exceed 150%. A turnover rate of 100% would occur if all the investments in
the Fund's portfolio at the beginning of the year were replaced by the end of
the year. During the past two fiscal years, the Fund's portfolio turnover rates
were 92% for 1995 and 108% 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
-27-
<PAGE>
Manager in servicing any of its accounts. Subject to best price and execution,
the Fund may consider a broker/dealer's sales of its 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. Each presentation will include
the average annual total return for one-, five- and ten-year periods. The Fund
may also advertise aggregate and average total return information concerning the
Class over additional periods of time.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not 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 dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling your Client Services Representative.
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. Income Funds, Inc.'s fiscal year ends on
July 31.
Distribution and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor of the Fund's shares under a Distribution Agreement with Income
Funds, Inc. dated April 3,
-28-
<PAGE>
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 September 30, 1996. 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 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 their services. In addition,
participant account maintenance fees may be assessed for certain recordkeeping
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. The ratio of operating
expenses to average daily net assets for the Class was .77% for the fiscal year
ended July 31, 1996.
Shares
Income Funds, 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, Income Funds, Inc. was organized as a Maryland
corporation on March 4, 1983. Income Funds, Inc. was previously organized as a
Delaware corporation in 1970. In addition to the Fund, Income Funds, Inc.
presently offers one other series of shares, the Strategic Income Fund series.
Income Funds, Inc. shares have a par value of $1.00, equal voting
rights, except as noted below, and are equal in all other respects. All Fund
shares have noncumulative voting rights which means that the holders of more
than 50% of Income Funds, Inc.'s shares voting for the election of directors can
elect 100% of the directors if they choose to do so. Under Maryland law, Income
Funds, Inc. is not required, and does not intend, to hold annual meetings of
-29-
<PAGE>
shareholders unless, under certain circumstances, it is required to do so under
the 1940 Act. Shareholders of 10% or more of Income Funds, Inc.'s outstanding
shares may request that a special meeting be called to consider the removal of
a director.
In addition to the Class, the Fund also offers the Delchester Fund A
Class, the Delchester Fund B Class and the Delchester 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 the other classes of the
Fund, 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 the
Delchester Fund A Class, the Delchester Fund B Class and the Delchester Fund C
Class.
Prior to September 30, 1996, Delaware Group Income Funds, Inc. was
known as Delaware Group Delchester High-Yield Bond Fund, Inc. Prior to September
30, 1996, Delaware Group Delchester High-Yield Bond Fund, Inc. offered a single
series of shares, the Common Stock Series, which was known as and did business
as Delchester Fund.
-30-
<PAGE>
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
Rule 144A 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 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 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; (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 which 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.
Zero Coupon Bonds and Pay-in-Kind Bonds
The Fund may acquire zero coupon bonds and, to a lesser extent,
pay-in-kind (PIK) bonds. Zero coupon bonds and PIK bonds are generally
considered to be more interest-sensitive than income bearing bonds, to be more
speculative than interest-bearing bonds, and to have certain tax consequences
which could, under certain circumstances, be adverse to the Fund. For example,
the Fund accrues, and is required to distribute to shareholders, income on its
zero coupon bonds. However, the Fund may not receive the cash associated with
this income until the bonds are sold or mature. If the Fund did not have
sufficient cash to make the required distribution of accrued income, the Fund
could be required to sell other securities in its portfolio or to borrow to
generate the cash required.
-31-
<PAGE>
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.
-32-
<PAGE>
APPENDIX A - RATINGS
The Fund's assets are invested primarily in bonds rated BBB or lower by
S&P or Baa or lower by Moody's and in unrated corporate bonds. These credit
ratings evaluate only the safety of principal and interest and do not consider
the market value risk associated with high-yield securities. The table set forth
below shows the percentage of the Fund's securities included in each of the
specified rating categories and shows the percentage of the Fund's assets held
in U.S. government securities. 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 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
Fund's fiscal year ended July 31, 1996. The paragraphs following the table
contain excerpts from Moody's and S&P's rating descriptions.
Rating Moody's Average Weighted
and/or Percentage of
S&P Portfolio
-------------------- ----------------
United States
Treasury Obligations 9.75%
Aaa/AAA 0.00%
Aa/AA 0.00%
A/A 0.00%
Baa/BBB 0.00%
Ba/BB 12.24%
B/B 72.40%
Caa/CCC 0.00%
Not Rated/Other 5.61%
The Fund tends to invest primarily in bonds rated Ba or B by Moody's or
similarly rated by S&P or another rating agency. During the fiscal year ended
July 31, 1996, the Fund increased its exposure to bonds rated B from 45.64% to
72.40% and reduced its exposure to bonds rated Ba from 33.25% to 12.24%. The
Fund tends to emphasize B-rated bonds during periods of economic expansion.
During periods of economic slowdown, the Fund tends to emphasize bonds rated Ba,
which are generally considered to be of higher quality but lower
-33-
<PAGE>
yielding than bonds rated B. In response to signs of economic growth in the
spring of 1996, the Fund's managers increased the Fund's holdings of B-rated
bonds in an effort to increase investment income while maintaining a prudent
risk profile, consistent with their view of economic and market conditions at
that time.
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 debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties
-34-
<PAGE>
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.
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
-35-
<PAGE>
_____________________________________
STRATEGIC INCOME FUND
_____________________________________
A CLASS
B CLASS
C CLASS
_____________________________________
PROSPECTUS
_____________________________________
SEPTEMBER 30, 1996
[Photo of water well]
DELAWARE
GROUP
--------
<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, tax-free funds, money market funds,
global and international funds and closed-end equity funds give investors the
ability to create a portfolio that fits their personal financial goals. For more
information, contact your financial adviser or call Delaware Group at
800-523-4640.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
SUB-ADVISER
Delaware International Advisers Ltd.
Veritas House
125 Finsbury Pavement
London, England EC2A 1NQ
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
<PAGE>
STRATEGIC INCOME FUND A CLASS SHARES
STRATEGIC INCOME FUND B CLASS SHARES PROSPECTUS
STRATEGIC INCOME FUND C CLASS SHARES SEPTEMBER 30, 1996
________________________________________________________
1818 Market Street, Philadelphia, PA 19103
For Prospectus and Performance:
Nationwide 800-523-4640
Information on Existing Accounts:
(SHAREHOLDERS ONLY)
Nationwide 800-523-1918
Dealer Services:
(BROKER/DEALERS ONLY)
Nationwide 800-362-7500
Representatives of Financial Institutions:
Nationwide 800-659-2259
This Prospectus describes the Strategic Income Fund A Class of shares
("Class A Shares"), the Strategic Income Fund B Class of shares ("Class B
Shares") and the Strategic Income Fund C Class of shares ("Class C Shares")
(individually, a "Class" and collectively, the "Classes") of the Strategic
Income Fund series (the "Fund") of Delaware Group Income Funds, Inc. ("Income
Funds, Inc."), a professionally-managed mutual fund of the series type. The
objective of the Fund is to seek to provide investors with high current income
and total return.
THIS FUND MAY INVEST UP TO 70% OF ITS ASSETS IN LOWER RATED SECURITIES,
COMMONLY KNOWN AS "JUNK BONDS" OR "BELOW INVESTMENT GRADE" SECURITIES WHICH
INVOLVE GREATER RISKS, INCLUDING DEFAULT RISKS, THAN HIGHER RATED SECURITIES.
PURCHASERS SHOULD CAREFULLY ASSESS THESE RISKS BEFORE INVESTING IN THIS FUND.
SEE INVESTMENT OBJECTIVE AND POLICIES, SPECIAL RISK CONSIDERATIONS, AND APPENDIX
B--RATINGS.
The Fund currently offers the three retail Classes. These alternatives
permit an investor to choose the method of purchasing shares that is most
suitable for his or her needs.
Class A Shares may be purchased at the public offering price, which is
equal to the next determined net asset value per share, plus a front-end sales
charge. Class A Shares are subject to a maximum front-end sales charge of 4.75%
and annual 12b-1 Plan expenses of up to .30% (currently, no more than .25%
pursuant to Board action).
<PAGE>
Class B Shares may be purchased at a price equal to the next determined
net asset value per share. Class B Shares are subject to a contingent deferred
sales charge ("CDSC") which may be imposed on redemptions made within six years
of purchase and annual 12b-1 Plan expenses of 1%, which are assessed against the
Class B Shares for approximately eight years after purchase. See Automatic
Conversion of Class B Shares under Classes of Shares.
Class C Shares may be purchased at a price equal to the next determined
net asset value per share. Class C Shares are subject to a CDSC which may be
imposed on redemptions made within 12 months of purchase and annual 12b-1 Plan
expenses of 1%, which are assessed against the Class C Shares for the life of
the investment.
In choosing the most suitable Class, an investor should consider the
differences among the Classes, including the effect of sales charges and 12b-1
Plan expenses, given the amount of the purchase and the length of time the
investor expects to hold the shares, among other circumstances. See Summary of
Expenses and Classes of Shares.
This Prospectus sets forth information that you should read and
consider before you invest. Please retain it for future reference. Part B of
Income Funds, Inc.'s registration statement, dated September 30, 1996, 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 numbers.
The Fund also offers the Strategic Income Fund Institutional Class,
which is available for purchase only by certain investors. A prospectus for the
Strategic Income Fund Institutional Class can be obtained by writing to Delaware
Distributors, L.P. at the above address or by calling the above numbers.
-2-
<PAGE>
TABLE OF CONTENTS
Cover Page How to Buy Shares
Synopsis Redemption and Exchange
Summary of Expenses Dividends and Distributions
Investment Objective Taxes
and Policies Calculation of Offering Price and
Suitability Net Asset Value Per Share
Investment Strategy Management of the Fund
Special Risk Considerations Other Investment Policies and
High-Yield Securities Risk Considerations
Foreign Securities Appendix A -- Investment Illustrations
The Delaware Difference Appendix B -- Ratings
Plans and Services
Retirement Planning
Classes of Shares
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.
-3-
<PAGE>
SYNOPSIS
Investment Objective
The objective of the Fund is to seek to provide investors with high
current income and total return. The Fund seeks to achieve its objective by
using a multi-sector investment approach, investing principally in three sectors
of the fixed-income securities markets: high-yield, higher risk securities;
investment grade fixed-income securities; and foreign government and other
foreign fixed-income securities. In addition, the Fund may invest in U.S. equity
securities. For further details, see Investment Objective and Policies.
Risk Factors
Prospective investors should consider the following:
1. The Fund may invest up to 70% of its assets in high-yield, higher
risk fixed-income or other securities ("junk" bonds or securities). Such
securities may increase the risks of an investment in this Fund. See High-Yield
Securities under Special Risk Considerations.
2. Investing in securities of non-United States companies which are
generally denominated in foreign currencies and the utilization of forward
foreign currency exchange contracts involve certain risk and opportunity
considerations not typically associated with investing in United States
companies. See Special Risk Considerations and Other Investment Policies and
Risk Considerations.
3. The Fund has the ability to engage in options transactions for
hedging purposes to counterbalance portfolio volatility. While the Fund does not
engage in options transactions for speculative purposes, there are risks which
result from the use of options, and an investor should carefully review the
descriptions of these risks in this Prospectus. Certain options may be
considered to be derivative securities. See Options under Other Investment
Policies and Risk Considerations.
4. The Fund may invest up to 15% of its net assets in issuers located
or operating in markets of emerging countries. The securities in these countries
may be subject to a greater degree of economic, political and social instability
than is the case in the United States, Western European and other developed
markets. See Special Risk Considerations.
Investment Manager, Sub-Adviser, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") furnishes investment
management services to the Fund, subject to the supervision and direction of
Income Funds, Inc.'s Board of Directors. Under the Investment Management
Agreement between the Fund and the Manager, the annual compensation paid to the
Manager is equal to 0.65% on the first $500 million of average daily net assets,
0.625% on the next $500 million and 0.60% on the average daily net assets in
excess of $1 billion. The Manager has entered into a sub-advisory agreement with
Delaware International Advisers Ltd. (the "Sub-Adviser"), an affiliate of the
Manager, with respect to the management of the Fund's investments in foreign
government and other foreign fixed-income securities. The Sub-Adviser will
receive from the Manager one-third of the investment management fees paid to the
Manager by the Fund. See Management of the Fund.
-4-
<PAGE>
The Manager and the Sub-Adviser provide 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 Management of the Fund.
Sales Charges
The price of Class A Shares includes a maximum front-end sales charge
of 4.75% of the offering price, which is equivalent to 4.91% of the amount
invested, based on an initial net asset value of $5.50 per share. The front-end
sales charge is reduced on certain transactions of at least $100,000 but under
$1,000,000. There is no front-end sales charge on purchases of $1,000,000 or
more. Class A Shares are subject to annual 12b-1 Plan expenses.
The price of Class B Shares is equal to the net asset value per share.
Class B Shares are subject to a CDSC of: (i) 4% if shares are redeemed within
two years of purchase; (ii) 3% if shares are redeemed during the third or fourth
year following purchase; (iii) 2% if shares are redeemed during the fifth year
following purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. Class B Shares are subject to annual 12b-1 Plan expenses for
approximately eight years after purchase. See Deferred Sales Charge Alternative
- - Class B Shares and Automatic Conversion of Class B Shares under Classes of
Shares.
The price of Class C Shares is equal to the net asset value per share.
Class C Shares are subject to a CDSC of 1% if shares are redeemed within 12
months of purchase. Class C Shares are subject to annual 12b-1 Plan expenses for
the life of the investment.
See Classes of Shares and Distribution (12b-1) and Service under
Management of the Fund.
Purchase Amounts
Generally, the minimum initial investment in any Class is $1,000.
Subsequent investments must generally be at least $100.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. An investor may exceed these maximum purchase
limitations for Class B Shares and Class C Shares by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B and Class C Shares and generally are not subject to a CDSC. The
minimum and maximum purchase amounts for retirement plans may vary. See How to
Buy Shares.
Redemption and Exchange
Class A Shares of the Fund may be redeemed or exchanged at the net
asset value calculated after receipt of the redemption or exchange request.
Neither the Fund nor the Distributor assesses a charge for redemptions or
exchanges of Class A Shares, except for certain redemptions of shares purchased
at net asset value, which may be subject to a CDSC if a dealer's commission was
paid in connection with such purchases. See Front-End Sales Charge Alternative -
Class A Shares under Classes of Shares.
-5-
<PAGE>
Class B Shares and Class C Shares may be redeemed or exchanged at the
net asset value calculated after receipt of the redemption or exchange request
subject, in the case of redemptions, to any applicable CDSC. Neither the Fund
nor the Distributor assesses any charges other than the CDSC for redemptions or
exchanges of Class B or Class C Shares. There are certain limitations on an
investor's ability to exchange shares between the various classes of shares that
are offered. See Redemption and Exchange.
Open-End Investment Company
Income Funds, Inc., which was organized as a Maryland corporation in
1983, 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"). Income Funds, Inc. was previously organized as a Delaware
corporation in 1970. See Shares under Management of the Fund.
-6-
<PAGE>
SUMMARY OF EXPENSES
A general comparison of the sales arrangements and other expenses
applicable to Class A, Class B and Class C Shares follows:
Class A Class B Class C
Shareholder Transaction Expenses Shares Shares Shares
- ------------------------------------------------------------------------
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price). . . . . . . . . 4.75% None None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of offering price) . . . None None None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds,
as applicable). . . . . . . . . . . None* 4.00%* 1.00%*
Redemption Fees. . . . . . . . . . . . None** None** None**
Annual Operating Expenses
(as a percentage of Class A Class B Class C
average daily net assets) Shares Shares Shares
- ------------------------------------------------------------------------
Management Fees . . . . . . . . . . .
(after voluntary waivers) 0.17% 0.17% 0.17%
12b-1 Plan Expenses
(including service fees) . . . . 0.25%+ 1.00%+ 1.00%+
Other Operating Expenses+ . . . . . . 0.58% 0.58% 0.58%
---- ---- ----
Total Operating Expenses++ . . .
(after voluntary waivers) 1.00% 1.75% 1.75%
==== ==== ====
The purpose of the above tables is to assist the investor in
understanding the various costs and expenses that an investor in each Class will
bear directly or indirectly.
*Class A purchases of $1 million or more may be made at net asset
value. However, if in connection with any such purchase a dealer commission is
paid to the financial adviser through whom such purchase is effected, a CDSC of
1% will be imposed on certain redemptions within 12 months of purchase ("Limited
CDSC"). Class B Shares are subject to a CDSC of: (i) 4% if shares are redeemed
within two years of purchase; (ii) 3% if shares are redeemed during the third or
fourth year following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; (iv) 1% if shares are redeemed during the sixth year
following purchase; and (v) 0% thereafter. Class C Shares are subject to a
-7-
<PAGE>
CDSC of 1% if the shares are redeemed within 12 months of purchase. See
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value under Redemption and Exchange; Deferred Sales
Charge Alternative - Class B Shares and Level Sales Charge Alternative - Class C
Shares under Classes of Shares.
**CoreStates Bank, N.A. currently charges $7.50 per redemption for redemptions
payable by wire.
+Class A Shares, Class B Shares and Class C Shares are subject to separate 12b-1
Plans. Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by rules of the National Association
of Securities Dealers, Inc. (the "NASD"). The annual 12b-1 Plan expenses for
the Class A Shares have been set by the Board of Directors at .25% of the
average daily net assets of such Class. The maximum annual 12b-1 Plan expenses
permitted under the 12b-1 Plan for Class A Shares are .30% of the average daily
net assets of such Class. See Distribution (12b-1) and Service under Management
of the Fund.
++"Other Operating Expenses" and "Total Operating Expenses" for the Class A
Shares, the Class B Shares and the Class C Shares are based on estimated
expenses expected to be incurred during the first full fiscal year of the
Classes, after giving effect to the voluntary expense waiver. The Manager has
elected voluntarily to waive that portion, if any, of the annual management fees
payable by the Strategic Income Fund and to pay certain expenses of the Fund to
the extent necessary to ensure that the Total Operating Expenses of each Class
of the Fund, excluding each such Class' 12b-1 fees, do not exceed 0.75%, during
the commencement of the public offering of the Classes through June 30, 1997. If
the voluntary expense waivers were not in effect, it is estimated that the Total
Operating Expenses, as a percentage of average daily net assets, would be 1.48%,
2.23%, and 2.23%, respectively, for the Class A Shares', the Class B Shares' and
the Class C Shares' first full fiscal year, reflecting management fees of 0.65%.
For expense information about the Strategic Income Fund Institutional
Class of shares, see the separate prospectus relating to that class.
-8-
<PAGE>
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, (2) redemption and no redemption at the end of each time period
and (3) for Class B Shares and Class C Shares, payment of a CDSC at the time of
redemption, if applicable.
Assuming Redemption Assuming No Redemption
1 year 3 years 1 year 3 years
------ ------- ------ -------
Class A Shares $57(1) $78 $57 $78
Class B Shares(2) $58 $85 $18 $55
Class C Shares $28 $55 $18 $55
(1) Generally, no redemption charge is assessed upon redemption of Class A
Shares. Under certain circumstances, however, a Limited CDSC, which has
not been reflected in this calculation, may be imposed on certain
redemptions within 12 months of purchase. See Contingent Deferred Sales
Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange.
(2) At the end of approximately eight years after purchase, Class B Shares
will be automatically converted into Class A Shares. The example above
does not assume conversion of Class B Shares since it reflects figures
only for one and three years. See Automatic Conversion of Class B
Shares under Classes of Shares for a description of the automatic
conversion feature.
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.
-9-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
SUITABILITY
The Fund may be suitable for the investor interested in high current
income and total return which, in part, is derived from such income. The net
asset value per share of each Class may fluctuate in response to the condition
of individual companies and general market and economic conditions and, as a
result, the Fund is not appropriate for a short-term investor. The Fund cannot
assure a specific rate of return or that principal will be protected. However,
through the cautious selection and supervision of its portfolio, the Manager and
the Sub-Adviser will strive to achieve the Fund's objective.
The types of securities in which the Fund may invest are subject to
price fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as yield,
in making an investment decision. While investments in unrated, lower-rated and
certain restricted securities have the potential for higher yields, they are
more speculative and increase the credit risk of the Fund's portfolio. Changes
in the market value of portfolio securities will not affect interest income from
such securities, but will be reflected in a Class' net asset value. In addition,
investments in foreign fixed-income securities involve special risks, including
those related to currency fluctuations, as well as to political, economic and
social situations different from and potentially more volatile than those in the
United States. Investors should be willing to accept the risks, including the
risk of net asset value fluctuations, associated with investing in these types
of securities. See Special Risk Considerations and Other Investment Policies and
Risk Considerations for a complete discussion of the risk factors affecting the
Fund's portfolio securities.
Ownership of Strategic Income Fund shares can reduce the bookkeeping
and administrative inconveniences that would be connected with direct purchases
of the types of securities in which the Fund invests.
INVESTMENT STRATEGY
The objective of the Fund is to seek to provide investors with high
current income and total return. The Manager will seek to achieve this objective
by allocating the Fund's investments principally among the following three
sectors of the fixed-income securities markets:
o a High-Yield Sector, consisting of high-yielding, lower-rated or
unrated fixed-income securities issued by U.S. companies;
o an Investment Grade Sector, consisting of investment grade debt
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or by U.S. companies; and
o an International Sector, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other
fixed-income securities of issuers in foreign countries and
denominated in foreign currencies.
The Manager will determine the amount of assets of the Fund that will
be allocated to each of the three sectors in which the Fund will invest, based
on its analysis of economic and market conditions and its assessment of the
returns and potential for appreciation that can be achieved from investment in
each of
-10-
<PAGE>
the three sectors. The Manager will periodically reallocate the Fund's assets as
it deems necessary, and as little as 20% and as much as 60% of the Fund's assets
among sectors may be invested in each fixed-income sector. In addition, the Fund
may invest up to 10% of its assets in U.S. equity securities.
Domestic High-Yield Sector
The Manager will invest the Fund's assets that are allocated to the
domestic high-yield sector primarily in those securities having a liberal and
consistent yield and those tending to reduce the risk of market fluctuations.
The Fund may invest in domestic corporate debt obligations, including, corporate
notes (including convertible notes), units consisting of bonds with stock or
warrants to buy stock attached, debentures, convertible debentures, zero coupon
bonds and pay-in-kind securities ("PIKs"). See Zero Coupon Bonds and Pay-In-Kind
Bonds under Other Investment Policies and Risk Considerations. The Fund may also
purchase preferred stock and convertible preferred stock.
The Fund will invest in both rated and unrated bonds. The rated bonds
that the Fund may purchase in this sector of its portfolio will generally be
rated BB or lower by Standard & Poor's Ratings Group ("S&P") or Fitch Investors
Service, Inc. ("Fitch"), Ba or lower by Moody's Investors Service, Inc.
("Moody's"), or similarly rated by another nationally recognized statistical
rating organization. See Appendix B to this Prospectus for more rating
information and High-Yield Securities under Special Risk Considerations for a
description of the risks associated with investing in lower-rated fixed-income
securities. Unrated bonds may be more speculative in nature than rated bonds.
Investment Grade Sector
In managing the Fund's assets allocated to the investment grade sector,
the Manager will invest primarily in debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities and by U.S. corporations.
The corporate debt obligations in which the Fund may invest include bonds,
notes, debentures and commercial paper of U.S. companies.
The U.S. government securities in which the Fund may invest include a
variety of securities which are issued or guaranteed as to the payment of
principal and interest by the U.S. government, and by various agencies or
instrumentalities which have been established or sponsored by the U.S.
government. See U.S. Government Securities under Other Investment Policies and
Risk Considerations for a discussion of these types of securities.
The investment grade sector of the Fund's portfolio may also be
invested in mortgage-backed securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or by government sponsored
corporations. See Mortgage-Backed Securities under Other Investment Policies and
Risk Considerations for a discussion of these types of securities. Other
mortgage-backed securities in which the Fund may invest are issued by certain
private, non-government entities. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). See CMOs and REMICs under Other
Investment Polices and Risk Considerations for a discussion of these types of
mortgage-backed securities.
Subject to the quality limitations set forth in this Prospectus, the
Fund may also invest in securities which are backed by assets such as
receivables on home equity and credit card loans, and receivables regarding
automobile, mobile home, recreational vehicle and other loans, wholesale dealer
floor plans and leases. See Asset-Backed Securities under Other Investment
Policies and Risk Considerations. The Fund may also invest in futures contracts
and options on futures contracts subject to certain limitations. See Futures
under Other Investment Policies and Risk Considerations.
-11-
<PAGE>
Securities purchased by the Fund within the investment grade sector
will be rated in one of the four highest rating categories or will be unrated
securities that are of comparable quality as determined by the Manager. The four
highest rating categories are AAA, AA, A or BBB by S&P and Fitch, or Aaa, Aa, A
or Baa by Moody's. Debt securities within the top three categories comprise what
are known as high-grade bonds and are regarded as having a strong capacity to
pay principal and interest. Securities in the fourth category, known as
medium-grade bonds, are regarded as having an adequate capacity to pay principal
and interest but with greater vulnerability to adverse economic conditions and
speculative characteristics. See Appendix B to this Prospectus for more rating
information.
International Sector
The Sub-Adviser will invest the assets of the Fund that are allocated
to the international sector primarily in fixed-income securities of issuers
organized or having a majority of their assets or deriving a majority of their
operating income in foreign countries. These fixed-income securities include
foreign government securities, debt obligations of foreign companies, and
securities issued by supranational entities.
A supranational entity is an entity established or financially
supported by the national governments of one or more countries to promote
reconstruction or development. Examples of supranational entities include, among
others, the International Bank for Reconstruction and Development (more commonly
known as the World Bank), the European Economic Community, the European Coal and
Steel Community, the European Investment Bank, the Inter-Development Bank, the
Export-Import Bank and the Asian Development Bank.
The Fund may invest in sponsored and unsponsored American Depositary
Receipts, European Depositary Receipts, or Global Depositary Receipts
("Depositary Receipts"). Depositary Receipts are receipts typically issued by a
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, and "unsponsored"
Depositary Receipts are issued without the participation of the issuer of the
deposited security. The Fund may also invest in Brady Bonds, which are described
more fully under Foreign Securities in the Special Risk Considerations section
of this Prospectus. The Fund may also invest in zero coupon bonds and may
purchase shares of other investment companies. See Zero Coupon Bonds and
Pay-In-Kind Bonds and Investment Company Securities under Other Investment
Polices and Risk Considerations.
The Fund may invest in securities issued in any currency and may hold
foreign currencies. Securities of issuers within a given country may be
denominated in the currency of another country or in multinational currency
units, such as the European Currency Unit. The Fund will, from time to time,
purchase or sell foreign currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of Fund transactions and to
minimize currency value fluctuations. See Other Investment Policies and Risk
Considerations for a further description of the Fund's foreign currency
transactions.
While the Fund may purchase securities of issuers in any foreign
country, developed and underdeveloped, no more than 15% of the Fund's assets may
be invested in direct obligations of issuers located in emerging market
countries. See Emerging Market Securities under Special Risk Considerations.
-12-
<PAGE>
The Fund will invest in both rated and unrated foreign securities. The
rated securities that the Fund may purchase in the international sector of its
portfolio may include those rated BBB or lower by S&P or Fitch, Baa or lower by
Moody's, or similarly rated by another nationally recognized statistical rating
organization. See Appendix B to this Prospectus for more rating information and
Foreign Securities and High-Yield Securities under Special Risk Considerations
for a description of the risks associated with investing in foreign securities
and lower-rated fixed-income securities.
Equity Sector
Up to 10% of the Fund's assets may be invested in U.S. equity
securities. Such investments may include common stocks, preferred stocks
(including adjustable rate preferred stocks) and other equity securities, such
as convertible securities and warrants, which may be used to create other
permissible investments. Such investments must be consistent with the Fund's
objective of high current income and total return. In addition, the Fund may
invest in shares or convertible bonds of real estate investment trusts
("REITs"). See REITs under Other Investment Policies and Risk Considerations for
a discussion of these types of securities.
In managing the Fund's assets allocated to the U.S. equity sector, the
Manager may invest in securities that are rated and unrated. The securities may
include those rated BBB or lower by S&P or Fitch, Baa or lower by Moody's or
similarly rated by another nationally recognized statistical rating
organization. See Appendix B to this Prospectus for more rating information and
High-Yield Securities under Special Risk Considerations for a description of the
risks associated with investing in lower-rated securities.
* * *
For a description of the Fund's other investment policies and for a
further description of some of the policies described above, see Other
Investment Policies and Risk Considerations.
In unusual market conditions, in order to meet redemption requests, for
temporary defensive purposes, and pending investment, the Fund may hold a
substantial portion of its assets in cash or short-term fixed-income
obligations. The Fund may invest in repurchase agreements, but it normally does
so only to invest cash balances. The Fund is permitted to borrow money.
Although the Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained.
The Fund's investment objective, and its designation as an open-end
investment company and as a diversified fund, may not be changed unless
authorized by the vote of a majority of the Fund's outstanding voting
securities. A "majority vote of the outstanding voting securities" is the vote
by the holders of the lesser of a) 67% or more of the Fund's voting securities
present in person or represented by proxy if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or b) more than 50% of the outstanding voting securities. Part B lists other
more specific investment restrictions of the Fund which may not be changed
without a majority shareholder vote.
The remaining investment policies of the Fund not identified above or
in Part B as fundamental are not fundamental and may be changed by the Board of
Directors of Income Funds, Inc. without a shareholder vote.
-13-
<PAGE>
SPECIAL RISK CONSIDERATIONS
Generally
The Fund invests a substantial portion of its assets in fixed-income
securities. The market values of fixed-income securities generally fall when
interest rates rise and, conversely, rise when interest rates fall. Lower-rated
and unrated fixed-income securities tend to reflect short-term corporate and
market developments to a greater extent than higher-rated fixed-income
securities, which react primarily to fluctuations in the general level of
interest rates. These lower-rated or unrated securities generally have higher
yields, but, as a result of factors such as reduced creditworthiness of issuers,
increased risk of default and a more limited and less liquid secondary market,
are subject to greater volatility and risk of loss of income and principal than
are higher-rated securities. The Manager will attempt to reduce such risk
through sector allocation, portfolio diversification, credit analysis, and
attention to trends in the economy, industries and financial markets.
High-Yield Securities
The Fund may invest a significant portion of its assets in bonds and
other securities rated BBB or lower by S&P or Fitch, Baa or lower by Moody's, or
similarly rated by another rating organization, and in unrated corporate bonds.
See Appendix B to this Prospectus for more rating information. Investing in
these so-called "junk" bonds or "high-yield" securities entails certain risks,
including the risk of loss of principal, which may be greater than the risks
involved in investment grade securities, and which should be considered by
investors contemplating an investment in the Fund. High-yield bonds are
sometimes issued by companies whose earnings at the time of issuance are less
than the projected debt service on the junk bonds. In addition to the
considerations discussed elsewhere in this Prospectus, those risks include the
following:
Youth and Volatility of the High-Yield Market. Although the market for
high-yield bonds has been in existence for many years, including periods of
economic downturns, the high-yield market grew rapidly during the long economic
expansion which took place in the United States during the 1980s. During that
economic expansion, the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings increased dramatically. As a
result, the high-yield market grew substantially during that economic expansion.
Although experts disagree on the impact recessionary periods have had and will
have on the high-yield market, some analysts believe a protracted economic
downturn would severely disrupt the market for high-yield bonds, would adversely
affect the value of outstanding bonds and would adversely affect the ability of
high-yield issuers to repay principal and interest. Those analysts cite
volatility experienced in the high-yield market in the past as evidence for
their position. It is likely that protracted periods of economic uncertainty
would result in increased volatility in the market prices of high-yield bonds,
an increase in the number of high-yield bond defaults and corresponding
volatility in a Class' net asset value.
Redemptions. If, as a result of volatility in the high-yield market or other
factors, the Fund experiences substantial net redemptions of the Fund's shares
for a sustained period of time (i.e., more shares of the Fund are redeemed than
are purchased), the Fund may be required to sell certain of its high-yield
securities without regard to the investment merits of the securities to be sold.
If the Fund sells a substantial number of securities to generate proceeds for
redemptions, the asset base of the Fund will decrease and the Fund's expense
ratios may increase.
-14-
<PAGE>
Liquidity and Valuation. The secondary market for high-yield securities is
currently dominated by institutional investors, including mutual funds, and
certain financial institutions. There is generally no established retail
secondary market for high-yield securities. As a result, the secondary market
for high-yield securities is more limited and less liquid than other secondary
securities markets. The high-yield secondary market is particularly susceptible
to liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings and
loan crisis. A less liquid secondary market may have an adverse effect on the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. In addition, a less liquid
secondary market makes it more difficult for the Fund to obtain precise
valuations of the high-yield securities in its portfolio. During periods
involving such liquidity problems, judgment plays a greater role in valuing
high-yield securities than is normally the case. The secondary market for
high-yield securities is also generally considered to be more likely to be
disrupted by adverse publicity and investor perceptions than the more
established secondary securities markets. The privately placed high-yield
securities that the Fund may purchase are particularly susceptible to the
liquidity and valuation risks outlined above.
Foreign Securities
The Fund has the ability to purchase debt securities in any foreign
country. Investors should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations.
These risks are in addition to the usual risks inherent in domestic investments.
There is the possibility of expropriation, nationalization or confiscatory
taxation, taxation of income earned in foreign nations or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in
securities of issuers in those nations.
In addition, in many countries, there is substantially less publicly
available information about issuers than is available in reports about companies
in the United States. Foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Consequently, financial data about foreign companies may not
accurately reflect the real condition of those issuers and securities markets.
Further, the Fund may encounter difficulty or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates on securities
transactions in foreign countries, which are sometimes fixed rather than subject
to negotiation as in the United States, are likely to be higher. Further, the
settlement period of securities transactions in foreign markets may be longer
than in domestic markets, and may be subject to administrative uncertainties. In
many foreign countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States, and capital requirements for brokerage firms are
generally lower. The foreign securities markets of many of the countries in
which the Fund may invest may also be smaller, less liquid and subject to
greater price volatility than those in the United States.
Emerging Market Securities. The Fund may invest up to 15% of its assets
in the debt securities of issuers located in emerging market nations. Compared
to the United States and other developed countries, emerging countries may have
volatile social conditions, relatively unstable governments and political
systems, economies based on only a few industries and economic structures that
are less diverse and
-15-
<PAGE>
mature, and securities markets that trade a small number of securities, which
can result in a low or nonexistent volume of trading. Prices in these securities
markets tend to be volatile and, in the past, securities in these countries have
offered greater potential for gain (as well as loss) than securities of
companies located in developed countries. Until recently, there has been an
absence of a capital market structure or market-oriented economy in certain
emerging countries. Further, investments and opportunities for investments by
foreign investors are subject to a variety of national policies and restrictions
in many emerging countries. Also, the repatriation of both investment income and
capital from several foreign countries is restricted and controlled under
certain regulations, including, in some cases, the need for certain governmental
consents. Countries such as those in which the Fund may invest have historically
experienced and may continue to experience, substantial, and in some periods
extremely high rates of inflation for many years, high interest rates, exchange
rate fluctuations or currency depreciation, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and unemployment.
Other factors which may influence the ability or willingness to service debt
include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, its
government's policy towards the International Monetary Fund, the World Bank and
other international agencies and the political constraints to which a government
debtor may be subject.
Brady Bonds. Among the foreign fixed-income securities in which the
Fund may invest are Brady Bonds. Brady Bonds are debt securities issued under
the framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally commercial bank
debt). In so restructuring its external debt, a debtor nation negotiates with
its existing bank lenders, as well as multilateral institutions such as the
World Bank and the International Monetary Fund, to exchange its commercial bank
debt for newly issued bonds (Brady Bonds). The Sub-Adviser believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced plans
to issue Brady Bonds an attractive opportunity for investment. Investors,
however, should recognize that the Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that solutions
must be negotiated on a case-by-case basis between debtor nations and their
creditors. In addition, Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history.
Foreign Government Securities. With respect to investment in debt
issues of foreign governments, including Brady Bonds, the ability of a foreign
government or government-related issuer to make timely and ultimate payments on
its external debt obligations will also be strongly influenced by the issuer's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. If foreign
government or government-related issuers cannot generate sufficient earnings
from foreign trade to service its external debt, they may need to depend on
continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may curtail the willingness
of such third parties to lend funds, which may further impair the issuer's
ability or willingness to service its debts in a timely
-16-
<PAGE>
manner. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. The ability to service external debt will also depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
government issuer to obtain sufficient foreign exchange to service its external
debt. If a foreign governmental issuer defaults on its obligations, the Fund may
have limited legal recourse against the issuer and/or guarantor.
See Other Investment Policies and Risk Considerations for a further
description of certain risks associated with certain of the Fund's investments,
including the risks associated with engaging in foreign currency transactions
and options.
-17-
<PAGE>
THE DELAWARE DIFFERENCE
PLANS AND SERVICES
The Delaware Difference is our commitment to provide you with superior
information and quality service on your investments in the Delaware Group of
funds.
SHAREHOLDER PHONE DIRECTORY
Investor Information Center
800-523-4640
Fund Information, Literature Price, Yield and Performance Figures
Shareholder Service Center
800-523-1918
Information on Existing Regular Investment Accounts and Retirement
Plan Accounts, Wire Investments, Wire Liquidations, Telephone
Liquidations and Telephone Exchanges
Delaphone
800-362-FUND
(800-362-3863)
Performance Information
You can call the Investor Information Center at any time for current
yield information. Current yield and total return information may also be
included in advertisements and information given to shareholders. Yields are
computed on an annual basis over a 30-day period.
Shareholder Services
During business hours, you can call the Delaware Group's Shareholder
Service Center. Our representatives can answer any questions about your account,
the Fund, various service features and other funds in the Delaware Group.
Delaphone Service
Delaphone is an account inquiry service for investors with
Touch-Tone(R) phone service. It enables you to get information on your account
faster than the mailed statements and confirmations. Delaphone also provides
current performance information on the Fund, as well as other funds in the
Delaware Group. Delaphone is available seven days a week, 24 hours a day.
-18-
<PAGE>
Dividend Payments
Dividends, capital gains and other distributions are automatically
reinvested in your account, unless you elect to receive them in cash. You may
also elect to have the dividends earned in one fund automatically invested in
another Delaware Group fund with a different investment objective, subject to
certain exceptions and limitations.
For more information, see Additional Methods of Adding to Your
Investment - Dividend Reinvestment Plan under How to Buy Shares or call the
Shareholder Service Center.
MoneyLine Direct Deposit Service
If you elect to have your dividends and distributions paid in cash and
such dividends and distributions are in an amount of $25 or more, you may choose
the MoneyLine Direct Deposit Service and have such payments transferred from
your Fund account to your predesignated bank account. See Dividends and
Distributions. In addition, you may elect to have your Systematic Withdrawal
Plan payments transferred from your Fund account to your predesignated bank
account through this service. See Systematic Withdrawal Plans under Redemption
and Exchange. Your funds will normally be credited to your bank account two
business days after the payment date. There are no fees for this service. You
can initiate the MoneyLine Direct Deposit Service by completing an Authorization
Agreement. If your name and address are not identical to the name and address on
your Fund account, you must have your signature guaranteed. This service is not
available for retirement plans.
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 dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling the Shareholder Service Center.
Duplicate Confirmations
If your financial adviser or investment dealer is noted on your
investment application, we will send a duplicate confirmation to him or her.
This makes it easier for your adviser to help you manage your investments.
Tax Information
Each year, Income Funds, Inc. will mail to you information on the tax
status of your dividends and distributions.
Right of Accumulation
With respect to Class A Shares, the Right of Accumulation feature
allows you to combine the value of your current holdings of Class A Shares,
Class B Shares and Class C Shares of the Fund with the dollar amount of new
purchases of Class A Shares of the Fund to qualify for a reduced front-end sales
charge on such purchases of Class A Shares. Under the Combined Purchases
Privilege, you may also include certain shares that you own in other funds in
the Delaware Group. See Classes of Shares.
Letter of Intention
The Letter of Intention feature permits you to obtain a reduced
front-end sales charge on purchases of Class A Shares by aggregating certain of
your purchases of Delaware Group fund shares over a 13-month period. See
Classes of Shares and Part B.
-19-
<PAGE>
12-Month Reinvestment Privilege
The 12-Month Reinvestment Privilege permits you to reinvest proceeds
from a redemption of Class A Shares, within one year of the date of the
redemption, without paying a front-end sales charge. See Part B.
Exchange Privilege
The Exchange Privilege permits shareholders to exchange all or part of
their shares into shares of the other funds in the Delaware Group, subject to
certain exceptions and limitations. For additional information on exchanges, see
Investing by Exchange under How to Buy Shares and Redemption and Exchange.
Wealth Builder Option
You may elect to invest in the Fund through regular liquidations of
shares in your accounts in other funds in the Delaware Group. Investments under
this feature are exchanges and are therefore subject to the same conditions and
limitations as other exchanges of Fund shares. See Additional Methods of Adding
to Your Investment - Wealth Builder Option and Investing by Exchange under How
to Buy Shares, and Redemption and Exchange.
Delaware Group Asset Planner
Delaware Group Asset Planner is an asset allocation service that gives
investors, working with a professional financial adviser, the ability to more
easily design and maintain investments in a diversified selection of Delaware
Group mutual funds. The Asset Planner service offers a choice of four
predesigned allocation strategies (each with a different risk/reward profile)
made up of separate investments in predetermined percentages of Delaware Group
funds. With the guidance of a financial adviser, investors may also tailor an
allocation strategy that meets their personal needs and goals. See How to Buy
Shares.
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. Income Funds, Inc.'s fiscal year ends
on July 31.
-20-
<PAGE>
RETIREMENT PLANNING
An investment in the Fund may be suitable for tax-deferred retirement
plans. Among the retirement plans noted below, Class B Shares are available for
investment only by Individual Retirement Accounts, Simplified Employee Pension
Plans, 457 Deferred Compensation Plans and 403(b)(7) Deferred
Compensation Plans.
Retirement plans may be subject to plan establishment fees, annual
maintenance fees and/or other administrative or trustee fees. Fees are based
upon the number of participants in the plan as well as the services selected.
Additional information about fees is included in retirement plan materials. Fees
are quoted upon request. Certain shareholder investment services available to
non-retirement plan shareholders may not be available to retirement plan
shareholders. Certain retirement plans may qualify to purchase the Strategic
Income Fund Institutional Class. For additional information on any of the plans
and Delaware's retirement services, call the Shareholder Service Center or see
Part B.
Individual Retirement Account ("IRA")
Individuals, even if they participate in an employer-sponsored
retirement plan, may establish their own retirement program for investments in
each of the Classes. Contributions to an IRA may be tax-deductible and earnings
are tax-deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA
contributions is restricted, and in some cases eliminated, for individuals who
participate in certain employer-sponsored retirement plans and whose annual
income exceeds certain limits. Existing IRAs and future contributions up to the
IRA maximums, whether deductible or not, still earn on a tax-deferred basis.
Simplified Employee Pension Plan ("SEP/IRA")
A SEP/IRA may be established by an employer who wishes to sponsor a
tax-sheltered retirement program by making contributions on behalf of all
eligible employees. Each of the Classes is available for investment by a
SEP/IRA.
Salary Reduction Simplified Employee Pension Plan ("SAR/SEP")
Offers employers with 25 or fewer eligible employees the ability to
establish a SEP/IRA that permits salary deferral contributions. An employer may
also elect to make additional contributions to this plan. Class B Shares are not
available for purchase by such plans.
403(b)(7) Deferred Compensation Plan
Permits employees of public school systems or of certain types of
non-profit organizations to enter into a deferred compensation arrangement for
the purchase of shares of each of the Classes.
457 Deferred Compensation Plan
Permits employees of state and local governments and certain other
entities to enter into a deferred compensation arrangement for the purchase of
shares of each of the Classes.
Prototype Profit Sharing or Money Purchase Pension Plan
Offers self-employed individuals, partnerships and corporations a
tax-qualified plan which provides for the investment of contributions in Class A
Shares or Class C Shares. Class B Shares are not available for purchase by such
plans.
-21-
<PAGE>
Prototype 401(k) Defined Contribution Plan
Permits employers to establish a tax-qualified plan based on salary
deferral contributions for investment in Class A or Class C Shares. Class B
Shares are not available for purchase by such plans.
Allied Plans
Class A Shares are available for purchase by participants in certain
401(k) Defined Contribution Plans ("Allied Plans") which are made available
under a joint venture agreement between the Distributor and another institution
through which mutual funds are marketed and which allow investments in Class A
Shares of designated Delaware Group funds ("eligible Delaware Group fund
shares"), as well as shares of designated classes of non-Delaware Group funds
("eligible non-Delaware Group fund shares"). Class B Shares and Class C Shares
are not eligible for purchase by Allied Plans.
With respect to purchases made in connection with an Allied Plan, the
value of eligible Delaware Group and eligible non-Delaware Group fund shares
held by the Allied Plan may be combined with the dollar amount of new purchases
by that Allied Plan to obtain a reduced front-end sales charge on additional
purchases of eligible Delaware Group fund shares. See Front-End Sales Charge
Alternative - Class A Shares under Classes of Shares.
Participants in Allied Plans may exchange all or part of their eligible
Delaware Group fund shares for other eligible Delaware Group fund shares or for
eligible non-Delaware Group fund shares at net asset value without payment of a
front-end sales charge. However, exchanges of eligible fund shares, both
Delaware Group and non-Delaware Group, which were not subject to a front-end
sales charge, will be subject to the applicable sales charge if exchanged for
eligible Delaware Group fund shares to which a sales charge applies. No sales
charge will apply if the eligible fund shares were previously acquired through
the exchange of eligible shares on which a sales charge was already paid or
through the reinvestment of dividends. See Investing by Exchange.
A dealer's commission may be payable on purchases of eligible Delaware
Group fund shares under an Allied Plan. In determining a financial adviser's
eligibility for a dealer's commission on net asset value purchases of eligible
Delaware Group fund shares in connection with Allied Plans, all participant
holdings in the Allied Plan will be aggregated. See Front-End Sales Charge
Alternative - Class A Shares under Classes of Shares.
The Limited CDSC is applicable to redemptions of net asset value
purchases from an Allied Plan on which a dealer's commission has been paid.
Waivers of the Limited CDSC, as described under Waiver of Limited Contingent
Deferred Sales Charge - Class A Shares under Redemption and Exchange, apply to
redemptions by participants in Allied Plans except in the case of exchanges
between eligible Delaware Group and non-Delaware Group fund shares. When
eligible Delaware Group fund shares are exchanged into eligible non-Delaware
Group fund shares, the Limited CDSC will be imposed at the time of the exchange,
unless the joint venture agreement specifies that the amount of the Limited CDSC
will be paid by the financial adviser or selling dealer. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange.
-22-
<PAGE>
CLASSES OF SHARES
Alternative Purchase Arrangements
Shares may be purchased at a price equal to the next determined net
asset value per share, subject to a sales charge which may be imposed, at the
election of the purchaser, at the time of the purchase for Class A Shares
("front-end sales charge alternative"), or on a contingent deferred basis for
Class B Shares ("deferred sales charge alternative") or Class C Shares ("level
sales charge alternative").
Class A Shares. An investor who elects the front-end sales charge
alternative acquires Class A Shares, which incur a sales charge when they are
purchased, but generally are not subject to any sales charge when they are
redeemed. Class A Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of .30% (currently, no more than .25% pursuant to Board action) of
average daily net assets of such shares. Certain purchases of Class A Shares
qualify for reduced front-end sales charges. See Front-End Sales Charge
Alternative - Class A Shares. See also Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange and Distribution (12b-1) and Service under Management of
the Fund.
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B Shares, which do not incur a front-end sales charge
when they are purchased, but are subject to a contingent deferred sales charge
if they are redeemed within six years of purchase. Class B Shares are subject to
annual 12b-1 Plan expenses of up to a maximum of 1% (.25% of which are service
fees to be paid to the Distributor, dealers or others for providing personal
service and/or maintaining shareholder accounts) of average daily net assets of
such shares for approximately eight years after purchase. Class B Shares permit
all of the investor's dollars to work from the time the investment is made. The
higher 12b-1 Plan expenses paid by Class B Shares will cause such shares to
have a higher expense ratio and to pay lower dividends than Class A Shares. At
the end of approximately eight years after purchase, the Class B Shares will
automatically be converted into Class A Shares. See Automatic Conversion of
Class B Shares, below.
Class C Shares. An investor who elects the level sales charge
alternative acquires Class C Shares, which do not incur a front-end sales charge
when they are purchased, but are subject to a contingent deferred sales charge
if they are redeemed within 12 months of purchase. Class C Shares are subject to
annual 12b-1 Plan expenses of up to a maximum of 1% (.25% of which are service
fees to be paid to the Distributor, dealers or others for providing personal
service and/or maintaining shareholder accounts) of average daily net assets of
such shares for the life of the investment. The higher 12b-1 Plan expenses paid
by Class C Shares will cause such shares to have a higher expense ratio and to
pay lower dividends than Class A Shares. Unlike Class B Shares, Class C Shares
do not convert to another class.
-23-
<PAGE>
The alternative purchase arrangements described above permit investors
to choose the method of purchasing shares that is most suitable given the amount
of their purchase, the length of time they expect to hold their shares and other
relevant circumstances. Investors should determine whether, given their
particular circumstances, it is more advantageous to purchase Class A Shares and
incur a front-end sales charge, purchase Class B Shares and have the entire
initial purchase amount invested in the Fund with their investment being subject
to a CDSC if they redeem shares within six years of purchase, or purchase Class
C Shares and have the entire initial purchase amount invested in the Fund with
their investment being subject to a CDSC if they redeem shares within 12 months
of purchase. In addition, investors should consider the level of annual 12b-1
Plan expenses applicable to each Class. In comparing Class B Shares to Class C
Shares, investors should also consider the desirability of an automatic
conversion feature, which is available only for Class B Shares.
As an illustration, investors who qualify for significantly reduced
front-end sales charges on purchases of Class A Shares, as described below,
might choose the front-end sales charge alternative because similar sales charge
reductions are not available for purchases under either the deferred sales
charge alternative or the level sales charge alternative. Moreover, shares
acquired under the front-end sales charge alternative are subject to annual
12b-1 Plan expenses of up to .30% (currently, no more than .25% pursuant to
Board action), whereas Class B Shares acquired under the deferred sales charge
alternative are subject to annual 12b-1 Plan expenses of up to 1% for
approximately eight years after purchase (see Automatic Conversion of Class B
Shares) and Class C Shares acquired under the level sales charge alternative are
subject to annual 12b-1 Plan expenses of up to 1% for the life of the
investment. However, because front-end sales charges are deducted from the
purchase amount at the time of purchase, investors who buy Class A Shares would
not have their full purchase amount invested in the Fund.
Other investors might determine it to be more advantageous to purchase
Class B Shares and have all their money invested initially, even though they
would be subject to a CDSC for up to six years after purchase and annual 12b-1
Plan expenses of up to 1% until the shares are automatically converted into
Class A Shares. Still other investors might determine it to be more advantageous
to purchase Class C Shares and have all of their funds invested initially,
recognizing that they would be subject to a CDSC for just 12 months after
purchase, but that Class C Shares do not offer a conversion feature, so their
shares would be subject to annual 12b-1 Plan expenses of up to 1% for the life
of the investment. The higher 12b-1 Plan expenses on Class B Shares and Class C
Shares will be offset to the extent a return is realized on the additional money
initially invested upon the purchase of such shares. However, there can be no
assurance as to the return, if any, that will be realized on such additional
money.
Prospective investors should refer to Appendix A--Investment
Illustrations in this Prospectus for an illustration of the potential effect
that each of the purchase options may have on a long-term shareholder's
investment.
-24-
<PAGE>
For the distribution and related services provided to, and the expenses
borne on behalf of, the Fund, the Distributor and others will be paid, in the
case of the Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of the Class B Shares and the Class C Shares,
from the proceeds of the 12b-1 Plan fees and, if applicable, the CDSC incurred
upon redemption. Financial advisers may receive different compensation for
selling Class A, Class B and Class C Shares. Investors should understand that
the purpose and function of the respective 12b-1 Plans and the CDSCs applicable
to Class B Shares and Class C Shares are the same as those of the 12b-1 Plan and
the front-end sales charge applicable to Class A Shares in that such fees and
charges are used to finance the distribution of the respective Classes. See
12b-1 Distribution Plans - Class A, Class B and Class C Shares.
Dividends paid on Class A, Class B and Class C Shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount, except that the additional
amount of 12b-1 Plan expenses relating to Class B Shares and Class C Shares will
be borne exclusively by such shares. See Calculation of Offering Price and Net
Asset Value Per Share.
The NASD has adopted certain rules relating to investment company sales
charges. Income Funds, Inc. and the Distributor intend to operate in compliance
with these rules.
Front-End Sales Charge Alternative - Class A Shares
Class A Shares may be purchased at the offering price, which reflects a
maximum front-end sales charge of 4.75%. See Calculation of Offering Price and
Net Asset Value Per Share.
-25-
<PAGE>
Purchases of $100,000 or more carry a reduced front-end sales charge
as shown in the following table.
Strategic Income Fund A Class
- --------------------------------------------------------------------------------
Dealer's
Front-End Sales Charge Commission***
as % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- --------------------------------------------------------------------------------
Less than $100,000 4.75% 4.91% 4.00%
$100,000 but under $250,000 3.75 3.82 3.00
$250,000 but under $500,000 2.50 2.55 2.00
$500,000 but under $1,000,000* 2.00 2.00 1.60
* There is no front-end sales charge on purchases of Class A Shares of $1
million or more but, under certain limited circumstances, a 1% Limited
CDSC may apply upon redemption of such shares.
** Based upon the initial net asset value of $5.50 per share of the Class A
Shares.
*** Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify
for the reduced front-end sales charge on the basis of previous or
current purchases. The reduced front-end sales charge will be granted
upon confirmation of the shareholder's holdings by the Fund. Such
reduced front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
the front-end sales charge shown above. In addition, certain dealers who
enter into an agreement to provide extra training and information on
Delaware Group products and services and who increase sales of Delaware
Group funds may receive an additional commission of up to .15% of the
offering price. Dealers who receive 90% or more of the sales charge may
be deemed to be underwriters under the Securities Act of 1933.
- --------------------------------------------------------------------------------
-26-
<PAGE>
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are made in accordance with the following schedule:
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million .75
Next $2 million up to $5 million .50
Amount over $5 million .25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies may be aggregated with those of the Class A Shares
of the Fund. Financial advisers also may be eligible for a dealer's commission
in connection with certain purchases made under a Letter of Intention or
pursuant to an investor's Right of Accumulation. Financial advisers should
contact the Distributor concerning the applicability and calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Redemptions of Class A Shares purchased at net asset value may result
in the imposition of a Limited CDSC if the dealer's commission described above
was paid in connection with the purchase of those shares. See Contingent
Deferred Sales Charge for Certain Redemptions of Class A Shares Purchased at Net
Asset Value under Redemption and Exchange.
Combined Purchases Privilege
By combining your holdings of Class A Shares with your holdings of
Class B Shares and/or Class C Shares of the Fund and shares of the other funds
in the Delaware Group, except those noted below, you can reduce the front-end
sales charges on any additional purchases of Class A Shares. Shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with ownership of
variable insurance products may be combined with other Delaware Group fund
holdings. Shares of other funds that do not carry a front-end sales charge or
CDSC may not be included unless they were acquired through an exchange from a
Delaware Group fund that does carry a front-end sales charge or CDSC.
This privilege permits you to combine your purchases and holdings with
those of your spouse, your children under 21 and any trust, fiduciary or
retirement account for the benefit of such family members.
It also permits you to use these combinations under a Letter of
Intention. A Letter of Intention allows you to make purchases over a 13-month
period and qualify the entire purchase for a reduction in front-end sales
charges on Class A Shares.
-27-
<PAGE>
Combined purchases of $1,000,000 or more, including certain purchases
made at net asset value pursuant to a Right of Accumulation or under a Letter of
Intention, may result in the payment of a dealer's commission and the
applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge Alternative - Class A Shares, above.
Buying Class A Shares at Net Asset Value
Class A Shares of the Fund may be purchased at net asset value under
the Delaware Group Dividend Reinvestment Plan and, under certain circumstances,
the Exchange Privilege and the 12-Month Reinvestment Privilege. See The Delaware
Difference and Redemption and Exchange for additional information.
Purchases of Class A Shares may be made at net asset value by current
and former officers, directors and employees (and members of their families) of
the Manager, any affiliate, any of the funds in the Delaware Group, certain of
their agents and registered representatives and employees of authorized
investment dealers and by employee benefit plans for such entities. Individual
purchases, including those in retirement accounts, must be for accounts in the
name of the individual or a qualifying family member.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware Group
funds. Officers, directors and key employees of institutional clients of the
Manager or any of its affiliates may purchase Class A Shares at net asset value.
Moreover, purchases may be effected at net asset value for the benefit of the
clients of brokers, dealers and registered investment advisers affiliated with a
broker or dealer, if such broker, dealer or investment adviser has entered into
an agreement with the Distributor providing specifically for the purchase of
Class A Shares in connection with special investment products, such as wrap
accounts or similar fee based programs.
Investments in Class A Shares made by plan level and/or participant
retirement accounts that are for the purpose of repaying a loan taken from such
accounts will be made at net asset value. Loan repayments made to a Delaware
Group account in connection with loans originated from accounts previously
maintained by another investment firm will also be invested at net asset value.
Investors who held shares in any class of any Delaware Group fund as of
December 1, 1995, may currently purchase Class A Shares at net asset value
through the Delaware Group Asset Planner service if such shares are being
purchased with proceeds from the redemption of shares of a fund (other than a
money market fund) outside of the Delaware Group of funds. The Delaware Group
Asset Planner Account Registration Form and check for such a transaction should
note that the investment is being made under the "NAV/Asset Planner
Accommodation Program." Prior notice will be given should this program be
discontinued. Class A Shares may also be purchased at net asset value in an IRA
through the Delaware Group Asset Planner service if the assets being invested
are being transferred from an existing IRA held outside of the Delaware Group or
are part of a distribution received from an employer-sponsored or other
retirement plan. See Delaware Group Asset Planner under How To Buy Shares.
-28-
<PAGE>
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
Group Investment Plans
Group Investment Plans (e.g., SEP/IRA, SAR/SEP, Prototype Profit
Sharing, Pension and 401(k) Defined Contribution Plans) may benefit from the
reduced front-end sales charges available on the Class A Shares set forth in the
table on page ____, based on total plan assets. In addition, 403(b)(7) and 457
Retirement Plan Accounts may benefit from a reduced front-end sales charge on
Class A Shares based on the total amount invested by all participants in the
plan by satisfying the following criteria: (i) the employer for which the plan
was established has 250 or more eligible employees and the plan lists only one
broker of record, or (ii) the plan includes employer contributions and the plan
lists only one broker of record. If a company has more than one plan investing
in the Delaware Group of funds, then the total amount invested in all plans will
be aggregated to determine the applicable front-end sales charge reduction on
each purchase, both initial and subsequent, if, at the time of each such
purchase, the company notifies the Fund that it qualifies for the reduction.
Employees participating in such Group Investment Plans may also combine the
investments held in their plan account to determine the front-end sales charge
applicable to purchases in non-retirement Delaware Group investment accounts if,
at the time of each such purchase, they notify the Fund that they are eligible
to combine purchase amounts held in their plan account.
For additional information on retirement plans, including plan forms,
applications, minimum investments and any applicable account maintenance fees,
contact your investment dealer or the Distributor.
For other retirement plans and special services, see Retirement
Planning.
Deferred Sales Charge Alternative - Class B Shares
Class B Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently anticipates
compensating dealers or brokers for selling Class B Shares at the time of
purchase from its own assets in an amount equal to no more than 4% of the dollar
amount purchased. In addition, from time to time, upon written notice to all of
its dealers, the Distributor may hold special promotions for specified periods
during which the Distributor may pay additional compensation to dealers or
brokers for selling Class B Shares at the time of purchase. As discussed below,
however, Class B Shares are subject to annual 12b-1 Plan expenses and, if
redeemed within six years of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares. These
payments support the compensation paid to dealers or brokers for selling Class B
Shares. Payments to the Distributor and others under the Class B 12b-1 Plan may
be in an amount equal to no more than 1% annually. The combination of the CDSC
and the proceeds of the 12b-1 Plan fees makes it possible for the Fund to sell
Class B Shares without deducting a front-end sales charge at the time of
purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class B Shares
described in this Prospectus, even after the exchange. Such CDSC schedule may be
higher than the CDSC schedule for the Class B Shares acquired as a result of the
exchange. See Redemption and Exchange.
-29-
<PAGE>
Automatic Conversion of Class B Shares
Class B Shares, other than shares acquired through reinvestment of
dividends, held for eight years after purchase are eligible for automatic
conversion into Class A Shares. Conversions of Class B Shares into Class A
Shares will occur only four times in any calendar year, on the last business day
of the second full week of March, June, September and December (each, a
"Conversion Date"). If the eighth anniversary after a purchase of Class B Shares
falls on a Conversion Date, an investor's Class B Shares will be converted on
that date. If the eighth anniversary occurs between Conversion Dates, an
investor's Class B Shares will be converted on the next Conversion Date after
such anniversary. Consequently, if a shareholder's eighth anniversary falls on
the day after a Conversion Date, that shareholder will have to hold Class B
Shares for as long as three additional months after the eighth anniversary of
purchase before the shares will automatically convert into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute
tax-free exchanges for federal income tax purposes. See Taxes.
Level Sales Charge Alternative - Class C Shares
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the Fund will invest the full amount of the
investor's purchase payment. The Distributor currently anticipates compensating
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount purchased.
As discussed below, however, Class C Shares are subject to annual 12b-1 Plan
expenses and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class C
Shares. Payments to the Distributor and others under the Class C 12b-1 Plan may
be in an amount equal to no more than 1% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for the Class C Shares
as described in this Prospectus. See Redemption and Exchange.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares redeemed within six years of purchase may be subject to
a CDSC at the rates set forth below and Class C Shares redeemed within 12 months
of purchase may be subject to a CDSC of 1%. CDSCs are charged as a percentage of
the dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the net asset value at the time of purchase of the shares
being redeemed or the net asset value of those shares at the time of redemption.
No CDSC will be imposed on increases in net asset value above the initial
purchase price, nor will a CDSC be assessed on redemptions of shares acquired
through reinvestments of dividends or capital gains distributions. For purposes
of this
-30-
<PAGE>
formula, the "net asset value at the time of purchase" will be the net asset
value at purchase of the Class B Shares or the Class C Shares of the Fund, even
if those shares are later exchanged for shares of another Delaware Group fund.
In the event of an exchange of the shares, the "net asset value of such shares
at the time of redemption" will be the net asset value of the shares that were
acquired in the exchange.
The following table sets forth the rates of the CDSC for the Class B
Shares of the Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ --------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. See Automatic Conversion of Class B Shares, above. Investors are
reminded that the Class A Shares into which the Class B Shares will convert are
subject to ongoing annual 12b-1 Plan expenses of up to a maximum of .30%
(currently, no more than .25% pursuant to Board action) of average daily net
assets of such shares.
In determining whether a CDSC applies to a redemption of Class B
Shares, it will be assumed that shares held for more than six years are redeemed
first, followed by shares acquired through the reinvestment of dividends or
distributions, and finally by shares held longest during the six-year period.
With respect to Class C Shares, it will be assumed that shares held for more
than 12 months are redeemed first followed by shares acquired through the
reinvestment of dividends or distributions, and finally by shares held for 12
months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares. See Waiver of Contingent Deferred Sales Charge - Class B Shares and
Class C Shares under Redemption and Exchange.
12b-1 Distribution Plans - Class A, Class B and Class C Shares
Under the distribution plans adopted by Income Funds, Inc. in
accordance with Rule 12b-1 under the 1940 Act, Income Funds, Inc. is permitted
to pay the Distributor annual distribution fees of up to .30% (currently, no
more than .25% pursuant to Board action) of the average daily net assets of the
Class A Shares, and 1% of the average daily net assets of each of the Class B
Shares and the Class C Shares. These fees, which are payable monthly, compensate
the Distributor for providing distribution and related services and bearing
certain expenses of each Class. The 12b-1 Plans applicable to Class B Shares and
-31-
<PAGE>
Class C Shares are designed to permit an investor to purchase these shares
through dealers or brokers without paying a front-end sales charge while
enabling the Distributor to compensate dealers and brokers for the sale of such
shares. For a more detailed discussion of the 12b-1 Plans relating to the Class
A, Class B and Class C Shares, see Distribution (12b-1) and Service under
Management of the Fund.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits, as
set by the Distributor, may receive from the Distributor an additional payment
of up to .25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares.
Subject to pending amendments to the NASD's Rules of Fair Practice, in
connection with the promotion of Delaware Group fund shares, the Distributor
may, from time to time, pay to participate in dealer-sponsored seminars and
conferences, reimburse dealers for expenses incurred in connection with
preapproved seminars, conferences and advertising and may, from time to time,
pay or allow additional promotional incentives to dealers, which shall include
non-cash concessions, such as certain luxury merchandise or a trip to or
attendance at a business or investment seminar at a luxury resort, as part of
preapproved sales contests. Payment of non-cash compensation to dealers is
currently under review by the NASD and the Securities and Exchange Commission.
It is likely that the NASD's Rules of Fair Practice will be amended such that
the ability of the Distributor to pay non-cash compensation as described above
will be restricted in some fashion. The Distributor intends to comply with the
NASD's Rules of Fair Practice as they may be amended.
Classes Offered
The following funds currently offer Class A, Class B and Class C
Shares: Enterprise Fund, U.S. Growth Fund, World Growth Fund, New Pacific Fund,
Federal Bond Fund and Corporate Income Fund of Delaware Group Adviser Funds,
Inc., Delaware Group Cash Reserve, Inc., Decatur Income Fund and Decatur Total
Return Fund of Delaware Group Decatur Fund, Inc., Delaware Fund and Devon Fund
of Delaware Group Delaware Fund, Inc., Delaware Group DelCap Fund, Inc.,
International Equity Series, Global Bond Series, Global Assets Series and
Emerging Markets Series of Delaware Group Global & International Funds, Inc.,
Delaware Group Government Fund, Inc., Limited-Term Government Fund of Delaware
Group Limited-Term Government Funds, Inc., Tax-Free USA Fund, Tax-Free Insured
Fund and Tax-Free USA Intermediate Fund of Delaware Group Tax-Free Fund, Inc.,
Delaware Group Trend Fund, Inc., Delaware Group Value Fund, Inc., Delchester
Fund of Delaware Group Income Funds, Inc., DMC Tax-Free Income
Trust-Pennsylvania, and the Fund. In addition, Delaware Group Cash Reserve, Inc.
offers Consultant Class shares.
U.S. Government Money Series of Delaware Group Limited-Term Government
Funds, Inc. and Delaware Group Tax-Free Money Fund, Inc. offer only Class A and
Consultant Class shares.
Strategic Income Fund Institutional Class
In addition to offering the Class A, Class B and Class C Shares, the
Fund also offers the Strategic Income Fund Institutional Class, which is
described in a separate prospectus and is available for purchase only by certain
investors. Strategic Income Fund Institutional Class shares generally are
distributed directly by the Distributor and do not have a front-end sales
charge, a CDSC or a Limited CDSC, and are
-32-
<PAGE>
not subject to 12b-1 Plan distribution expenses. To obtain the prospectus that
describes the Strategic Income Fund Institutional Class, contact the Distributor
by writing to the address or by calling the telephone number listed on the back
of this Prospectus.
-33-
<PAGE>
HOW TO BUY SHARES
Purchase Amounts
Generally, the minimum initial purchase is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases of shares of any Class
generally must be $100 or more. For purchases under a Uniform Gifts to Minors
Act or Uniform Transfers to Minors Act or through an Automatic Investing Plan,
there is a minimum initial purchase of $250 and a minimum subsequent purchase of
$25. Minimum purchase requirements do not apply to retirement plans other than
IRAs, for which there is a minimum initial purchase of $250, and a minimum
subsequent purchase of $25, regardless of which Class is selected.
There is a maximum purchase limitation of $250,000 on each purchase of
Class B Shares. For Class C Shares, each purchase must be in an amount that is
less than $1,000,000. An investor may exceed these maximum purchase limitations
by making cumulative purchases over a period of time. In doing so, an investor
should keep in mind that reduced front-end sales charges are available on
investments of $100,000 or more in Class A Shares, and that Class A Shares (i)
are subject to lower annual 12b-1 Plan expenses than Class B Shares and Class C
Shares and (ii) generally are not subject to a CDSC. For retirement plans, the
maximum purchase limitations apply only to the initial purchase of Class B
Shares or Class C Shares by the plan.
Investing through Your Investment Dealer
You can make a purchase of shares of the Fund through most investment
dealers who, as part of the service they provide, must transmit orders promptly.
They may charge for this service. If you want a dealer but do not have one, we
can refer you to one.
Investing 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 Strategic Income Fund A Class, Strategic Income
Fund B Class or Strategic Income Fund C Class, to 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. An investment slip (similar to
a deposit slip) is provided at the bottom of transaction confirmations and
dividend statements that you will receive from Income Funds, Inc. Use of this
investment slip can help expedite processing of your check when making
additional purchases. Your investment may be delayed if you send additional
purchases by certified mail.
Investing 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 Class in which you are
investing).
1. Initial Purchases--Before you invest, telephone the Shareholder Service
Center to get an account number. If you do not call first, processing of your
investment may be delayed. In addition, you must promptly send your Investment
Application or, in the case of a retirement account, an appropriate
-34-
<PAGE>
retirement plan application, to the specific Fund and Class selected, to 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 should advise the
Shareholder Service Center by telephone of each wire you send.
If you want to wire investments to a retirement plan account, call the
Shareholder Service Center for special wiring instructions.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware Group,
you may write and authorize an exchange of part or all of your investment into
shares of the Fund. If you wish to open an account by exchange, call the
Shareholder Service Center for more information. All exchanges are subject to
the eligibility and minimum purchase requirements set forth in each fund's
prospectus.
Holders of Class A Shares may exchange all or part of their shares for
certain of the shares of other funds in the Delaware Group, including other
Class A Shares, but may not exchange their Class A Shares for Class B Shares or
Class C Shares of the Fund or of any other fund in the Delaware Group. Holders
of Class B Shares of the Fund are permitted to exchange all or part of their
Class B Shares only into Class B Shares of other Delaware Group funds.
Similarly, holders of Class C Shares of the Fund are permitted to exchange all
or part of their Class C Shares only into Class C Shares of other Delaware Group
funds. Class B Shares of the Fund and Class C Shares of the Fund acquired by
exchange will continue to carry the CDSC and, in the case of Class B Shares, the
automatic conversion schedule of the fund from which the exchange is made. The
holding period of Class B Shares of the Fund acquired by exchange will be added
to that of the shares that were exchanged for purposes of determining the time
of the automatic conversion into Class A Shares of the Fund.
Permissible exchanges into Class A Shares of the Fund will be made
without a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares of the Fund will be made without the imposition of a
CDSC by the fund from which the exchange is being made at the time of the
exchange.
See Allied Plans under Retirement Planning for information on exchanges
by participants in an Allied Plan.
Additional Methods of Adding to Your Investment
Call the Shareholder Service Center for more information if you wish to
use the following services:
1. Automatic Investing Plan
The Automatic Investing Plan enables you to make regular monthly
investments without writing or mailing checks. You may authorize Income Funds,
Inc. to transfer a designated amount monthly from your checking account to your
Fund account. Many shareholders use this as an automatic savings plan.
Shareholders should allow a reasonable amount of time for initial purchases and
changes to these plans to become effective.
-35-
<PAGE>
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, 403(b)(7) Deferred Compensation Plans or 457
Deferred Compensation Plans.
2. Direct Deposit
You may have your employer or bank make regular investments directly to
your Fund account for you (for example: payroll deduction, pay by phone, annuity
payments). The Fund also accepts preauthorized recurring government and private
payments by Electronic Fund Transfer, which avoids mail time and check clearing
holds on payments such as social security, federal salaries, Railroad Retirement
benefits, etc.
* * *
Should investments through an automatic investing plan or by direct
deposit be reclaimed or returned for some reason, Income Funds, Inc. has the
right to liquidate your shares to reimburse the government or transmitting bank.
If there are insufficient funds in your account, you are obligated to reimburse
the Fund.
3. Wealth Builder Option
You can use our Wealth Builder Option to invest in the Fund through
regular liquidations of shares in your accounts in other funds in the Delaware
Group. You may also elect to invest in other mutual funds in the Delaware Group
through the Wealth Builder Option through regular liquidations of shares in your
Fund account.
Under this automatic exchange program, you can authorize regular
monthly amounts (minimum of $100 per fund) to be liquidated from your account in
one or more funds in the Delaware Group and invested automatically into any
other Delaware Group account that you may specify. If in connection with the
election of the Wealth Builder Option, you wish to open a new account to receive
the automatic investment, such new account must meet the minimum initial
purchase requirements described in the prospectus of the fund that you select.
All investments under this option are exchanges and are therefore subject to the
same conditions and limitations as other exchanges noted above. You can
terminate your participation at any time by written notice to the fund from
which the exchanges are made. See Redemption and Exchange.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, 403(b)(7) Deferred Compensation Plans or 457
Deferred Compensation Plans.
4. Dividend Reinvestment Plan
You can elect to have your distributions (capital gains and/or dividend
income) paid to you by check or reinvested in your Fund account. Or, you may
invest your distributions in certain other funds in the Delaware Group, subject
to the exceptions noted below as well as the eligibility and minimum purchase
requirements set forth in each fund's prospectus.
Reinvestments of distributions into Class A Shares of the Fund or of
other Delaware Group funds are made without a front-end sales charge.
Reinvestments of distributions into Class B Shares of the Fund or of other
Delaware Group funds or into Class C Shares of the Fund or of other Delaware
Group funds are also made without any sales charge and will not be subject to a
CDSC if later redeemed.
-36-
<PAGE>
See Automatic Conversion of Class B Shares under Classes of Shares for
information concerning the automatic conversion of Class B Shares acquired by
reinvesting dividends.
Holders of Class A Shares of the Fund may not reinvest their
distributions into Class B Shares or Class C Shares of any fund in the Delaware
Group, including the Fund. Holders of Class B Shares of the Fund may reinvest
their distributions only into Class B Shares of the funds in the Delaware Group
which offer that class of shares (the "Class B Funds"). Similarly, holders of
Class C Shares of the Fund may reinvest their distributions only into Class C
Shares of the funds in the Delaware Group which offer that class of shares (the
"Class C Funds"). See Classes Offered under Classes of Shares for a list of the
funds offering those classes of shares. For more information about
reinvestments, call the Shareholder Service Center.
Delaware Group Asset Planner
To invest in Delaware Group funds using the Delaware Group Asset
Planner asset allocation service, you should complete a Delaware Group Asset
Planner Account Registration Form, which is available only from a financial
adviser or investment dealer. As previously described, the Delaware Group Asset
Planner service offers a choice of four predesigned asset allocation strategies
(each with a different risk/reward profile) in predetermined percentages in
Delaware Group funds. Or, with the help of a financial adviser, you may design a
customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Group accounts into the Asset Planner service may be made at net asset value
under the circumstances described under Investing by Exchange, above. Also see
Buying Class A Shares at Net Asset Value under Classes of Shares. The minimum
initial investment per Strategy is $2,000; subsequent investments must be at
least $100. Individual fund minimums do not apply to investments made using the
Asset Planner service. Class A, Class B and Class C Shares are available through
the Asset Planner service. Generally, only shares within the same class may be
used within the same Strategy. However, Class A Shares of the Fund and of other
funds in the Delaware Group may be used in the same Strategy with consultant
class shares that are offered by certain other Delaware Group funds. See Classes
Offered under Classes of Shares for the Delaware Group funds that offer
consultant class shares.
An annual maintenance fee, currently $35 per Strategy, is due at the
time of initial investment and by September 30th of each subsequent year.
However, for all IRA accounts established with the same Social Security number
under the Asset Planner service, the annual maintenance fee will be limited to
$35 irrespective of the number of Strategies selected. For example, if you
transfer regular IRA assets and rollover assets from a qualified plan into an
IRA through the Delaware Group Asset Planner service and, to avoid commingling,
maintain more than one Strategy registered under the same Social Security
number, only one $35 annual fee needs to be paid. The fee, payable to Delaware
Service Company, Inc. to defray extra costs associated with administering the
Asset Planner service, will be deducted automatically from one of the funds
within your Asset Planner account if not paid by September 30th. See Part B.
Investors will receive a customized quarterly Strategy Report
summarizing all Delaware Group Asset Planner investment performance and account
activity during the prior period. Confirmation statements will be sent following
all transactions other than those involving a reinvestment of distributions.
-37-
<PAGE>
Certain shareholder services are not available to investors using the
Asset Planner service, due to its special design. These include Delaphone,
Checkwriting, Wealth Builder Option and Letter of Intention. Systematic
Withdrawal Plans are available after the account has been open for two years.
Purchase Price and Effective Date
The offering price and net asset value of the Class A, Class B and
Class C Shares are 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 unless
it is received after the time the offering price or net asset value of shares 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 canceled 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
purchase orders paid by third-party checks or checks that are not drawn on a
domestic branch of a United States financial institution. If a check drawn on a
foreign financial institution is accepted, you may be subject to additional bank
charges for clearance and currency conversion.
The Fund also reserves the right, following shareholder notification,
to charge a service fee on non-retirement accounts that have remained below the
minimum stated account balance for a period of three or more consecutive months.
Holders of such accounts may be notified of their insufficient account balance
and advised that they have until the end of the current calendar quarter to
raise their balance to the stated minimum. If the account has not reached the
minimum balance requirement by that time, the Fund will charge a $9 fee for that
quarter and each subsequent calendar quarter until the account is brought up to
the minimum balance. The service fee will be deducted from the account during
the first week of each calendar quarter for the previous quarter, and will be
used to help defray the cost of maintaining low-balance accounts. No fees will
be charged without proper notice, and no CDSC will apply to such assessments.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
-38-
<PAGE>
REDEMPTION AND EXCHANGE
You can redeem or exchange your shares in a number of different ways.
The exchange service is useful if your investment requirements change and you
want an easy way to invest in other bond funds, equity funds, tax-advantaged
funds or money market funds. This service is also useful if you are anticipating
a major expenditure and want to move a portion of your investment into a fund
that has the checkwriting feature. Exchanges are subject to the requirements of
each fund and all exchanges of shares constitute taxable events. See Taxes.
Further, in order for an exchange to be processed, shares of the fund being
acquired must be registered in the state where the acquiring shareholder
resides. You may want to consult your financial adviser or investment dealer to
discuss which funds in the Delaware Group will best meet your changing
objectives, and the consequences of any exchange transaction. You may also call
the Delaware Group directly for fund information.
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.
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,
subject, in the case of a redemption, to any applicable CDSC or Limited CDSC.
Redemption or exchange requests received in good order after the time the
offering price and net asset value of shares are determined, as noted above,
will be processed on the next business day. See Purchase Price and Effective
Date under How to Buy Shares. A shareholder submitting a redemption request may
indicate that he or she wishes to receive redemption proceeds of a specific
dollar amount. In the case of such a request, and in the case of certain
redemptions from retirement plan accounts, the Fund will redeem the number of
shares necessary to deduct the applicable CDSC in the case of Class B and Class
C Shares, and, if applicable, the Limited CDSC in the case of Class A Shares and
tender to the shareholder the requested amount, assuming the shareholder holds
enough shares in his or her account for the redemption to be processed in this
manner. Otherwise, the amount tendered to the shareholder upon redemption will
be reduced by the amount of the applicable CDSC or Limited CDSC.
Except as noted below, for a redemption request to be in "good order,"
you must provide your account number, account registration, and the total number
of shares or dollar amount of the transaction. For exchange requests, you must
also provide the name of the fund 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 Shareholder Service Center at 800-523-1918. The Fund may
suspend, terminate, or amend the terms of the exchange privilege upon 60 days'
written notice to shareholders.
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 redemption requests as to shares for which a check
was tendered 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.
-39-
<PAGE>
There is no front-end sales charge or fee for exchanges made between
shares of funds which both carry a front-end sales charge. Any applicable
front-end sales charge will apply to exchanges from shares of funds not subject
to a front-end sales charge, except for exchanges involving assets that were
previously invested in a fund with a front-end sales charge and/or exchanges
involving the reinvestment of dividends.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for Class B shares of other Class B Funds or Class C shares
of other Class C Funds, as applicable (in each case, "New Shares"), will not be
subject to a CDSC that might otherwise be due upon redemption of the Original
Shares. However, such shareholders will continue to be subject to the CDSC and,
in the case of Class B Shares, the automatic conversion schedule of the Original
Shares as described in this Prospectus and any CDSC assessed upon redemption
will be charged by the Fund from which the Original Shares were exchanged. In an
exchange of Class B Shares from the Fund, the Fund's CDSC schedule may be higher
than the CDSC schedule relating to the New Shares acquired as a result of the
exchange. For purposes of computing the CDSC that may be payable upon a
disposition of the New Shares, the period of time that an investor held the
Original Shares is added to the period of time that an investor held the New
Shares. With respect to Class B Shares, the automatic conversion schedule of the
Original Shares may be longer than that of the New Shares. Consequently, an
investment in New Shares by exchange may subject an investor to the higher 12b-1
fees applicable to Class B Shares of the Fund for a longer period of time than
if the investment in New Shares were made directly.
Various redemption and exchange methods are outlined below. Except for
the CDSC applicable to certain redemptions of Class B and Class C Shares and the
Limited CDSC applicable to certain redemptions of Class A Shares purchased at
net asset value, there is no fee charged by the Fund or the Distributor for
redeeming or exchanging your shares, but such fees could be charged in the
future. You may 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.
Written Redemption
You can write to the Fund at 1818 Market Street, Philadelphia, PA 19103
to redeem some or all of your shares. The request must be signed by all owners
of the account or your investment dealer of record. For redemptions of more than
$50,000, or when the proceeds are not sent to the shareholder(s) at the address
of record, the Fund requires a signature by all owners of the account and a
signature guarantee for each owner. 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, but no later than
seven days, after receipt of your redemption request. If your Class A Shares are
in certificate form, the certificate must accompany your request and also be in
good order. Certificates are issued for Class A Shares only if a shareholder
submits a specific request. Certificates are not issued for Class B Shares or
Class C Shares.
-40-
<PAGE>
Written Exchange
You may also write to the Fund (at 1818 Market Street, Philadelphia, PA
19103) to request an exchange of any or all of your shares into another mutual
fund in the Delaware Group, subject to the same conditions and limitations as
other exchanges noted above.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption--Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in 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, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Instructions received by telephone are
generally tape recorded, and a written confirmation will be provided for all
purchase, exchange and redemption transactions initiated by telephone. By
exchanging shares by telephone, you are acknowledging prior receipt of a
prospectus for the fund into which your shares are being exchanged.
Telephone Redemption--Check to Your Address of Record
The Telephone Redemption feature is a quick and easy method to redeem
shares. You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your address of record. Checks will be payable
to the shareholder(s) of record. Payment is normally mailed the next business
day, but no later than seven days, after receipt of the request. This service is
only available to individual, joint and individual fiduciary-type accounts.
Telephone Redemption--Proceeds to Your Bank
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must complete an Authorization Form and have your signature
guaranteed. For your protection, your authorization must be on file. If you
request a wire, your funds will normally be sent the next business day.
CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted from your
redemption. If you ask for a check, it will normally be mailed the next business
day, but no later than seven days, after receipt of your request to your
predesignated bank account. Except for any CDSC which may be applicable to Class
B and Class C Shares and the Limited CDSC which may be applicable to certain
Class A Shares, there are no fees for this redemption method, but the mail time
may delay getting funds into your bank account. Simply call the Shareholder
Service Center prior to the time the offering price and net asset value are
determined, as noted above.
-41-
<PAGE>
If expedited payment by check or wire could adversely affect the Fund,
the Fund may take up to seven days to pay.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to
adjust your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in the Delaware Group under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
Systematic Withdrawal Plans
1. Regular Plans
This plan provides shareholders with a consistent monthly (or
quarterly) payment. This is particularly useful to shareholders living on fixed
incomes, since it can provide them with a stable supplemental amount. With
accounts of at least $5,000, you may elect monthly withdrawals of $25 (quarterly
$75) or more. The Fund does not recommend any particular monthly amount, as each
shareholder's situation and needs vary. Payments are normally made by check. In
the alternative, you may elect to have your payments transferred from your Fund
account to your predesignated bank account through the MoneyLine Direct Deposit
Service. Your funds will normally be credited to your bank account two business
days after the payment date. Except for the Limited CDSC which may be applicable
to Class A Shares and the CDSC which may be applicable to Class B Shares and
Class C Shares as noted below, there are no fees for this redemption method. See
MoneyLine Direct Deposit Service under The Delaware Difference for more
information about this service.
2. Retirement Plans
For shareholders eligible under the applicable retirement plan to
receive benefits in periodic payments, the Systematic Withdrawal Plan provides
you with maximum flexibility. A number of formulas are available for calculating
your withdrawals depending upon whether the distributions are required or
optional. Withdrawals must be for $25 or more; however, no minimum account
balance is required. The MoneyLine Direct Deposit Service described above is not
available for retirement plans.
* * *
Shareholders should not purchase additional shares while participating
in a Systematic Withdrawal Plan.
Redemptions of Class A Shares via a Systematic Withdrawal Plan may be
subject to a Limited CDSC if the original purchase was made at net asset value
within the 12 months prior to the withdrawal and a dealer's commission was paid
on that purchase. See Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value, below.
The applicable CDSC for Class B Shares and Class C Shares redeemed via
a Systematic Withdrawal Plan will be waived if, on the date that the Plan is
established, the annual amount selected to be withdrawn is less than 12% of the
account balance. If the annual amount selected to be withdrawn exceeds 12% of
the account balance on the date that the Systematic Withdrawal Plan is
established, all redemptions under the Plan will be subject to the applicable
CDSC. Whether a waiver of the CDSC is
-42-
<PAGE>
available or not, the first shares to be redeemed for each Systematic Withdrawal
Plan payment will be those not subject to a CDSC because they have either
satisfied the required holding period or were acquired through the reinvestment
of distributions. The 12% annual limit will be reset on the date that any
Systematic Withdrawal Plan is modified (for example, a change in the amount
selected to be withdrawn or the frequency or date of withdrawals), based on the
balance in the account on that date. See Waiver of Contingent Deferred Sales
Charge - Class B and Class C Shares, below.
For more information on Systematic Withdrawal Plans, call the
Shareholder Service Center.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
A Limited CDSC will be imposed on certain redemptions of Class A Shares
(or shares into which such Class A Shares are exchanged) made within 12 months
of purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission previously described. See
Classes of Shares.
The Limited CDSC will be paid to the Distributor and will be equal to
the lesser of 1% of: (1) the net asset value at the time of purchase of the
Class A Shares being redeemed; or (2) the net asset value of such Class A Shares
at the time of redemption. For purposes of this formula, the "net asset value at
the time of purchase" will be the net asset value at purchase of the Class A
Shares even if those shares are later exchanged for shares of another Delaware
Group fund and, in the event of an exchange of Class A Shares, the "net asset
value of such shares at the time of redemption" will be the net asset value of
the shares acquired in the exchange.
Redemptions of such Class A Shares held for more than 12 months will
not be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Group fund will not trigger the imposition of the Limited CDSC
at the time of such exchange. The period a shareholder owns shares into which
Class A Shares are exchanged will count towards satisfying the 12-month holding
period. The Limited CDSC is assessed if such 12-month period is not satisfied
irrespective of whether the redemption triggering its payment is of Class A
Shares of the Fund or Class A Shares acquired in the exchange.
In determining whether a Limited CDSC is payable, it will be assumed
that shares not subject to the Limited CDSC are the first redeemed followed by
other shares held for the longest period of time. The Limited CDSC will not be
imposed upon shares representing reinvested dividends or capital gains
distributions, or upon amounts representing share appreciation. All investments
made during a calendar month, regardless of what day of the month the investment
occurred, will age one month on the last day of that month and each subsequent
month.
Waiver of Limited Contingent Deferred Sales Charge - Class A Shares
The Limited CDSC for Class A Shares on which a dealer's commission has
been paid will be waived in the following instances: (i) redemptions that result
from the Fund's right to liquidate a shareholder's account if the aggregate net
asset value of the shares held in the account is less than the then-effective
minimum account size; (ii) distributions to participants from a retirement plan
qualified under section 401(a) or 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"), or due to death of a participant in such a plan; (iii)
redemptions pursuant to the direction of a participant or beneficiary of a
retirement plan qualified under section 401(a) or 401(k) of the Code with
respect to that retirement plan; (iv) distributions from a section 403(b)(7)
Plan or an IRA due to death, disability, or attainment of age 59 1/2; (v)
returns of excess contributions to an IRA; (vi) distributions by other
-43-
<PAGE>
employee benefit plans to pay benefits; (vii) distributions described in (ii),
(iv), and (vi) above pursuant to a systematic withdrawal plan; and (viii)
redemptions by the classes of shareholders who are permitted to purchase shares
at net asset value, regardless of the size of the purchase (see Buying Class A
Shares at Net Asset Value under Classes of Shares).
Waiver of Contingent Deferred Sales Charge - Class B and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares in
connection with the following redemptions: (i) redemptions that result from the
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the then-effective minimum
account size; (ii) returns of excess contributions to an IRA or 403(b)(7)
Deferred Compensation Plan; (iii) required minimum distributions from an IRA,
403(b)(7) Deferred Compensation Plan or 457 Deferred Compensation Plan; and (iv)
distributions from an account if the redemption results from the death of all
registered owners of the account (in the case of accounts established under the
Uniform Gifts to Minors or Uniform Transfers to Minors Acts or trust accounts,
the waiver applies upon the death of all beneficial owners) or a total and
permanent disability (as defined in Section 72 of the Code) of all registered
owners occurring after the purchase of the shares being redeemed.
The CDSC on Class C Shares is waived in connection with the following
redemptions: (i) redemptions that result from the Fund's right to liquidate a
shareholder's account if the aggregate net asset value of the shares held in the
account is less than the then-effective minimum account size; (ii) returns of
excess contributions to an IRA, 403(b)(7) Deferred Compensation Plan, Profit
Sharing Plan, Money Purchase Pension Plan or 401(k) Defined Contribution Plan;
(iii) required minimum distributions from an IRA, 403(b)(7) Deferred
Compensation Plan, 457 Deferred Compensation Plan, Profit Sharing Plan, Money
Purchase Pension Plan or 401(k) Defined Contribution Plan; (iv) distributions
from a 403(b)(7) Deferred Compensation Plan, 457 Deferred Compensation Plan,
Profit Sharing Plan, or 401(k) Defined Contribution Plan, under hardship
provisions of the plan; (v) distributions from a 403(b)(7) Deferred Compensation
Plan, 457 Deferred Compensation Plan, Profit Sharing Plan, Money Purchase
Pension Plan or a 401(k) Defined Contribution Plan upon attainment of normal
retirement age under the plan or upon separation from service; (vi)
distributions from an IRA on or after attainment of age 59 1/2; and (vii)
distributions from an account if the redemption results from the death of all
registered owners of the account (in the case of accounts established under the
Uniform Gifts to Minors or Uniform Transfers to Minors Acts or trust accounts,
the waiver applies upon the death of all beneficial owners) or a total and
permanent disability (as defined in Section 72 of the Code) of all registered
owners occurring after the purchase of the shares being redeemed.
In addition, the CDSC will be waived on Class B and Class C Shares
redeemed in accordance with a Systematic Withdrawal Plan if the annual amount
selected to be withdrawn under the Plan does not exceed 12% of the value of the
account on the date that the Systematic Withdrawal Plan was established or
modified.
-44-
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to declare and pay dividends monthly. However, the
Fund does not anticipate declaring or paying dividends during the first few
months following the commencement of its operations. Payment by check of cash
dividends will ordinarily be mailed within three business days after the payable
date. Distributions from net realized securities profits, if any, will be
distributed twice a year. The first payment normally would be made during the
first quarter of the next fiscal year. The second payment would be made near the
end of the calendar year to comply with certain requirements of the Code.
Each class of the Fund will share proportionately in the investment
income and expenses of the Fund, except that the per share dividends from net
investment income on the Class A Shares, the Class B Shares and the Class C
Shares will vary due to the expenses under the 12b-1 Plan applicable to each
Class. Generally, the dividends per share on Class B Shares and Class C Shares
can be expected to be lower than the dividends per share on Class A Shares
because the expenses under the 12b-1 Plans relating to Class B and Class C
Shares will be higher than the expenses under the 12b-1 Plan relating to Class A
Shares. See Distribution (12b-1) and Service under Management of the Fund.
Both dividends and distributions, if any, are automatically reinvested
in your account at net asset value unless you elect otherwise. Any check in
payment of dividends or other distributions which cannot be delivered by the
United States Post Office or which remains uncashed for a period of more than
one year may be reinvested in your account at the then-current net asset value
and the dividend option may be changed from cash to reinvest. If you elect to
take your dividends and distributions in cash and such dividends and
distributions are in an amount of $25 or more, you may choose the MoneyLine
Direct Deposit Service and have such payments transferred from your Fund account
to your predesignated bank account. This service is not available for retirement
plans. See MoneyLine Direct Deposit Service under The Delaware Difference for
more information about this service.
-45-
<PAGE>
TAXES
The tax discussion set forth below is included for general information
only. Investors should consult their own advisers concerning the federal, state,
local or foreign tax consequences of an investment in the Fund.
The Fund intends 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, whether received in cash or in additional
shares. It is expected that either none or only a nominal portion of the Fund's
dividends will be eligible for the dividends-received deduction for
corporations.
Distributions paid by the Fund from long-term capital gains, whether
received in cash or 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 byproduct 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 calendar year in which they are 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. All or a portion of the sales charge
incurred in acquiring Fund shares will be excluded from the federal tax basis of
any of such shares sold or exchanged within 90 days of their purchase (for
purposes of determining gain or loss upon the sale of such shares) if the sale
proceeds are reinvested in the Fund or in another fund in the Delaware Group of
funds and a sales charge that would otherwise apply to the reinvestment is
reduced or eliminated. Any portion of such sales charge excluded from the tax
basis of the shares sold will be added to the tax basis of the shares acquired
in the reinvestment.
The automatic conversion of Class B Shares into Class A Shares at the
end of approximately eight years after purchase will be tax-free for federal tax
purposes. See Automatic Conversion of Class B Shares under Classes of Shares.
-46-
<PAGE>
The Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% in value of the total assets
of the Fund at the end of its fiscal year are invested in securities of foreign
corporations, the Fund may elect to pass-through to its shareholders a pro-rata
share of foreign income taxes paid by the Fund. If this election is made,
shareholders will be (i) required to include in their gross income their
pro-rata share of foreign source income (including any foreign taxes paid by the
Fund), and (ii) entitled to either deduct (as an itemized deduction in the case
of individuals) their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code. Shareholders will be informed by
the Fund at the end of each calendar year of the availability of any credits on,
and the amount of foreign source income to be included in, their income tax
returns.
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, Income Funds, Inc. will mail to you information on the tax
status of the Fund's dividends and distributions. Shareholders will also receive
each year information as to the portion of dividend income 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.
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 Taxes in Part B for additional information on tax matters relating
to the Fund and its shareholders.
-47-
<PAGE>
CALCULATION OF OFFERING PRICE AND NET ASSET VALUE PER SHARE
The net asset value ("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. Debt securities are priced on the basis of valuations provided by
an independent pricing service using methods approved by Income Funds, Inc.'s
Board of Directors. Equity 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 Income Funds, Inc.'s Board of Directors.
Class A Shares are purchased at the offering price per share, while
Class B Shares and Class C Shares are purchased at the NAV per share. The
offering price per share of Class A Shares consists of the NAV per share next
computed after the order is received, plus any applicable front-end sales
charges.
The offering price and NAV are computed as of the close of regular
trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern time) on
days when the Exchange is open.
The net asset values 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 Strategic Income Fund Institutional Class will not incur any of
the expenses under the Fund's 12b-1 Plans and the Class A, Class B and Class C
Shares alone will bear the 12b-1 Plan expenses payable under their respective
Plans. Due to the specific distribution expenses and other costs that may be
allocable to each class, the NAV of each class is expected to vary.
-48-
<PAGE>
MANAGEMENT OF THE FUND
Directors
The business and affairs of Income Funds, Inc. are managed under the
direction of its Board of Directors. Part B contains additional information
regarding Income Funds, Inc.'s directors and officers.
Investment Manager and Sub-Adviser
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 July 31, 1996, the Manager and its affiliates in
the Delaware Group, including the Sub-Adviser, were supervising in the aggregate
more than $28 billion in assets in the various institutional or separately
managed (approximately $17,646,283,000) and investment company (approximately
$10,764,119,000) 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.
The Manager manages the Fund's portfolio and makes investment decisions
for the Fund. The Manager also administers Income Funds, Inc.'s affairs and pays
the salaries of all the directors, officers and employees of Income Funds, Inc.
who are affiliated with the Manager. For these services, the Manager is paid an
annual fee equal to 0.65% on the first $500 million of average daily net assets,
0.625% on the next $500 million and 0.60% on the average daily net assets in
excess of $1 billion.
Subject to the overall supervision of the Manager, the Sub-Adviser
manages the international sector of the Fund's portfolio and furnishes the
Manager with investment recommendations, asset allocation advice, research and
other investment services with respect to foreign securities. For the services
provided to the Manager, the Manager pays the Sub-Adviser a fee equal to
one-third of the fee paid to the Manager under the terms of the Investment
Management Agreement.
Paul A. Matlack has primary responsibility for allocating the Fund's
assets among the fixed-income and equity sectors and for making day-to-day
investment decisions for the Fund regarding its investments in the high-yield
sector. Mr. Matlack, a Vice President/Senior Portfolio Manager of Income Funds,
Inc., has been a member of the Fund's management team since its inception. A
Chartered Financial Analyst, Mr. Matlack is a graduate of the University of
Pennsylvania with an MBA in Finance from George Washington University. He began
his career at Mellon Bank as a credit specialist, and later served as a
corporate loan officer for Mellon Bank and then Provident National Bank.
Paul Grillo has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in investment grade securities.
Mr. Grillo has been a member of the Fund's management team since its inception.
Mr. Grillo, an Assistant Vice President and Portfolio Manager of Income Funds,
Inc., holds a BA in Business Management from North Carolina State University and
an MBA in Finance from Pace University. Prior to joining the Manager in 1993, he
served as mortgage strategist and trader at the Dreyfus Corporation. He also
served as a mortgage strategist and portfolio
-49-
<PAGE>
manager for the Chemical Investment Group and as financial analyst at the
Chemical Bank. Mr. Grillo is a Chartered Financial Analyst.
Ian G. Sims, a Director and Senior Portfolio Manager with the
Sub-Adviser, has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in foreign securities. Mr. Sims
has been a member of the Fund's management team since its inception. Mr. Sims is
a graduate of the University of Leicester and holds a postgraduate degree in
statistics from the University of Newcastle-Upon-Tyne. He joined the Sub-Adviser
in 1990 as a senior international fixed-income and currency manager. Mr. Sims
began his investment career with the Standard Life Assurance Co., and
subsequently moved to the Royal Bank of Canada Investment Management
International Company, where he was an international fixed-income manager. Prior
to joining the Sub-Adviser, he was a senior fixed-income and currency portfolio
manager with Hill Samuel Investment Advisers Ltd.
Babak Zenouzi has primary responsibility for making day-to-day
investment decisions for the Fund regarding its investments in U.S. equity
securities. Mr. Zenouzi, a Vice President/Portfolio Manager of Income Funds,
Inc., has been a member of the Fund's management team since its inception. Mr.
Zenouzi holds a BS in Finance and Economics from Babson College in Wellesley,
Massachusetts, and an MS in Finance from Boston College. Prior to joining the
Manager in 1992, he was with The Boston Company where he held the positions of
assistant vice president, senior financial analyst, financial analyst and
portfolio accountant.
The portfolio management team will from time to time consult with Paul
E. Suckow, Executive Vice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc., with respect to security selection, evaluation of market and
economic trends, and sector allocation. A Chartered Financial Analyst, he is a
graduate of Bradley University with an MBA from Western Illinois University. Mr.
Suckow was a fixed-income portfolio manager at the Delaware Group from 1981 to
1985. He returned to the Delaware Group in 1993 after eight years with
Oppenheimer Management Corporation where he served as Executive Vice President
and Director of Fixed Income.
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. Given the
Fund's investment objective, its annual portfolio turnover rate is not expected
to exceed 100%. A turnover rate of 100% would occur, for example, if all the
investments in the Fund's portfolio at the beginning of the year were replaced
by the end of the year.
The Manager and Sub-Adviser use their 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 to the Sub-Adviser, or to their advisory clients.
These services may be used by the Manager or Sub-Adviser in servicing any of
their respective accounts. Subject to best price and execution, the Manager and
the Sub-Adviser may consider a broker/dealer's sales of the Fund's shares in
placing portfolio orders and may place orders with broker/dealers that have
agreed to defray certain Fund expenses such as custodian fees.
-50-
<PAGE>
Performance Information
From time to time, the Fund may quote yield or total return performance
of the Classes in advertising and other types of literature.
The current yield for each Class will be calculated by dividing the
annualized net investment income earned by that Class during a recent 30-day
period by the maximum offering price 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 and: (i) in
the case of Class A Shares, the impact of the maximum front-end sales charge at
the beginning of each specified period; and (ii) in the case of Class B Shares
and Class C Shares, the deduction of any applicable CDSC at the end of the
relevant period. Each presentation will include the average annual total return
for one-, five- and ten-year periods, as relevant. The Fund may also advertise
aggregate and average total return information concerning a Class over
additional periods of time. In addition, the Fund may present total return
information that does not reflect the deduction of the maximum front-end sales
charge or any applicable CDSC. In this case, such total return information would
be more favorable than total return information that includes the deductions of
the maximum front-end sales charge or any applicable CDSC.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not an indication of future results.
Distribution (12b-1) and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor of the Fund's shares under a Distribution Agreement with Income
Funds, Inc. dated as of September 30, 1996.
Income Funds, Inc. has adopted a separate distribution plan under Rule
12b-1 for each of the Class A Shares, Class B Shares and Class C Shares (the
"Plans"). The Plans permit the Fund to pay the Distributor from the assets of
the respective Classes a monthly fee for the Distributor's services and expenses
in distributing and promoting sales of shares. These expenses include, among
other things, preparing and distributing advertisements, sales literature, and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, holding special promotions for specified periods of time,
and paying distribution and maintenance fees to brokers, dealers and others. In
connection with the promotion of Class A, Class B and Class C Shares, the
Distributor may, from time to time, pay to participate in dealer-sponsored
seminars and conferences, and reimburse dealers for expenses incurred in
connection with preapproved seminars, conferences, and advertising. The
Distributor may pay or allow additional promotional incentives to dealers as
part of preapproved sales contests and/or to dealers who provide extra training
and information concerning a Class and increase sales of the Class. In addition,
the Fund may make payments from the assets of the respective Class directly to
others, such as banks, who aid in the distribution of Class shares or provide
services in respect of a Class, pursuant to service agreements with Income
Funds, Inc.
The 12b-1 Plan expenses relating to each of the Class B Shares and
Class C Shares are also used to pay the Distributor for advancing the commission
costs to dealers with respect to the initial sale of such shares.
-51-
<PAGE>
The aggregate fees paid by the Fund from the assets of the respective
Classes to the Distributor and others under the Plans may not exceed (i) .30% of
the Class A Shares' average daily net assets in any year, and (ii) 1% (.25% of
which are service fees to be paid to the Distributor, dealers and others for
providing personal service and/or maintaining shareholder accounts) of each of
the Class B Shares' and Class C Shares' average daily net assets in any year.
The Class A, Class B and Class C Shares will not incur any distribution expenses
beyond these limits, which may not be increased without shareholder approval.
Although the maximum fee payable under the Plan relating to the Class A
Shares is .30% of average daily net assets, the Board of Directors has currently
set the annual fee for the Class at .25% of the average daily net assets. The
Board of Directors may increase the fee to the full .30% on all Class A Shares'
assets at any time. See Shares.
While payments pursuant to the Plans may not exceed .30% annually with
respect to the Class A Shares, and 1% annually with respect to each of the Class
B Shares and the Class C Shares, the Plans do not limit fees to amounts actually
expended by the Distributor. It is therefore possible that the Distributor may
realize a profit in any particular year. However, the Distributor currently
expects that its distribution expenses will likely equal or exceed payments to
it under the Plans. The Distributor may, however incur such additional expenses
and make additional payments to dealers from its own resources to promote the
distribution of shares of the Classes. The monthly fees paid to the Distributor
are subject to the review and approval of Income Funds, Inc.'s unaffiliated
directors, who may reduce the fees or terminate the Plans at any time.
Income Funds, Inc.'s Plans do not apply to the Strategic Income Fund
Institutional Class of shares. Those shares are not included in calculating the
Plans' fees, and the Plans are not used to assist in the distribution and
marketing of the Strategic Income Fund Institutional Class shares.
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for Income Funds,
Inc. under an agreement dated as of September 30, 1996. 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.
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. The expense ratio of each
Class will reflect the impact of its 12b-1 Plan.
Shares
Income Funds, 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, Income Funds, Inc. was organized as a Maryland
corporation on March 4, 1983. Income Funds, Inc. was previously organized as a
Delaware corporation in 1970. In addition to the Fund, Income Funds, Inc.
presently offers one other series of shares, the Delchester Fund series.
-52-
<PAGE>
Income Funds, Inc.'s shares have a par value of $1.00, equal voting
rights, except as noted below, and are equal in all other respects. Income
Funds, Inc.'s shares have noncumulative voting rights which means that the
holders of more than 50% of Income Funds, Inc.'s shares voting for the election
of directors can elect 100% of the directors if they choose to do so. Under
Maryland law, Income Funds, 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 Income
Funds, Inc.'s outstanding shares may request that a special meeting be called to
consider the removal of a director.
In addition to Class A Shares, Class B Shares and Class C Shares, the
Fund also offers the Strategic Income Fund Institutional Class shares. Shares of
each class represent proportionate interests in the assets of the Fund and have
the same voting and other rights and preferences as the other classes of the
Fund, except that shares of the Strategic Income Fund Institutional Class are
not subject to, and may not vote on matters affecting, the Distribution Plans
under Rule 12b-1 relating to the Class A, Class B and Class C Shares. Similarly,
as a general matter, the shareholders of Class A Shares, Class B Shares and
Class C Shares may vote only on matters affecting the 12b-1 Plan that relates to
the class of shares that they hold. However, the Class B Shares may vote on any
proposal to increase materially the fees to be paid by the Fund under the Rule
12b-1 Plan relating to the Class A Shares.
It is expected that Lincoln National Corporation Employees' Retirement
Trust (the "Trust") will make an initial investment in the Fund, which could
result in the Trust holding up to 100% of the outstanding shares of the Fund.
Subject to certain limited exceptions, there would be no limitation on the
Trust's ability to redeem its shares of the Fund and it may elect to do so at
any time.
-53-
<PAGE>
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
U.S. Government Securities
U.S. Treasury securities are backed by the "full faith and credit" of
the United States. Securities issued or guaranteed by federal agencies and U.S.
government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, the Federal Housing Administration, the Maritime
Administration, the Small Business Administration, and others. Certain agencies
and instrumentalities, such as the Government National Mortgage Association
("GNMA"), are, in effect, backed by the full faith and credit of the United
States through provisions in their charters that they may make "indefinite and
unlimited" drawings on the Treasury, if needed to service its debt. Debt from
certain other agencies and instrumentalities, including the Federal Home Loan
Bank and Federal National Mortgage Association, are not guaranteed by the United
States, but those institutions are protected by the discretionary authority for
the U.S. Treasury to purchase certain amounts of their securities to assist the
institutions in meeting their debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System, the Tennessee Valley
Authority and the Federal Home Loan Mortgage Corporation, are federally
chartered institutions under U.S. government supervision, but their debt
securities are backed only by the creditworthiness of those institutions, not
the U.S. government.
An instrumentality of a U.S. government agency is a government agency
organized under Federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal National Mortgage Association.
The maturities of such securities usually range from three months to
thirty years. While such securities are guaranteed as to principal and interest
by the U.S. government or its instrumentalities, their market values may
fluctuate and are not guaranteed, which may, along with the other securities in
the Fund's portfolio, cause a Class' daily net asset value to fluctuate.
Zero Coupon Bonds and Pay-In-Kind Bonds
Although the Fund does not intend to purchase a substantial amount of
zero coupon bonds or PIK bonds, from time to time, the Fund may acquire zero
coupon bonds and, to a lesser extent, PIK bonds. Zero coupon bonds are debt
obligations which do not entitle the holder to any periodic payments of interest
prior to maturity or a specified date when the securities begin paying current
interest, and therefore are issued and traded at a discount from their face
amounts or par value. PIK bonds pay interest through the issuance to holders of
additional securities. Zero coupon bonds and PIK bonds are generally considered
to be more interest-sensitive than income bearing bonds, to be more speculative
than interest-bearing bonds, and to have certain tax consequences which could,
under certain circumstances, be adverse to the Fund. For example, with zero
coupon bonds, the Fund accrues, and is required to distribute to shareholders,
income on such bonds. However, the Fund may not receive the cash associated with
this income until the bonds are sold or mature. If the Fund did not have
sufficient cash to make the required distribution of accrued income, the Fund
could be required to sell other securities in its portfolio or to borrow to
generate the cash required.
-54-
<PAGE>
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, including GNMA
certificates. Such securities differ from other fixed-income securities in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. When prevailing interest rates rise, the
value of a GNMA security may decrease as do other debt securities. When
prevailing interest rates decline, however, the value of GNMA securities may not
rise on a comparable basis with other debt securities because of the prepayment
feature of GNMA securities. Additionally, if a GNMA certificate is purchased at
a premium above its principal value because its fixed rate of interest exceeds
the prevailing level of yields, the decline in price to par may result in a loss
of the premium in the event of prepayment. Funds received from prepayments may
be reinvested at the prevailing interest rates which may be lower than the rate
of interest that had previously been earned.
The mortgages backing these securities include conventional 30-year
fixed rate mortgages, graduated payment mortgages and adjustable rate mortgages.
These mortgages may be supported by various types of insurance, may be backed by
GNMA certificates or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities. However, the guarantees do
not extend to the mortgage-backed securities' value, which is likely to vary
inversely with fluctuations in interest rates. These certificates are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the
certificate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the average life or realized
yield of a particular issue of pass-through certificates. During periods of
declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Fund may reinvest the prepaid amounts in securities, the yield of
which reflects interest rates prevailing at the time. Moreover, prepayments of
mortgages which underlie securities purchased at a premium could result in
capital losses.
CMOs and REMICs
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. To the extent any privately-issued CMOs or
REMICs in which the Fund may invest are considered by the Securities and
Exchange Commission to be investment companies, the Fund will limit its
investment in such securities in a manner consistent with the provisions of the
1940 Act.
Certain CMOs and REMICs may have variable or floating interest rates
and others may be stripped. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which the Fund may invest.
Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the "interest-only" class), while the other class will receive
all of the principal (the "principal-only" class). The yield to maturity on
-55-
<PAGE>
an interest-only class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed and, accordingly,
these securities are generally illiquid and to such extent, together with any
other illiquid investments, will not exceed 15% of the Fund's net assets.
The Fund may invest in CMOs and REMICs issued by private entities which
are not collateralized by securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, so-called non-agency
mortgage-backed securities. Investments in these securities may be made only if
the securities (i) are rated at the time of purchase in the four top rating
categories by a nationally-recognized statistical rating organization (e.g., BBB
or better by S&P or Fitch, or Baa or better by Moody's) and (ii) represent
interests in whole-loan mortgages, multi-family mortgages, commercial mortgages
and other mortgage collateral supported by a first mortgage lien on real estate.
Non-agency mortgage-backed securities are subject to the interest rate and
prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non-agency mortgage-backed securities may also be
subject to a greater risk of loss of interest and principal because they are not
collateralized by securities issued or guaranteed by the U.S. government. In
addition, timely information concerning the loans underlying these securities
may not be as readily available and the market for these securities may be less
liquid than other CMOs and REMICs.
Asset-Backed Securities
The asset-backed securities in which the Fund may invest must be rated
in the four top rating categories by a nationally recognized statistical rating
organization (e.g., BBB or better by S&P and Fitch, or Baa or better by
Moody's). The receivables underlying asset-backed securities are typically
securitized in either a pass-through or a pay-through structure. Pass-through
securities provide investors with an income stream consisting of both principal
and interest payments in respect of the receivables in the underlying pool.
Pay-through asset-backed securities are debt obligations issued usually by a
special purpose entity, which are collateralized by the various receivables and
in which the payments on the underlying receivables provide the funds to pay the
debt service on the debt obligations issued. The Fund may invest in these and
other types of asset-backed securities structured in this way that may be
developed in the future.
The rate of principal payment on asset-backed securities generally
depends upon the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors such
as changes in interest rates. Therefore, the yield may be difficult
to predict and actual yield to maturity may be more or less than the anticipated
yield to maturity. Due to the shorter maturity of the collateral backing such
securities, there is less of a risk of substantial prepayment than with
mortgage-backed securities. Such asset-backed securities do, however, involve
certain risks not associated with mortgage-backed securities, including the risk
that security interests cannot be adequately or in many cases, ever,
established. In addition, with respect to credit card receivables, a number of
state and federal consumer credit laws give debtors the right to set off certain
-56-
<PAGE>
amounts owed on the credit cards, thereby reducing the outstanding balance. In
the case of automobile receivables, there is a risk that the holders may not
have either a proper or first security interest in all of the obligations
backing such receivables due to the large number of vehicles involved in a
typical issuance and technical requirements under state laws. Therefore,
recoveries on repossessed collateral may not always be available to support
payments on the securities.
Borrowings
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 not be
purchased while the Fund has an outstanding borrowing.
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are purchased with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The Fund will maintain with its custodian bank a
separate account with a segregated portfolio of securities in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Fund enters into the commitment
and no interest accrues to the Fund until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
Portfolio Loan Transactions
The Fund may loan up to 25% of its assets to qualified broker/dealers
or institutional investors.
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.
Rule 144A Securities
The Fund may invest in restricted securities, including privately
placed securities, some of which may be 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 15% of the value of its net assets in illiquid securities.
-57-
<PAGE>
While maintaining oversight, the Board of Directors 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 15% 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; (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 or Sub-Adviser determines that a Rule 144A Security
which 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 15% 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.
Investment Company Securities
Any investments that the Fund makes in either closed-end or open-end
investment companies will be limited by the 1940 Act, and would involve an
indirect payment of a portion of the expenses, including advisory fees, of such
other investment companies. Under the 1940 Act's current limitations, the Fund
may not (1) own more than 3% of the voting stock of another investment company;
(2) invest more than 5% of the Fund's total assets in the shares of any one
investment company; nor (3) invest more than 10% of the Fund's total assets in
shares of other investment companies. If the Fund elects to limit its investment
in other investment companies to closed-end investment companies, the 3%
limitation described above is increased to 10%. These percentage limitations
also apply to the Fund's investments in unregistered investment companies.
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 the Manager, 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. Not more than 15% of the Fund's assets may
be invested in repurchase agreements of over seven-days' maturity or other
illiquid assets. Should an issuer of a repurchase agreement fail to repurchase
the underlying security, the loss to the Fund, 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 the Manager 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 100% of the repurchase price, including the portion representing the
Fund's yield under such agreements, which is monitored on a daily basis.
Foreign Currency Transactions
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will, however, from time to time, purchase or sell
foreign currencies and/or engage in forward foreign currency transactions in
order to expedite settlement of portfolio transactions and to minimize currency
value fluctuations. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign
-58-
<PAGE>
currencies at a future date (i.e., a "forward foreign currency" contract or
"forward" contract). A forward contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract, agreed upon by the parties, at a price set at the
time of the contract. The Fund will convert currency on a spot basis from time
to time, and investors should be aware of the costs of currency conversion.
The Fund may enter into forward contracts to "lock in" the price of a
security it has agreed to purchase or sell, in terms of U.S. dollars or other
currencies in which the transaction will be consummated. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the underlying
security transaction, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in currency exchange rates during the
period between the date the security is purchased or sold and the date on which
payment is made or received.
When the Sub-Adviser believes that the currency of a particular country
may suffer a significant decline against the U.S. dollar or against another
currency, the Fund may enter into a forward foreign currency contract to sell,
for a fixed amount of U.S. dollars or other appropriate currency, the amount of
foreign currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency.
The Fund will not enter into forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's securities or other assets denominated in that currency.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions. With respect to forward foreign currency contracts, the precise
matching of forward contract amounts and the value of the securities involved is
generally not possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency strategy is highly
uncertain.
It is impossible to forecast the market value of Fund securities at the
expiration of the contract. Accordingly, it may be necessary for the Fund to
purchase additional foreign currency on the spot market (and bear the expense of
such purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make delivery of the foreign currency. Conversely, it may
be necessary to sell on the spot market some of the foreign currency received
upon the sale of a security if its market value exceeds the amount of foreign
currency the Fund is obligated to deliver.
Options
The Manager and Sub-Adviser may employ options techniques in an attempt
to protect appreciation attained and to take advantage of the liquidity
available in the options market. The Fund may purchase call options on foreign
or U.S. securities and indices and enter into related closing transactions and
the Fund may write covered call options on such securities. The Fund may also
purchase put options on such securities and indices and enter into related
closing transactions.
-59-
<PAGE>
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price up to an
agreed date. A covered call option obligates the writer, in return for the
premium received, to sell the securities subject to the option to the purchaser
of the option for an agreed upon price up to an agreed date. The advantage is
that the purchaser may hedge against an increase in the price of securities it
ultimately wishes to buy or take advantage of a rise in a particular index. The
Fund will only purchase call options to the extent that premiums paid on all
outstanding call options do not exceed 2% of its total assets.
A put option enables the purchaser of the option, in return for the
premium paid, to sell the security underlying the option to the writer at the
exercise price during the option period, and the writer of the option has the
obligation to purchase the security from the purchaser of the option. The Fund
will only purchase put options to the extent that the premiums on all
outstanding put options do not exceed 2% of its total assets. The advantage is
that the purchaser can be protected should the market value of the security
decline or should a particular index decline.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions essentially let the Fund offset put options or
call options prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
In purchasing put and call options, the premium paid by the Fund plus
any transaction costs will reduce any benefit realized by the Fund upon exercise
of the option. With respect to writing covered call options, the Fund may lose
the potential market appreciation of the securities subject to the option, if
the Manager's or the Sub-Adviser's judgment is wrong and the price of the
security moves in the opposite direction from what was anticipated.
The Fund may use both Exchange-traded and over-the-counter options.
Certain over-the-counter options may be illiquid. The Fund will only invest in
such options to the extent consistent with its 15% limitation on investment in
illiquid securities. The Fund will comply with Securities and Exchange
Commission asset segregation and coverage requirements when engaging in these
types of transactions.
Futures
Futures contracts are agreements for the purchase or sale for future
delivery of securities. When a futures contract is sold, the Fund incurs a
contractual obligation to deliver the securities underlying the contract at a
specified price on a specified date during a specified future month. A purchase
of a futures contract means the acquisition of a contractual right to obtain
delivery to the Fund of the securities called for by the contract at a specified
price during a specified future month.
While futures contracts provide for the delivery of securities,
deliveries usually do not occur. Contracts are generally terminated by entering
into an offsetting transaction. When the Fund enters into a futures transaction,
it must deliver to the futures commission merchant selected by the Fund an
amount referred to as "initial margin." This amount is maintained by the futures
commission merchant in an account at the Fund's custodian bank. Thereafter, a
"variation margin" may be paid by the Fund to, or drawn by the Fund from, such
account in accordance with controls set for such account, depending upon changes
in the price of the underlying securities subject to the futures contract.
-60-
<PAGE>
The Fund may also purchase and write options to buy or sell futures
contracts. Options on futures are similar to options on securities except that
options on futures give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract, rather than actually to purchase or
sell the futures contract, at a specified exercise price at any time during the
period of the option.
The purpose of the purchase or sale of futures contracts consisting of
U.S. government securities is to protect the Fund against the adverse effects of
fluctuations in interest rates without actually buying or selling such
securities. Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of U.S. government securities at higher prices.
REITs
REITs are pooled investment vehicles which invest primarily in
income-producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Like investment companies such as Income Funds, Inc., REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements in the Code. REITs are subject to substantial cash flow dependency,
defaults by borrowers, self-liquidation, and the risk of failing to qualify for
tax-free pass-through of income under the Code, and/or maintain exemptions from
the 1940 Act.
-61-
<PAGE>
APPENDIX A - INVESTMENT ILLUSTRATIONS
Illustrations of the Potential Impact on Investment Based on Purchase Option
$10,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
- ----- --------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
0 9,525 10,000 10,000 9,525 10,000 10,000
1 10,192 10,625 10,625 10,192 10,225 10,525+
2 10,905 11,289 11,289
3 11,669 11,995 11,995
4 12,485 12,744 12,744
5 13,359 13,541 13,541
6 14,294 14,387 14,387
7 15,295 15,286 15,286
8 16,366+ 16,242 16,242
9 17,511 17,379* 17,257
10 18,737 18,595* 18,335
</TABLE>
*This assumes that Class B Shares were converted to Class A
Shares at the end of the eighth year.
<TABLE>
<CAPTION>
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
- ---- --------------------------------------- ---------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 9,525 10,000 10,000 9,525 10,000 10,000
1 10,192 10,625 10,625 10,192 10,625 10,625
2 10,905 11,289 11,289 10,905 11,289 11,289
3 11,669 11,695 11,995+ 11,669 11,995 11,995
4 12,485 12,744 12,744
5 13,359 13,341 13,541+
6
7
8
9
10
</TABLE>
<PAGE>
$250,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
- ---- --------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Class A Class B Class C Class A Class B Class C
- ---- -------- ------- ------- ------- ------- -------
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,625 265,625 260,813 255,625 263,125+
2 279,069 282,227 282,227
3 298,604 299,866 299,866
4 319,507+ 318,607 318,607
5 341,872 338,520 338,520
6 365,803 359,678 359,678
7 391,409 382,158 382,158
8 418,808 406,043 406,043
9 448,124 434,466* 431,420
10 479,493 464,878* 458,384
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
- ---- --------------------------------------- ---------------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,625 265,625 260,813 265,625 265,625
2 279,069 282,227 282,227 279,069 282,227 282,227
3 298,604 292,366 300,866+ 298,604 299,866 299,866
4 319,507+ 318,607 318,607
5 341,872 333,520 338,520
6
7
8
9
10
</TABLE>
*This assumes that Class B Shares were converted to Class A
Shares at the end of the eighth year.
Assumes a hypothetical return for Class A of 7% per year, a hypothetical return
for Class B of 6.25% for years 1-8 and 7% for years 9-10, and a hypothetical
return for Class C of 6.25% per year. Hypothetical returns vary due to the
different expense structure for each Class and do not represent actual
performance.
Class A purchase subject to appropriate sales charge breakpoint (4.75% @
$10,000; 3.75% @ $100,000; 2.50% @ $250,000).
Class B purchase assessed appropriate CDSC upon redemption (4%-4%-3%-3%-2%-1%
in years 1-2-3-4-5-6).
Class C purchase assessed 1% CDSC upon redemption in year 1.
Figures marked "+" identify which Class offers the greater return potential
based on investment amount, the holding period and the expense structure of each
Class.
<PAGE>
APPENDIX B -- RATINGS
The Fund's assets may be invested in securities rated BBB or lower by
S&P or Fitch, Baa or lower by Moody's, in securities similarly rated by another
nationally recognized statistical rating organization, and in unrated corporate
bonds. These credit ratings evaluate only the safety of principal and interest
and do not consider the market value risk associated with high-yield securities.
General Rating Information
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 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.
Excerpts from Fitch's description of its bond ratings:
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events; AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+; A--
Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances that bonds with higher ratings; BBB--Bonds considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay
-62-
<PAGE>
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings; BB--Bonds are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements; B--Bonds
are considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue; CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment; CC--Bonds are minimally
protected. Default in payment of interest and/or principal seems probable over
time; C--Bonds are in imminent default in payment of interest or principal; and
DDD, DD and D--Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D" represents
the lowest potential for recovery.
Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
-63-
<PAGE>
- ---------------------------
STRATEGIC INCOME FUND
- ---------------------------
INSTITUTIONAL
- ---------------------------
P R O S P E C T U S
- ---------------------------
SEPTEMBER 30, 1996
[Photo of various
Philadelphia sites]
DELAWARE
GROUP
---------
<PAGE>
For more information contact the Delaware Group at 800-828-5052.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
SUB-ADVISER
Delaware International Advisers Ltd.
Veritas House
125 Finsbury Pavement
London, England EC2A 1NQ
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
<PAGE>
STRATEGIC INCOME FUND PROSPECTUS
INSTITUTIONAL CLASS SHARES SEPTEMBER 30, 1996
-----------------------------------
1818 Market Street, Philadelphia, PA 19103
For more information about
the Strategic Income Fund Institutional Class
call the Delaware Group at 800-828-5052.
This Prospectus describes the Strategic Income Fund Institutional Class
of shares of the Strategic Income Fund series (the "Fund") of Delaware Group
Income Funds, Inc. ("Income Funds, Inc."), a professionally-managed mutual fund
of the series type. The objective of the Fund is to seek to provide investors
with high current income and total return.
This Fund may invest up to 70% of its assets in lower rated securities,
commonly known as "junk bonds" or "below investment grade" securities which
involve greater risks, including default risks, than higher rated securities.
Purchasers should carefully assess these risks before investing in this Fund.
See Investment Objective and Policies, Special Risk Considerations, and Appendix
A-Ratings.
The Fund offers the Strategic Income Fund Institutional Class (the
"Class") of shares. Shares of this 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 Classes of 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. Part B of Income Funds, Inc.'s registration statement, dated
September 30, 1996, 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 also offers the Strategic Income Fund A Class of shares, the
Strategic Income Fund B Class of shares and the Strategic Income Fund C Class of
shares. 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.
-1-
<PAGE>
TABLE OF CONTENTS
Cover Page Classes of Shares
Synopsis How to Buy Shares
Summary of Expenses Redemption and Exchange
Investment Objective Dividends and Distributions
and Policies Taxes
Suitability Calculation of Net Asset
Investment Strategy Value Per Share
Special Risk Considerations Management of the Fund
High-Yield Securities Other Investment Policies
Foreign Securities and Risk Considerations
Appendix A - Ratings
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.
-2-
<PAGE>
SYNOPSIS
Investment Objective
The objective of the Fund is to seek to provide investors with high
current income and total return. The Fund seeks to achieve its objective by
using a multi-sector investment approach, investing principally in three sectors
of the fixed-income securities markets: high-yield, higher risk securities;
investment grade fixed-income securities; and foreign government and other
foreign fixed-income securities. In addition, the Fund may invest in U.S. equity
securities. For further details, see Investment Objective and Policies.
Risk Factors
Prospective investors should consider the following:
1. The Fund may invest up to 70% of its assets in high-yield, higher
risk fixed-income or other securities ("junk" bonds or securities). Such
securities may increase the risks of an investment in this Fund. See High-Yield
Securities under Special Risk Considerations.
2. Investing in securities of non-United States companies which are
generally denominated in foreign currencies and the utilization of forward
foreign currency exchange contracts involve certain risk and opportunity
considerations not typically associated with investing in United States
companies. See Special Risk Considerations and Other Investment Policies and
Risk Considerations.
3. The Fund has the ability to engage in options transactions for
hedging purposes to counterbalance portfolio volatility. While the Fund does not
engage in options transactions for speculative purposes, there are risks which
result from the use of options, and an investor should carefully review the
descriptions of these risks in this Prospectus. Certain options may be
considered to be derivative securities. See Options under Other Investment
Policies and Risk Considerations.
4. The Fund may invest up to 15% of its net assets in issuers located
or operating in markets of emerging countries. The securities markets in these
countries may be subject to a greater degree of economic, political and social
instability than is the case in the United States, Western European and other
developed markets. See Special Risk Considerations.
Investment Manager, Sub-Adviser, Distributor and Service Agent
Delaware Management Company, Inc. (the "Manager") furnishes investment
management services to the Fund, subject to the supervision and direction of
Income Funds, Inc.'s Board of Directors. Under the Investment Management
Agreement between the Fund and the Manager, the annual compensation paid to the
Manager is equal to 0.65% on the first $500 million of average daily net assets,
0.625% on the next $500 million and 0.60% on the average daily net assets in
excess of $1 billion. The Manager has entered into a sub-advisory agreement with
Delaware International Advisers Ltd. (the "Sub-Adviser"), an affiliate of the
Manager, with respect to the management of the Fund's investments in foreign
government and other foreign fixed-income securities. The Sub-Adviser will
receive from the Manager one-third of the investment management fees paid to the
Manager by the Fund. See Management of the Fund.
The Manager and the Sub-Adviser provide 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
-3-
<PAGE>
"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 Management of the Fund.
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
Income Funds, Inc., which was organized as a Maryland corporation in
1983, 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"). Income Funds, Inc. was previously organized as a Delaware
corporation in 1970. See Shares under Management of the Fund.
-4-
<PAGE>
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
Redemption Fees . . . . . . . . . . . . . . . . . None*
Exchange Fees . . . . . . . . . . . . . . . . . . None**
Annual Operating Expenses
(as a percentage of average daily net assets)
- -------------------------------------------------------------------------------
Management Fees (after voluntary waivers) . . . . 0.17%
12b-1 Fees. . . . . . . . . . . . . . . . . . . . None
Other Operating Expenses. . . . . . . . . . . . . 0.58%
-----
Total Operating Expenses+
(after voluntary waivers) . . . . . . . 0.75%
=====
The purpose of this table is to assist the investor in understanding
the various costs and expenses that an investor in the Class will bear directly
or indirectly. Because the Fund has no operating history, "Other Operating
Expenses" are estimated based on expenses expected to be incurred during the
Fund's first fiscal year.
*CoreStates Bank, N.A. currently charges $7.50 per redemption for redemptions
payable by wire.
**Exchanges are subject to the requirements of each fund and a front-end sales
charge may apply.
+"Other Operating Expenses" and "Total Operating Expenses" for the Strategic
Income Fund Institutional Class are based on estimated expenses expected to be
incurred during the first full fiscal year of the Class, after giving effect to
the voluntary expense waiver. The Manager has elected voluntarily to waive that
portion, if any, of the annual management fees payable by the Strategic Income
Fund and to pay certain expenses of the Fund to the extent necessary to ensure
that the Total Operating Expenses of the Strategic Income Fund Institutional
Class, do not exceed .75% during the commencement of the public offering of the
Class through June 30, 1997. If the voluntary expense waivers were not in
effect, it is estimated that the Total Operating Expenses, as a percentage of
average daily net assets, would be 1.23% for the Strategic Income Fund
Institutional Class' first full fiscal year, reflecting management fees of
0.65%.
-5-
<PAGE>
For expense information about Strategic Income Fund A Class, Strategic
Income Fund B Class and Strategic 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 table above, the Fund charges no redemption fees.
1 year 3 years
------ -------
$8 $24
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.
-6-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
SUITABILITY
The Fund may be suitable for the investor interested in high current
income and total return which, in part, is derived from such income. The net
asset value per share of the Class may fluctuate in response to the condition of
individual companies and general market and economic conditions and, as a
result, the Fund is not appropriate for a short-term investor. The Fund cannot
assure a specific rate of return or that principal will be protected. However,
through the cautious selection and supervision of its portfolio, the Manager and
the Sub-Adviser will strive to achieve the Fund's objective.
The types of securities in which the Fund may invest are subject to
price fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as yield,
in making an investment decision. While investments in unrated, lower-rated and
certain restricted securities have the potential for higher yields, they are
more speculative and increase the credit risk of the Fund's portfolio. Changes
in the market value of portfolio securities will not affect interest income from
such securities, but will be reflected in the Class' net asset value. In
addition, investments in foreign fixed-income securities involve special risks,
including those related to currency fluctuations, as well as to political,
economic and social situations different from and potentially more volatile than
those in the United States. Investors should be willing to accept the risks,
including the risk of net asset value fluctuations, associated with investing in
these types of securities. See Special Risk Considerations and Other Investment
Policies and Risk Considerations for a complete discussion of the risk factors
affecting the Fund's portfolio securities.
Ownership of Strategic Income Fund shares can reduce the bookkeeping
and administrative inconveniences that would be connected with direct purchases
of the types of securities in which the Fund invests.
INVESTMENT STRATEGY
The objective of the Fund is to seek to provide investors with high
current income and total return. The Manager will seek to achieve this objective
by allocating the Fund's investments principally among the following three
sectors of the fixed-income securities markets:
o a High-Yield Sector, consisting of high-yielding, lower-rated or
unrated fixed-income securities issued by U.S. companies;
o an Investment Grade Sector, consisting of investment grade debt
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or by U.S. companies; and
o an International Sector, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other
fixed-income securities of issuers in foreign countries and
denominated in foreign currencies.
-7-
<PAGE>
The Manager will determine the amount of assets of the Fund that will
be allocated to each of the three sectors in which the Fund will invest, based
on its analysis of economic and market conditions and its assessment of the
returns and potential for appreciation that can be achieved from investment in
each of the three sectors. The Manager will periodically reallocate the Fund's
assets among sectors as it deems necessary, and as little as 20% and as much as
60% of the Fund's assets may be invested in each fixed-income sector. In
addition, the Fund may invest up to 10% of its assets in U.S. equity securities.
Domestic High-Yield Sector
The Manager will invest the Fund's assets that are allocated to the
domestic high-yield sector primarily in those securities having a liberal and
consistent yield and those tending to reduce the risk of market fluctuations.
The Fund may invest in domestic corporate debt obligations, including corporate
notes (including convertible notes), units consisting of bonds with stock or
warrants to buy stock attached, debentures, convertible debentures, zero coupon
bonds and pay-in-kind securities ("PIKs"). See Zero Coupon Bonds and Pay-In-Kind
Bonds under Other Investment Policies and Risk Considerations. The Fund may also
purchase preferred stock and convertible preferred stock.
The Fund will invest in both rated and unrated bonds. The rated bonds
that the Fund may purchase in this sector of its portfolio will generally be
rated BB or lower by Standard & Poor's Ratings Group ("S&P") or Fitch Investors
Service, Inc. ("Fitch"), Ba or lower by Moody's Investors Service, Inc.
("Moody's"), or similarly rated by another nationally recognized statistical
rating organization. See Appendix A to this Prospectus for more rating
information and High-Yield Securities under Special Risk Considerations for a
description of the risks associated with investing in lower-rated fixed-income
securities. Unrated bonds may be more speculative in nature than rated bonds.
Investment Grade Sector
In managing the Fund's assets allocated to the investment grade sector,
the Manager will invest primarily in debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities and by U.S. corporations.
The corporate debt obligations in which the Fund may invest include bonds,
notes, debentures and commercial paper of U.S. companies.
The U.S. government securities in which the Fund may invest include a
variety of securities which are issued or guaranteed as to the payment of
principal and interest by the U.S. government, and by various agencies or
instrumentalities which have been established or sponsored by the U.S.
government. See U.S. Government Securities under Other Investment Policies and
Risk Considerations for a discussion of these types of securities.
The investment grade sector of the Fund's portfolio may also be
invested in mortgage-backed securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities or by government sponsored
corporations. See Mortgage-Backed Securities under Other Investment Policies and
Risk Considerations for a discussion of these types of securities. Other
mortgage-backed securities in which the Fund may invest are issued by certain
private, non-government entities. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). See CMOs and REMICs under Other
Investment Polices and Risk Considerations for a discussion of these types of
mortgage-backed securities.
-8-
<PAGE>
Subject to the quality limitations set forth in this Prospectus, the
Fund may also invest in securities which are backed by assets such as
receivables on home equity and credit card loans, and receivables regarding
automobile, mobile home, recreational vehicle and other loans, wholesale dealer
floor plans and leases. See Asset-Backed Securities under Other Investment
Policies and Risk Considerations. The Fund may also invest in futures contracts
and options on futures contracts subject to certain limitations. See Futures
under Other Investment Policies and Risk Considerations.
Securities purchased by the Fund within the investment grade sector
will be rated in one of the four highest rating categories or will be unrated
securities that are of comparable quality as determined by the Manager. The four
highest rating categories are AAA, AA, A or BBB by S&P and Fitch, or Aaa, Aa, A
or Baa by Moody's. Debt securities within the top three categories comprise what
are known as high-grade bonds and are regarded as having a strong capacity to
pay principal and interest. Securities in the fourth category, known as
medium-grade bonds, are regarded as having an adequate capacity to pay principal
and interest but with greater vulnerability to adverse economic conditions and
speculative characteristics. See Appendix A to this Prospectus for more rating
information.
International Sector
The Sub-Adviser will invest the assets of the Fund that are allocated
to the international sector primarily in fixed-income securities of issuers
organized or having a majority of their assets or deriving a majority of their
operating income in foreign countries. These fixed-income securities include
foreign government securities, debt obligations of foreign companies, and
securities issued by supranational entities.
A supranational entity is an entity established or financially
supported by the national governments of one or more countries to promote
reconstruction or development. Examples of supranational entities include, among
others, the International Bank for Reconstruction and Development (more commonly
known as the World Bank), the European Economic Community, the European Coal and
Steel Community, the European Investment Bank, the Inter-Development Bank, the
Export-Import Bank and the Asian Development Bank.
The Fund may invest in sponsored and unsponsored American Depositary
Receipts, European Depositary Receipts, or Global Depositary Receipts
("Depositary Receipts"). Depositary Receipts are receipts typically issued by a
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, and "unsponsored"
Depositary Receipts are issued without the participation of the issuer of the
deposited security. The Fund may also invest in Brady Bonds, which are described
more fully under Foreign Securities in the Special Risk Considerations section
of this Prospectus. The Fund may also invest in zero coupon bonds and may
purchase shares of other investment companies. See Zero Coupon Bonds and
Pay-In-Kind Bonds and Investment Company Securities under Other Investment
Polices and Risk Considerations.
The Fund may invest in securities issued in any currency and may hold
foreign currencies. Securities of issuers within a given country may be
denominated in the currency of another country or in multinational currency
units, such as the European Currency Unit. The Fund will, from time to time,
purchase or sell foreign currencies and/or engage in forward foreign currency
transactions in order to
-9-
<PAGE>
expedite settlement of Fund transactions and to minimize currency value
fluctuations. See Other Investment Policies and Risk Considerations for a
further description of the Fund's foreign currency transactions.
While the Fund may purchase securities of issuers in any foreign
country, developed and underdeveloped, no more than 15% of the Fund's assets may
be invested in direct obligations of issuers located in emerging market
countries. See Emerging Market Securities under Special Risk Considerations.
The Fund will invest in both rated and unrated foreign securities. The
rated securities that the Fund may purchase in the international sector of its
portfolio may include those rated BBB or lower by S&P or Fitch, Baa or lower by
Moody's, or similarly rated by another nationally recognized statistical rating
organization. See Appendix A to this Prospectus for more rating information and
Foreign Securities and High-Yield Securities under Special Risk Considerations
for a description of the risks associated with investing in foreign securities
and lower-rated fixed-income securities.
Equity Sector
Up to 10% of the Fund's assets may be invested in U.S. equity
securities. Such investments may include common stocks, preferred stocks
(including adjustable rate preferred stocks) and other equity securities, such
as convertible securities and warrants, which may be used to create other
permissible investments. Such investments must be consistent with the Fund's
objective of high current income and total return. In addition, the Fund may
invest in shares or convertible bonds of real estate investment trusts
("REITs"). See REITs under Other Investment Policies and Risk Considerations for
a discussion of these types of securities.
In managing the Fund's assets allocated to the U.S. equity sector, the
Manager may invest in securities that are rated and unrated. The securities may
include those rated BBB or lower by S&P or Fitch, Baa or lower by Moody's, or
similarly rated by another nationally recognized statistical rating
organization. See Appendix A to this Prospectus for more rating information and
High-Yield Securities under Special Risk Considerations for a description of the
risks associated with investing in lower-rated securities.
* * *
For a description of the Fund's other investment policies and for a
further description of some of the policies described above, see Other
Investment Policies and Risk Considerations.
In unusual market conditions, in order to meet redemption requests, for
temporary defensive purposes, and pending investment, the Fund may hold a
substantial portion of its assets in cash or short-term fixed-income
obligations. The Fund may invest in repurchase agreements, but it normally does
so only to invest cash balances. The Fund is permitted to borrow money.
Although the Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained.
-10-
<PAGE>
The Fund's investment objective, and its designation as an open-end
investment company and as a diversified fund, may not be changed unless
authorized by the vote of a majority of the Fund's outstanding voting
securities. A "majority vote of the outstanding voting securities" is the vote
by the holders of the lesser of a) 67% or more of the Fund's voting securities
present in person or represented by proxy if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or b) more than 50% of the outstanding voting securities. Part B lists other
more specific investment restrictions of the Fund which may not be changed
without a majority shareholder vote.
The remaining investment policies of the Fund not identified above or
in Part B as fundamental are not fundamental and may be changed by the Board of
Directors of Income Funds, Inc. without a shareholder vote.
-11-
<PAGE>
SPECIAL RISK CONSIDERATIONS
Generally
The Fund invests a substantial portion of its assets in fixed-income
securities. The market values of fixed-income securities generally fall when
interest rates rise and, conversely, rise when interest rates fall. Lower-rated
and unrated fixed-income securities tend to reflect short-term corporate and
market developments to a greater extent than higher-rated fixed-income
securities, which react primarily to fluctuations in the general level of
interest rates. These lower-rated or unrated securities generally have higher
yields, but, as a result of factors such as reduced creditworthiness of issuers,
increased risk of default and a more limited and less liquid secondary market,
are subject to greater volatility and risk of loss of income and principal than
are higher-rated securities. The Manager will attempt to reduce such risk
through sector allocation, portfolio diversification, credit analysis, and
attention to trends in the economy, industries and financial markets.
High-Yield Securities
The Fund may invest a significant portion of its assets in bonds and
other securities rated BBB or lower by S&P or Fitch, Baa or lower by Moody's or
similarly rated by another rating organization, and in unrated corporate bonds.
See Appendix A to this Prospectus for more rating information. Investing in
these so-called "junk" bonds or "high-yield" securities entails certain risks,
including the risk of loss of principal, which may be greater than the risks
involved in investment grade securities, and which should be considered by
investors contemplating an investment in the Fund. High-yield bonds are
sometimes issued by companies whose earnings at the time of issuance are less
than the projected debt service on the junk bonds. In addition to the
considerations discussed elsewhere in this Prospectus, those risks include the
following:
Youth and Volatility of the High-Yield Market. Although the market for
high-yield bonds has been in existence for many years, including periods of
economic downturns, the high-yield market grew rapidly during the long economic
expansion which took place in the United States during the 1980s. During that
economic expansion, the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings increased dramatically. As a
result, the high-yield market grew substantially during that economic expansion.
Although experts disagree on the impact recessionary periods have had and will
have on the high-yield market, some analysts believe a protracted economic
downturn would severely disrupt the market for high-yield bonds, would adversely
affect the value of outstanding bonds and would adversely affect the ability of
high-yield issuers to repay principal and interest. Those analysts cite
volatility experienced in the high-yield market in the past as evidence for
their position. It is likely that protracted periods of economic uncertainty
would result in increased volatility in the market prices of high-yield bonds,
an increase in the number of high-yield bond defaults and corresponding
volatility in the Class' net asset value.
Redemptions. If, as a result of volatility in the high-yield market or other
factors, the Fund experiences substantial net redemptions of the Fund's shares
for a sustained period of time (i.e., more shares of the Fund are redeemed than
are purchased), the Fund may be required to sell certain of its high-yield
securities without regard to the investment merits of the securities to be sold.
If the Fund sells a substantial number of securities to generate proceeds for
redemptions, the asset base of the Fund will decrease and the Fund's expense
ratios may increase.
-12-
<PAGE>
Liquidity and Valuation. The secondary market for high-yield securities is
currently dominated by institutional investors, including mutual funds, and
certain financial institutions. There is generally no established retail
secondary market for high-yield securities. As a result, the secondary market
for high-yield securities is more limited and less liquid than other secondary
securities markets. The high-yield secondary market is particularly susceptible
to liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings and
loan crisis. A less liquid secondary market may have an adverse effect on the
Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. In addition, a less liquid
secondary market makes it more difficult for the Fund to obtain precise
valuations of the high-yield securities in its portfolio. During periods
involving such liquidity problems, judgment plays a greater role in valuing
high-yield securities than is normally the case. The secondary market for
high-yield securities is also generally considered to be more likely to be
disrupted by adverse publicity and investor perceptions than the more
established secondary securities markets. The privately placed high-yield
securities that the Fund may purchase are particularly susceptible to the
liquidity and valuation risks outlined above.
Foreign Securities
The Fund has the ability to purchase debt securities in any foreign
country. Investors should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations.
These risks are in addition to the usual risks inherent in domestic investments.
There is the possibility of expropriation, nationalization or confiscatory
taxation, taxation of income earned in foreign nations or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given
country), default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in
securities of issuers in those nations.
In addition, in many countries, there is substantially less publicly
available information about issuers than is available in reports about companies
in the United States. Foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Consequently, financial data about foreign companies may not
accurately reflect the real condition of those issuers and securities markets.
Further, the Fund may encounter difficulty or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates on securities
transactions in foreign countries, which are sometimes fixed rather than subject
to negotiation as in the United States, are likely to be higher. Further, the
settlement period of securities transactions in foreign markets may be longer
than in domestic markets, and may be subject to administrative uncertainties. In
many foreign countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States, and capital requirements for brokerage firms are
generally lower. The foreign securities markets of many of the countries in
which the Fund may invest may also be smaller, less liquid and subject to
greater price volatility than those in the United States.
-13-
<PAGE>
Emerging Market Securities. The Fund may invest up to 15% of its assets
in the debt securities of issuers located in emerging market nations. Compared
to the United States and other developed countries, emerging countries may have
volatile social conditions, relatively unstable governments and political
systems, economies based on only a few industries and economic structures that
are less diverse and mature, and securities markets that trade a small number of
securities, which can result in a low or nonexistent volume of trading. Prices
in these securities markets tend to be volatile and, in the past, securities in
these countries have offered greater potential for gain (as well as loss) than
securities of companies located in developed countries. Until recently, there
has been an absence of a capital market structure or market-oriented economy in
certain emerging countries. Further, investments and opportunities for
investments by foreign investors are subject to a variety of national policies
and restrictions in many emerging countries. Also, the repatriation of both
investment income and capital from several foreign countries is restricted and
controlled under certain regulations, including, in some cases, the need for
certain governmental consents. Countries such as those in which the Fund may
invest have historically experienced and may continue to experience,
substantial, and in some periods extremely high rates of inflation for many
years, high interest rates, exchange rate fluctuations or currency depreciation,
large amounts of external debt, balance of payments and trade difficulties and
extreme poverty and unemployment. Other factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's cash
flow situation, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of its debt service burden to the economy as a
whole, its government's policy towards the International Monetary Fund, the
World Bank and other international agencies and the political constraints to
which a government debtor may be subject.
Brady Bonds. Among the foreign fixed-income securities in which the
Fund may invest are Brady Bonds. Brady Bonds are debt securities issued under
the framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally commercial bank
debt). In so restructuring its external debt, a debtor nation negotiates with
its existing bank lenders, as well as multilateral institutions such as the
World Bank and the International Monetary Fund, to exchange its commercial bank
debt for newly issued bonds (Brady Bonds). The Sub-Adviser believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced plans
to issue Brady Bonds an attractive opportunity for investment. Investors,
however, should recognize that the Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that solutions
must be negotiated on a case-by-case basis between debtor nations and their
creditors. In addition, Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history.
Foreign Government Securities. With respect to investment in debt
issues of foreign governments, including Brady Bonds, the ability of a foreign
government or government-related issuer to make timely and ultimate payments on
its external debt obligations will also be strongly influenced by the issuer's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. If foreign
government or government-related issuers cannot generate sufficient earnings
from foreign trade to service its external debt, they may need to depend on
continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these
-14-
<PAGE>
foreign governments, multilateral organizations and others to make such
disbursements may be conditioned on the government's implementation of economic
reforms and/or economic performance and the timely service of its obligations.
Failure to implement such reforms, achieve such levels of economic performance
or repay principal or interest when due may curtail the willingness of such
third parties to lend funds, which may further impair the issuer's ability or
willingness to service its debts in a timely manner. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a government issuer to obtain sufficient
foreign exchange to service its external debt. If a foreign governmental issuer
defaults on its obligations, the Fund may have limited legal recourse against
the issuer and/or guarantor.
See Other Investment Policies and Risk Considerations for a further
description of certain risks associated with certain of the Fund's investments,
including the risks associated with engaging in foreign currency transactions
and options.
-15-
<PAGE>
CLASSES OF SHARES
The Distributor serves as the national distributor for Income Funds,
Inc. 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 plans 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) banks, trust companies and similar financial institutions
investing for their own account or for the account of their trust customers for
whom such financial institution is exercising investment discretion in
purchasing shares of the Class; 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.
Strategic Income Fund A Class, Strategic Income Fund B Class and Strategic
Income Fund C Class
In addition to offering the Strategic Income Fund Institutional Class,
the Fund also offers the Strategic Income Fund A Class, the Strategic Income
Fund B Class and the Strategic Income Fund C Class, which are described in a
separate prospectus. Shares of the Strategic Income Fund A Class, the Strategic
Income Fund B Class and the Strategic Income Fund C Class may be purchased
through authorized investment dealers or directly by contacting the Fund or the
Distributor. The Strategic Income Fund A Class carries a front-end sales charge
and has annual 12b-1 expenses equal to a maximum of .30% (currently, no more
than .25% pursuant to Board action). 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. The Strategic Income Fund B Class and the Strategic 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 the Strategic Income Fund B Class
and the Strategic Income Fund C Class and certain shares of the Strategic 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.
-16-
<PAGE>
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 Strategic Income Fund Institutional Class, to
1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by mailing
a check payable to Strategic Income Fund Institutional Class. 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).
1. Initial Purchases--Before you invest, telephone the Fund's 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, to Strategic Income Fund Institutional
Class, to 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 the
Strategic Income Fund B Class and Strategic Income Fund C Class and the 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 the Class. If you wish to open an
account by exchange, call your Client Services Representative at 800-828-5052
for more information.
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. They
may charge for this service.
Purchase Price and Effective Date
The purchase price (net asset value) 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, 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.
-17-
<PAGE>
The Conditions of Your Purchase
The Fund reserves the right to reject any purchase order. If a purchase
is canceled 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
purchase orders paid by third-party checks or checks that are not drawn on a
domestic branch of a United States financial institution. If a check drawn on a
foreign financial institution is accepted, you may be subject to additional bank
charges for clearance and currency conversion.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under $250 as a result of redemptions.
-18-
<PAGE>
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 based on the net asset value
next determined after we receive your request in good order. Redemption and
exchange requests received in good order after the time the net asset value of
shares is determined, as noted above, 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 Class 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.
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 redemption requests as to shares for which a check
was tendered 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 the Class B
Shares or Class C Shares 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, 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.
-19-
<PAGE>
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 of
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.
The redemption request is effective at the net asset value next
determined after it is received in good order. Payment is normally mailed the
next business day, but no later than seven days, after receipt of your 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 service 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, the 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.
-20-
<PAGE>
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 record address. Checks will be payable to
the shareholder(s) of record. Payment is normally mailed the next business day,
but no later than seven days, after receipt of the request.
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.
CoreStates Bank, N.A.'s fee (currently $7.50) will be deducted from your
redemption. If you ask for a check, it will normally be mailed the next business
day, but no later than seven days, after receipt of your 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.
-21-
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to declare and pay dividends monthly. However, the
Fund does not anticipate declaring or paying dividends during the first few
months following the commencement of its operations. Payment by check of cash
dividends will ordinarily be mailed within three business days after the payable
date. Distributions from net realized securities profits, if any, will be
distributed twice a year. The first payment normally would be made during the
first quarter of the next fiscal year. The second payment would be made near the
end of the calendar year to comply with certain requirements of the Internal
Revenue Code (the "Code").
Each class of the Fund will share proportionately in the investment
income and expenses of the Fund, except that the Class will not incur
distribution fees under the Rule 12b-1 Plans which apply to the Strategic Income
Fund A Class, the Strategic Income Fund B Class and the Strategic Income Fund C
Class.
-22-
<PAGE>
TAXES
The tax discussion set forth below is included for general information
only. Investors should consult their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in the Fund.
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 investors who are subject to
income taxes as ordinary income, even though received in additional shares. It
is expected that either none or only a nominal portion of the Fund's dividends
will be eligible for the dividends-received deduction for corporations.
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 byproduct 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 calendar year in which they are 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.
The Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% in value of the total assets
of the Fund at the end of its fiscal year are invested in securities of foreign
corporations, the Fund may elect to pass-through to its shareholders a pro-rata
share of foreign income taxes paid by the Fund. If this election is made,
shareholders will be (i) required to include in their gross income their
pro-rata share of foreign source income (including any foreign taxes paid by the
Fund), and (ii) entitled to either deduct (as an itemized deduction in the case
of individuals) their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code. Shareholders will
-23-
<PAGE>
be informed by the Fund at the end of each calendar year of the availability of
any credits on, and the amount of foreign source income to be included in, their
income tax returns.
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, Income Funds, Inc. will mail to you information on the tax
status of the Fund's dividends and distributions. Shareholders will also receive
each year information as to the portion of dividend income 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.
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 Taxes in Part B for additional information on tax matters relating
to the Fund and its shareholders.
-24-
<PAGE>
CALCULATION OF NET ASSET VALUE PER SHARE
The purchase and redemption price of the Class is the net asset value
("NAV") per share of the Class 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 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. Debt securities
are priced on the basis of valuations provided by an independent pricing service
using methods approved by Income Funds, Inc.'s Board of Directors. Equity
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
Income Funds, Inc.'s Board of Directors.
The net asset values 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 the Strategic 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 may be allocable to each class, the NAV of each
class is expected to vary.
-25-
<PAGE>
MANAGEMENT OF THE FUND
Directors
The business and affairs of Income Funds, Inc. are managed under the
direction of its Board of Directors. Part B contains additional information
regarding Income Funds, Inc.'s directors and officers.
Investment Manager and Sub-Adviser
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 July 31, 1996, the Manager and its affiliates in
the Delaware Group, including the Sub-Adviser, were supervising in the aggregate
more than $28 billion in assets in the various institutional or separately
managed (approximately $17,646,283,000) and investment company (approximately
$10,764,119,000) 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.
The Manager manages the Fund's portfolio and makes investment decisions
for the Fund. The Manager also administers Income Funds, Inc.'s affairs and pays
the salaries of all the directors, officers and employees of Income Funds, Inc.
who are affiliated with the Manager. For these services, the Manager is paid an
annual fee equal to 0.65% on the first $500 million of average daily net assets,
0.625% on the next $500 million and 0.60% on the average daily net assets in
excess of $1 billion.
Subject to the overall supervision of the Manager, the Sub-Adviser
manages the international sector of the Fund's portfolio and furnishes the
Manager with investment recommendations, asset allocation advice, research and
other investment services with respect to foreign securities. For the services
provided to the Manager, the Manager pays the Sub-Adviser a fee equal to
one-third of the fee paid to the Manager under the terms of the Investment
Management Agreement.
Paul A. Matlack has primary responsibility for allocating the Fund's
assets among the fixed-income and equity sectors and for making day-to-day
investment decisions for the Fund regarding its investments in the high-yield
sector. Mr. Matlack, a Vice President/Senior Portfolio Manager of Income Funds,
Inc., has been a member of the Fund's management team since its inception. A
Chartered Financial Analyst, Mr. Matlack is a graduate of the University of
Pennsylvania with an MBA in Finance from George Washington University. He began
his career at Mellon Bank as a credit specialist, and later served as a
corporate loan officer for Mellon Bank and then Provident National Bank.
Paul Grillo has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in investment grade securities.
Mr. Grillo has been a member of the Fund's management team since its inception.
Mr. Grillo, an Assistant Vice President and Portfolio Manager of Income Funds,
Inc., holds a BA in Business Management from North Carolina State University and
an
-26-
<PAGE>
MBA in Finance from Pace University. Prior to joining the Manager in
1993, he served as mortgage strategist and trader at the Dreyfus Corporation. He
also served as a mortgage strategist and portfolio manager for the Chemical
Investment Group and as financial analyst at the Chemical Bank. Mr. Grillo is a
Chartered Financial Analyst.
Ian G. Sims, a Director and Senior Portfolio Manager with the
Sub-Adviser, has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in foreign securities. Mr. Sims
has been a member of the Fund's management team since its inception. Mr. Sims is
a graduate of the University of Leicester and holds a postgraduate degree in
statistics from the University of Newcastle-Upon-Tyne. He joined the Sub-Adviser
in 1990 as a senior international fixed-income and currency manager. Mr. Sims
began his investment career with the Standard Life Assurance Co., and
subsequently moved to the Royal Bank of Canada Investment Management
International Company, where he was an international fixed-income manager. Prior
to joining the Sub-Adviser, he was a senior fixed-income and currency portfolio
manager with Hill Samuel Investment Advisers Ltd.
Babak Zenouzi has primary responsibility for making day-to-day
investment decisions for the Fund regarding its investments in U.S. equity
securities. Mr. Zenouzi, a Vice President/Portfolio Manager of Income Funds,
Inc., has been a member of the Fund's management team since its inception. Mr.
Zenouzi holds a BS in Finance and Economics from Babson College in Wellesley,
Massachusetts, and an MS in Finance from Boston College. Prior to joining the
Manager in 1992, he was with The Boston Company where he held the positions of
assistant vice president, senior financial analyst, financial analyst and
portfolio accountant.
The portfolio management team will from time to time consult with Paul
E. Suckow, Executive Vice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc., with respect to security selection, evaluation of market and
economic trends, and sector allocation. A Chartered Financial Analyst, he is a
graduate of Bradley University with an MBA from Western Illinois University. Mr.
Suckow was a fixed-income portfolio manager at the Delaware Group from 1981 to
1985. He returned to the Delaware Group in 1993 after eight years with
Oppenheimer Management Corporation where he served as Executive Vice President
and Director of Fixed Income.
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. Given the
Fund's investment objective, its annual portfolio turnover rate is not expected
to exceed 100%. A turnover rate of 100% would occur if all the investments in
the Fund's portfolio at the beginning of the year were replaced by the end of
the year.
The Manager and the Sub-Adviser use their 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 the Sub-Adviser, or to their advisory clients. These
services may be used by the Manager or the Sub-Adviser in servicing any of their
respective accounts. Subject to best price and execution, the Manager and the
Sub-Adviser may consider a broker/dealer's sales of the Fund's shares in placing
portfolio orders and may place orders with broker/dealers that have agreed to
defray certain Fund expenses such as custodian fees.
-27-
<PAGE>
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. Each presentation will include
the average annual total return for one-, five- and ten-year periods, as
relevant. The Fund may also advertise aggregate and average total return
information concerning the Class over additional periods of time.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not an indication 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 dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling your Client Services Representative.
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. The Fund's fiscal year ends on July 31.
Distribution and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor of the Fund's shares under a Distribution Agreement dated as of
September 30, 1996. 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 Income Funds,
Inc. under an agreement dated as of September 30, 1996. 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 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 their services. In addition, participant account
maintenance fees may be assessed for certain recordkeeping 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.
-28-
<PAGE>
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.
Shares
Income Funds, 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, Income Funds, Inc. was organized as a Maryland
corporation on March 4, 1983. Income Funds, Inc. was previously organized as a
Delaware corporation in 1970. In addition to the Fund, Income Funds, Inc.
presently offers one other series of shares, the Delchester Fund series.
Income Funds, Inc.'s shares have a par value of $1.00, equal voting
rights, except as noted below, and are equal in all other respects. Income
Funds, Inc.'s shares have noncumulative voting rights which means that the
holders of more than 50% of Income Funds, Inc.'s shares voting for the election
of directors can elect 100% of the directors if they choose to do so. Under
Maryland law, Income Funds, 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 Income
Funds, Inc.'s outstanding shares may request that a special meeting be called to
consider the removal of a director.
In addition to the Class, the Fund also offers the Strategic Income
Fund A Class, the Strategic Income Fund B Class and the Strategic 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 the other
classes of the Fund, 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 the Strategic Income Fund A Class, the Strategic Income Fund B Class and the
Strategic Income Fund C Class.
It is expected that Lincoln National Corporation Employees' Retirement
Trust (the "Trust") will make an initial investment in the Fund, which could
result in the Trust holding up to 100% of the outstanding shares of the Fund.
Subject to certain limited exceptions, there would be no limitation on the
Trust's ability to redeem its shares of the Fund and it may elect to do so at
any time.
-29-
<PAGE>
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
U.S. Government Securities
U.S. Treasury securities are backed by the "full faith and credit" of
the United States. Securities issued or guaranteed by federal agencies and U.S.
government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, the Federal Housing Administration, the Maritime
Administration, the Small Business Administration, and others. Certain agencies
and instrumentalities, such as the Government National Mortgage Association
("GNMA"), are, in effect, backed by the full faith and credit of the United
States through provisions in their charters that they may make "indefinite and
unlimited" drawings on the Treasury, if needed to service its debt. Debt from
certain other agencies and instrumentalities, including the Federal Home Loan
Bank and Federal National Mortgage Association, are not guaranteed by the United
States, but those institutions are protected by the discretionary authority for
the U.S. Treasury to purchase certain amounts of their securities to assist the
institutions in meeting their debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System, the Tennessee Valley
Authority and the Federal Home Loan Mortgage Corporation, are federally
chartered institutions under U.S. government supervision, but their debt
securities are backed only by the creditworthiness of those institutions, not
the U.S. government.
An instrumentality of a U.S. government agency is a government agency
organized under Federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal National Mortgage Association.
The maturities of such securities usually range from three months to
thirty years. While such securities are guaranteed as to principal and interest
by the U.S. government or its instrumentalities, their market values may
fluctuate and are not guaranteed, which may, along with the other securities in
the Fund's portfolio, cause a Class' daily net asset value to fluctuate.
Zero Coupon Bonds and Pay-In-Kind Bonds
Although the Fund does not intend to purchase a substantial amount of
zero coupon bonds or PIK bonds, from time to time, the Fund may acquire zero
coupon bonds and, to a lesser extent, PIK bonds. Zero coupon bonds are debt
obligations which do not entitle the holder to any periodic payments of interest
prior to maturity or a specified date when the securities begin paying current
interest, and therefore are issued and traded at a discount from their face
amounts or par value. PIK bonds pay interest through the issuance to holders of
additional securities. Zero coupon bonds and PIK bonds are generally considered
to be more interest-sensitive than income bearing bonds, to be more speculative
than interest-bearing bonds, and to have certain tax consequences which could,
under certain circumstances, be adverse to the Fund. For example, with zero
coupon bonds, the Fund accrues, and is required to distribute to shareholders,
income on such bonds. However, the Fund may not receive the cash associated with
this income until the bonds are sold or mature. If the Fund did not have
sufficient cash to make the required distribution of accrued income, the Fund
could be required to sell other securities in its portfolio or to borrow to
generate the cash required.
-30-
<PAGE>
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, including GNMA
certificates. Such securities differ from other fixed-income securities in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. When prevailing interest rates rise, the
value of a GNMA security may decrease as do other debt securities. When
prevailing interest rates decline, however, the value of GNMA securities may not
rise on a comparable basis with other debt securities because of the prepayment
feature of GNMA securities. Additionally, if a GNMA certificate is purchased at
a premium above its principal value because its fixed rate of interest exceeds
the prevailing level of yields, the decline in price to par may result in a loss
of the premium in the event of prepayment. Funds received from prepayments may
be reinvested at the prevailing interest rates which may be lower than the rate
of interest that had previously been earned.
The mortgages backing these securities include conventional 30-year
fixed rate mortgages, graduated payment mortgages and adjustable rate mortgages.
These mortgages may be supported by various types of insurance, may be backed by
GNMA certificates or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities. However, the guarantees do
not extend to the mortgage-backed securities' value, which is likely to vary
inversely with fluctuations in interest rates. These certificates are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the
certificate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the average life or realized
yield of a particular issue of pass-through certificates. During periods of
declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Fund may reinvest the prepaid amounts in securities, the yield of
which reflects interest rates prevailing at the time. Moreover, prepayments of
mortgages which underlie securities purchased at a premium could result in
capital losses.
CMOs and REMICs
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. To the extent any privately-issued CMOs or
REMICs in which the Fund may invest are considered by the Securities and
Exchange Commission to be investment companies, the Fund will limit its
investment in such securities in a manner consistent with the provisions of the
1940 Act.
Certain CMOs and REMICs may have variable or floating interest rates
and others may be stripped. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which the Fund may invest.
Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal
-31-
<PAGE>
from the mortgage assets, while the other class will receive most of the
interest and the remainder of the principal. In the most extreme case, one class
will receive all of the interest (the "interest-only" class), while the other
class will receive all of the principal (the "principal-only" class). The yield
to maturity on an interest-only class is extremely sensitive not only to changes
in prevailing interest rates but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the Fund's
yield to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities are rated in the
highest rating categories.
Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed and, accordingly,
these securities are generally illiquid and to such extent, together with any
other illiquid investments, will not exceed 15% of the Fund's net assets.
The Fund may invest in CMOs and REMICs issued by private entities which
are not collateralized by securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, so-called non-agency
mortgage-backed securities. Investments in these securities may be made only if
the securities (i) are rated at the time of purchase in the four top rating
categories by a nationally-recognized statistical rating organization (e.g., BBB
or better by S&P or Fitch, or Baa or better by Moody's) and (ii) represent
interests in whole-loan mortgages, multi-family mortgages, commercial mortgages
and other mortgage collateral supported by a first mortgage lien on real estate.
Non-agency mortgage-backed securities are subject to the interest rate and
prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non-agency mortgage-backed securities may also be
subject to a greater risk of loss of interest and principal because they are not
collateralized by securities issued or guaranteed by the U.S. government. In
addition, timely information concerning the loans underlying these securities
may not be as readily available and the market for these securities may be less
liquid than other CMOs and REMICs.
Asset-Backed Securities
The asset-backed securities in which the Fund may invest must be rated
in the four top rating categories by a nationally recognized statistical rating
organization (e.g., BBB or better by S&P and Fitch, or Baa or better by
Moody's). The receivables underlying asset-backed securities are typically
securitized in either a pass-through or a pay-through structure. Pass-through
securities provide investors with an income stream consisting of both principal
and interest payments in respect of the receivables in the underlying pool.
Pay-through asset-backed securities are debt obligations issued usually by a
special purpose entity, which are collateralized by the various receivables and
in which the payments on the underlying receivables provide the funds to pay the
debt service on the debt obligations issued. The Fund may invest in these and
other types of asset-backed securities structured in this way that may be
developed in the future.
The rate of principal payment on asset-backed securities generally
depends upon the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors such
as changes in interest rates. Therefore, the yield may be difficult to predict
and actual yield to maturity may be more or less than the anticipated yield to
maturity. Due to
-32-
<PAGE>
the shorter maturity of the collateral backing such securities, there is less of
a risk of substantial prepayment than with mortgage-backed securities. Such
asset-backed securities do, however, involve certain risks not associated with
mortgage-backed securities, including the risk that security interests cannot be
adequately or in many cases, ever, established. In addition, with respect to
credit card receivables, a number of state and federal consumer credit laws give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables, there
is a risk that the holders may not have either a proper or first security
interest in all of the obligations backing such receivables due to the large
number of vehicles involved in a typical issuance and technical requirements
under state laws. Therefore, recoveries on repossessed collateral may not always
be available to support payments on the securities.
Borrowings
The Fund may borrow money as a temporary measure 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 not be purchased while the Fund has an
outstanding borrowing.
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are purchased with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The Fund will maintain with its custodian bank a
separate account with a segregated portfolio of securities in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Fund enters into the commitment
and no interest accrues to the Fund until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
Portfolio Loan Transactions
The Fund may loan up to 25% of its assets to qualified broker/dealers
or institutional investors.
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.
-33-
<PAGE>
Rule 144A Securities
The Fund may invest in restricted securities, including privately
placed securities, some of which may be 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 15% of the value of its net assets in illiquid securities.
While maintaining oversight, the Board of Directors 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 15% 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; (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 or Sub-Adviser determines that a Rule 144A Security
which 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 15% 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.
Investment Company Securities
Any investments that the Fund makes in either closed-end or open-end
investment companies will be limited by the 1940 Act, and would involve an
indirect payment of a portion of the expenses, including advisory fees, of such
other investment companies. Under the 1940 Act's current limitations, the Fund
may not (1) own more than 3% of the voting stock of another investment company;
(2) invest more than 5% of the Fund's total assets in the shares of any one
investment company; nor (3) invest more than 10% of the Fund's total assets in
shares of other investment companies. If the Fund elects to limit its investment
in other investment companies to closed-end investment companies, the 3%
limitation described above is increased to 10%. These percentage limitations
also apply to the Fund's investments in unregistered investment companies.
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 the Manager, 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. Not more than 15% of the Fund's assets may
be invested in repurchase agreements of over seven-days' maturity or other
illiquid assets. Should an issuer of a repurchase agreement fail to repurchase
the underlying security, the loss to the Fund, 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 the Manager 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 100% of the repurchase price, including the portion representing the
Fund's yield under such agreements, which is monitored on a daily basis.
-34-
<PAGE>
Foreign Currency Transactions
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will, however, from time to time, purchase or sell
foreign currencies and/or engage in forward foreign currency transactions in
order to expedite settlement of portfolio transactions and to minimize currency
value fluctuations. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date (i.e., a "forward foreign currency"
contract or "forward" contract). A forward contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract, agreed upon by the parties, at a
price set at the time of the contract. The Fund will convert currency on a spot
basis from time to time, and investors should be aware of the costs of currency
conversion.
The Fund may enter into forward contracts to "lock in" the price of a
security it has agreed to purchase or sell, in terms of U.S. dollars or other
currencies in which the transaction will be consummated. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars or
foreign currency, of the amount of foreign currency involved in the underlying
security transaction, the Fund will be able to protect itself against a possible
loss resulting from an adverse change in currency exchange rates during the
period between the date the security is purchased or sold and the date on which
payment is made or received.
When the Sub-Adviser believes that the currency of a particular country
may suffer a significant decline against the U.S. dollar or against another
currency, the Fund may enter into a forward foreign currency contract to sell,
for a fixed amount of U.S. dollars or other appropriate currency, the amount of
foreign currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency.
The Fund will not enter into forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's securities or other assets denominated in that currency.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions. With respect to forward foreign currency contracts, the precise
matching of forward contract amounts and the value of the securities involved is
generally not possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency strategy is highly
uncertain.
It is impossible to forecast the market value of Fund securities at the
expiration of the contract. Accordingly, it may be necessary for the Fund to
purchase additional foreign currency on the spot market (and bear the expense of
such purchase) if the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver and if a decision is made to
sell the security and make
-35-
<PAGE>
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of a security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
Options
The Manager and the Sub-Adviser may employ options techniques in an
attempt to protect appreciation attained and to take advantage of the liquidity
available in the options market. The Fund may purchase call options on foreign
or U.S. securities and indices and enter into related closing transactions and
the Fund may write covered call options on such securities. The Fund may also
purchase put options on such securities and indices and enter into related
closing transactions.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price up to an
agreed date. A covered call option obligates the writer, in return for the
premium received, to sell the securities subject to the option to the purchaser
of the option for an agreed upon price up to an agreed date. The advantage is
that the purchaser may hedge against an increase in the price of securities it
ultimately wishes to buy or take advantage of a rise in a particular index. The
Fund will only purchase call options to the extent that premiums paid on all
outstanding call options do not exceed 2% of its total assets.
A put option enables the purchaser of the option, in return for the
premium paid, to sell the security underlying the option to the writer at the
exercise price during the option period, and the writer of the option has the
obligation to purchase the security from the purchaser of the option. The Fund
will only purchase put options to the extent that the premiums on all
outstanding put options do not exceed 2% of its total assets. The advantage is
that the purchaser can be protected should the market value of the security
decline or should a particular index decline.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions essentially let the Fund offset put options or
call options prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
In purchasing put and call options, the premium paid by the Fund plus
any transaction costs will reduce any benefit realized by the Fund upon exercise
of the option. With respect to writing covered call options, the Fund may lose
the potential market appreciation of the securities subject to the option, if
the Manager's or the Sub-Adviser's judgment is wrong and the price of the
security moves in the opposite direction from what was anticipated.
The Fund may use both Exchange-traded and over-the-counter options.
Certain over-the-counter options may be illiquid. The Fund will only invest in
such options to the extent consistent with its 15% limitation on investment in
illiquid securities. The Fund will comply with U.S. Securities and Exchange
Commission asset segregation and coverage requirements when engaging in these
types of transactions.
-36-
<PAGE>
Futures
Futures contracts are agreements for the purchase or sale for future
delivery of securities. When a futures contract is sold, the Fund incurs a
contractual obligation to deliver the securities underlying the contract at a
specified price on a specified date during a specified future month. A purchase
of a futures contract means the acquisition of a contractual right to obtain
delivery to the Fund of the securities called for by the contract at a specified
price during a specified future month.
While futures contracts provide for the delivery of securities,
deliveries usually do not occur. Contracts are generally terminated by entering
into an offsetting transaction. When the Fund enters into a futures transaction,
it must deliver to the futures commission merchant selected by the Fund an
amount referred to as "initial margin." This amount is maintained by the futures
commission merchant in an account at the Fund's custodian bank. Thereafter, a
"variation margin" may be paid by the Fund to, or drawn by the Fund from, such
account in accordance with controls set for such account, depending upon changes
in the price of the underlying securities subject to the futures contract.
The Fund may also purchase and write options to buy or sell futures
contracts. Options on futures are similar to options on securities except that
options on futures give the purchaser the right, in return for the premium paid,
to assume a position in a futures contract, rather than actually to purchase or
sell the futures contract, at a specified exercise price at any time during the
period of the option.
The purpose of the purchase or sale of futures contracts consisting of
U.S. government securities is to protect the Fund against the adverse effects of
fluctuations in interest rates without actually buying or selling such
securities. Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of U.S. government securities at higher prices.
REITs
REITs are pooled investment vehicles which invest primarily in
income-producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Like investment companies such as Income Funds, Inc., REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements in the Code. REITs are subject to substantial cash flow dependency,
defaults by borrowers, self-liquidation, and the risk of failing to qualify for
tax-free pass-through of income under the Code, and/or to maintain exemptions
from the 1940 Act.
-37-
<PAGE>
APPENDIX A - RATINGS
The Fund's assets may be invested in securities rated BBB or lower by
S&P or Fitch, Baa or lower by Moody's, in securities similarly rated by another
nationally recognized statistical rating organization, and in unrated corporate
bonds. These credit ratings evaluate only the safety of principal and interest
and do not consider the market value risk associated with high-yield securities.
General Rating Information
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 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.
Excerpts from Fitch's description of its bond ratings: AAA--Bonds
considered to be investment grade and of the highest credit quality. The obligor
has an exceptionally strong ability to pay interest and repay principal, which
is unlikely to be affected by reasonably foreseeable events; AA-- Bonds
considered to be investment grade and of very high credit quality. The obligor's
ability to pay interest and repay principal is very strong, although not quite
as strong as bonds rated AAA. Because bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable future developments, short-term
debt of these issuers is generally rated F-1+; A--Bonds considered to be
investment grade and of high credit quality. The obligor's ability to pay
interest and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher
-38-
<PAGE>
ratings; BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore,
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings; BB--Bonds
are considered speculative. The obligor's ability to pay interest and repay
principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements; B--Bond are considered
highly speculative. While bonds in this class are currently meeting debt service
requirements, the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of the issue;
CCC--Bonds have certain identifiable characteristics which, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment; CC--Bonds are minimally protected. Default in
payment of interest and/or principal seems probable over time; C--Bonds are in
imminent default in payment of interest or principal; and DDD, DD and D--Bonds
are in default on interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their ultimate recovery value
in liquidation or reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and "D" represents the lowest potential
for recovery.
Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
-39-
<PAGE>
- -------------------------------------------------
DELAWARE GROUP INCOME FUNDS, INC.
- ------------------------------------------------
DELCHESTER FUND
- ------------------------------------------------
STRATEGIC INCOME FUND
- ------------------------------------------------
PART B
======
STATEMENT OF
ADDITIONAL INFORMATION
- -----------------------------------------------
SEPTEMBER 30, 1996
DELAWARE
GROUP
<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, tax-free funds, money market funds,
global and international funds and closed-end equity funds give investors the
ability to create a portfolio that fits their personal financial goals. For more
information, shareholders of the Fund Classes should contact their financial
adviser or call Delaware Group at 800-523-4640, and shareholders of the
Institutional Class should contact Delaware Group at 800-828-5052.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
SUB-ADVISER
Strategic Income Fund:
Delaware International Advisers Ltd.
Veritas House
125 Finsbury Pavement
London, England EC2A 1NQ
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
CUSTODIANS
Delchester Fund:
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
Strategic Income Fund:
Bankers Trust Company
One Bankers Trust Plaza
New York, NY 10006
<PAGE>
PART B--STATEMENT OF ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
DELAWARE GROUP
- -------------------------------------------------------------------------------
DELAWARE GROUP INCOME FUNDS, INC.
- -------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- -------------------------------------------------------------------------------
For more information about the Delchester Fund Institutional Class and
the Strategic Income Fund Institutional Class: 800-828-5052
For Prospectus and Performance of the Delchester Fund A Class, Delchester Fund B
Class, Delchester Fund C Class, Strategic Income Fund A Class, Strategic Income
Fund B Class and Strategic Income Fund C Class: Nationwide 800-523-4640
Information on Existing Accounts of the Delchester Fund A Class,
Delchester Fund B Class, Delchester Fund C Class,
Strategic Income Fund A Class,
Strategic Income Fund B Class and Strategic Income
Fund C Class: (SHAREHOLDERS ONLY)
Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY)
Nationwide 800-362-7500
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Cover Page
- -------------------------------------------------------------------------------
Investment Objectives and Policies
- -------------------------------------------------------------------------------
Performance Information
- -------------------------------------------------------------------------------
Trading Practices and Brokerage
- -------------------------------------------------------------------------------
Purchasing Shares
- -------------------------------------------------------------------------------
Investment Plans
- -------------------------------------------------------------------------------
Determining Offering Price and
Net Asset Value
- -------------------------------------------------------------------------------
Redemption and Repurchase
- -------------------------------------------------------------------------------
Dividends and Realized Securities
Profits Distributions
- -------------------------------------------------------------------------------
Taxes
- -------------------------------------------------------------------------------
Investment Management Agreements and Sub-Advisory Agreement
- -------------------------------------------------------------------------------
Officers and Directors
- -------------------------------------------------------------------------------
Exchange Privilege
- -------------------------------------------------------------------------------
General Information
- -------------------------------------------------------------------------------
Appendix A -- IRA Information
- -------------------------------------------------------------------------------
Financial Statements
- -------------------------------------------------------------------------------
-1-
<PAGE>
Delaware Group Income Funds, Inc. ("Income Funds, Inc.") is a
professionally-managed mutual fund of the series type presently offering two
series of shares: the Delchester Fund series (the "Delchester Fund") and the
Strategic Income Fund series (the "Strategic Income Fund") (individually, a
"Fund" and collectively, the "Funds").
Each Fund of Income Funds, Inc. offers three retail classes: the
Delchester Fund A Class and the Strategic Income Fund A Class (the "Class A
Shares"); the Delchester Fund B Class and the Strategic Income Fund B Class (the
"Class B Shares"); and the Delchester Fund C Class and the Strategic Income Fund
C Class (the "Class C Shares"). Class A Shares, Class B Shares and Class C
Shares are collectively referred to as the "Fund Classes." Each Fund also offers
an institutional class: the Delchester Fund Institutional Class and the
Strategic Income Fund Institutional Class (collectively, the "Institutional
Classes").
Class B Shares, Class C Shares and Institutional Class shares of each
Fund may be purchased at a price equal to the next determined net asset value
per share. Class A Shares may be purchased at the public offering price, which
is equal to the next determined net asset value per share, plus a front-end
sales charge. Class A Shares are subject to a maximum front-end sales charge of
4.75% and annual 12b-1 Plan expenses which, for Delchester Fund A Class will
vary because of the formula adopted by Income Funds, Inc.'s Board of Directors
but may not exceed .30%, and for Strategic Income Fund A Class may not exceed
.30% and have currently been fixed by the Board at .25%. Class B Shares are
subject to a contingent deferred sales charge ("CDSC") which may be imposed on
redemptions made within six years of purchase and annual 12b-1 Plan expenses of
up to 1% which are assessed against Class B Shares for approximately eight years
after purchase. See Automatic Conversion of Class B Shares under Classes of
Shares in the Prospectuses for the Fund Classes. Class C Shares are subject to a
CDSC which may be imposed on redemptions made within 12 months of purchase and
annual 12b-1 Plan expenses of up to 1%, which are assessed against the Class C
Shares for the life of the investment.
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectuses of
the Fund Classes for the Delchester Fund and the Strategic Income Fund, each
dated September 30, 1996, and the current Prospectuses of the Institutional
Class for the Delchester Fund and the Strategic Income Fund, each dated
September 30, 1996, as they may be amended from time to time. Part B should be
read in conjunction with the respective class' Prospectus. Part B is not itself
a prospectus but is, in its entirety, incorporated by reference into each class'
Prospectus. A Prospectus for each class may be obtained by writing or calling
your investment dealer or by contacting Income Funds, Inc.'s national
distributor, Delaware Distributors, L.P. (the "Distributor"), 1818 Market
Street, Philadelphia, PA 19103.
All references to "shares" in this Part B refer to all classes of
shares of Income Funds, Inc., except where noted.
-3-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Delchester Fund seeks to earn and pay shareholders as high a current
income as is consistent with providing reasonable safety. Strategic Income Fund
seeks to provide investors with high current income and total return. The
investment objective of each Fund is a fundamental policy and cannot be changed
without shareholder approval.
Delchester Fund
In investing for income and safety of principal, Delchester Fund's
emphasis in selection will be on securities having a liberal and consistent
yield and those tending to reduce the risk of market fluctuations. The types of
securities in which Delchester Fund invests are subject to price fluctuations
particularly due to changes in interest rates and economic conditions.
Management will seek to achieve Delchester Fund's objective by investing at
least 80% of the Fund's assets at time of purchase in:
(1) Corporate Bonds. The Fund will invest in both rated and unrated
bonds. Unrated bonds ay be more speculative in nature than rated bonds; or
(2) Government Securities. Securities of, or guaranteed by, the U.S.
government, its agencies or instrumentalities; or
(3) Commercial Paper. Commercial paper of companies having, at the time
of purchase, an issue of outstanding debt securities rated as described above or
commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group ("S&P") or
rated P-1 or P-2 by Moody's Investors Service, Inc. ("Moody's") or similarly
rated by other rating agencies.
Appendix B to Delchester Fund's Fund Classes' Prospectus (Appendix A to
the Fund's Institutional Class' Prospectus) describes the ratings of S&P and
Moody's and provides information concerning the ratings of the securities in the
Fund's portfolio.
As a matter of practice, Delchester Fund has consistently invested more
than 80% of its assets in such securities. With respect to the remaining assets,
if any, that Delchester Fund may invest in other securities, the Fund must
invest in income-producing securities, including common stocks and preferred
stocks, some of which may have convertible features or attached warrants.
Additionally, in unusual market conditions, in order to meet redemption
requests, for temporary defensive purposes, and pending investment, the Fund may
hold a substantial portion of its assets in cash or short-term obligations for
an appreciable period of time when market conditions warrant and the Fund is
anticipating higher interest rates. Currently, Delchester Fund's assets are
invested primarily in unrated bonds and bonds rated BB or lower by S&P or Ba or
lower by Moody's.
Strategic Income Fund
Foreign and Emerging Markets Securities
Investors should recognize that investing in foreign issuers, including
issuers located in emerging market countries, involves certain considerations,
including those set forth in Strategic Income Fund's Prospectuses, which are not
typically associated with investing in United States issuers. Since the stocks
of foreign companies are frequently denominated in foreign currencies, and since
Strategic Income Fund may temporarily hold uninvested reserves in bank deposits
in foreign currencies, the Fund will be
-4-
<PAGE>
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of Strategic Income Fund permit it
to enter into forward foreign currency exchange contracts in order to hedge the
Fund's holdings and commitments against changes in the level of future currency
rates. Such contracts involve an obligation to purchase or sell a specific
currency at a future date at a price set at the time of the contract.
As disclosed in Strategic Income Fund's Prospectuses, there are a
number of risks involved in investing in foreign securities. For example, the
assets and profits appearing on the financial statements of a developing or
emerging country issuer may not reflect its financial position or results of
operations in the way they would be reflected had the financial statements been
prepared in accordance with United States generally accepted accounting
principles. Also, for an issuer that keeps accounting records in local currency,
inflation accounting rules may require for both tax and accounting purposes,
that certain assets and liabilities be restated on the issuer's balance sheet in
order to express items in terms of currency or constant purchasing power.
Inflation accounting may indirectly generate losses on profits.
With reference to the Fund's investment in foreign government
securities, there is the risk that a foreign governmental issuer may default on
its obligations. If such a default occurs, the Fund may have limited effective
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign government and government-related debt securities to
obtain recourse may be subject to the political climate in the relevant country.
In addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign government and
government-related debt obligations in the event of default under their
commercial bank loan agreements.
The issuers of the foreign government and government-related debt
securities in which the Fund expects to invest have in the past experienced
substantial difficulties in servicing their external debt obligations, which
have led to defaults on certain obligations and the restructuring of certain
indebtedness. Restructuring arrangements have included, among other things,
reducing and rescheduling interest and principal payments by negotiating new or
amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign government and government-related high-yield
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign government and
government-related securities in which the Fund may invest will not be subject
to similar defaults or restructuring arrangements which may adversely affect the
value of such investments. Furthermore, certain participants in the secondary
market for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.
There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by Strategic Income Fund.
Payment of such interest equalization tax, if imposed, would reduce the Fund's
rate of return on its investment. Dividends paid by foreign issuers may be
subject to withholding and other foreign taxes which may decrease the net return
on such investments as compared to dividends paid to the Fund by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the
-5-
<PAGE>
obligor under, a bond or other debt instrument (including, to the extent
provided in Treasury Regulations, preferred stock); (ii) the accruing of certain
trade receivables and payables; and (iii) the entering into or acquisition of
any forward contract, futures contract, option and similar financial instruments
other than any "regulated futures contract" or "nonequity option" marked to
market. The disposition of a currency other than the U.S. dollar by a U.S.
taxpayer is also treated as a transaction subject to the special currency rules.
However, foreign currency-related regulated futures contracts and nonequity
options are generally not subject to the special currency rules, if they are or
would be treated as sold for their fair market value at year-end under the
marking to market rules applicable to other futures contracts, unless an
election is made to have such currency rules apply. With respect to transactions
covered by the special rules, foreign currency gain or loss is calculated
separately from any gain or loss on the underlying transaction and is normally
taxable as ordinary gain or loss. A taxpayer may elect to treat as capital gain
or loss foreign currency gain or loss arising from certain identified forward
contracts, futures contracts and options that are capital assets in the hands of
the taxpayer and which are not part of a straddle. Certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), and the Treasury Regulations) will be integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
The income tax effects of integrating and treating a transaction as a single
transaction are generally to create a synthetic debt instrument that is subject
to the original discount provisions. It is anticipated that some of the non-U.S.
dollar denominated investments and foreign currency contracts Strategic Income
Fund may make or enter into will be subject to the special currency rules
described above.
Investments and opportunities for investments by foreign investors in
emerging market countries are subject to a variety of national policies and
restrictions. These restrictions may take the form of prior governmental
approval, limits on the amount or type of securities held by foreigners, limits
on the types of companies in which foreigners may invest and prohibitions on
foreign investments in issuers or industries deemed sensitive to national
interests. Additional restrictions may be imposed at any time by these or other
countries in which Strategic Income Fund invests. Although these restrictions
may in the future make it undesirable to invest in emerging countries, Delaware
International Advisers Ltd., Strategic Income Fund's sub-adviser (the
"Sub-Adviser"), does not believe that any current registration restrictions
would affect its decision to invest in such countries.
Foreign Currency Transactions
The foreign investments made by Strategic Income Fund present currency
considerations which pose special risks. The Sub-Adviser uses a purchasing power
parity approach to evaluate currency risk. A purchasing power parity approach
attempts to identify the amount of goods and services that a dollar will buy in
the United States and compares that to the amount of a foreign currency required
to buy the same amount of goods and services in another country. When the dollar
buys less abroad, the foreign currency may be considered to be overvalued. When
the dollar buys more abroad, the foreign currency may be considered to be
undervalued. Eventually, currencies should trade at levels that should make it
possible for the dollar to buy the same amount of goods and services overseas as
in the United States.
Strategic Income Fund may purchase or sell currencies and/or engage in
forward foreign currency transactions in order to expedite settlement of
portfolio transactions and to minimize currency value fluctuations. Forward
foreign currency contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Strategic Income Fund will account for forward
contracts by marking to market each day at daily exchanges rates. When the Fund
enters into a forward contract to sell an amount of
-6-
<PAGE>
foreign currency approximating the value of some or all of the Fund's assets
denominated in such foreign currency, the Fund's custodian bank or subcustodian
will place cash or liquid high grade debt securities in a separate account of
the Fund in an amount not less than the value of the Fund's total assets
committed to the consummation of such forward contract. If the additional cash
or securities placed in the separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of Strategic Income Fund's commitments with
respect to such contract.
Strategic Income Fund's use of forward foreign currency exchange
contracts for hedging and other non-speculative purposes involves certain risks.
For example, a lack of correlation between price changes of a forward contract
and the assets being hedged could render Strategic Income Fund's hedging
strategy unsuccessful and could result in losses. The same results could occur
if movements of foreign currencies do not correlate as expected by the
Sub-Adviser at a time when the Fund is using a hedging instrument denominated in
one foreign currency to protect the value of a security denominated in a second
foreign currency against changes caused by fluctuations in the exchange rate for
the dollar and the second currency. If the direction of securities prices,
interest rates or foreign currency prices is incorrectly predicted, Strategic
Income Fund will be in a worse position than if such transactions had not been
entered into. In addition, since there can be no assurance that a liquid
secondary market will exist for any contract purchased or sold, the Fund may be
required to maintain a position until exercise or expiration, which could result
in losses. Further, forward contracts entail particular risks related to
conditions affecting the underlying currency. Over-the-counter transactions in
forward contracts also involve risks arising from the lack of an organized
exchange trading environment.
Successful use by Strategic Income Fund of forward foreign currency
exchange contracts for hedging and other non-speculative purposes is subject to
the Sub-Adviser's ability to predict correctly the direction of movements in
foreign currencies relative to the U.S. dollar. This requires different skills
and techniques than predicting changes in the prices of individual securities.
Options, Futures and Options on Futures
Strategic Income Fund may purchase call options or purchase put options
and will not engage in option strategies for speculative purposes. Strategic
Income Fund may invest in options that are either listed on U.S. or recognized
foreign exchanges or traded over-the-counter. Certain over-the-counter options
may be illiquid. Thus, it may not be possible to close options positions and
this may have an adverse impact on the Fund's ability to effectively hedge its
securities. Strategic Income Fund will not, however, invest more than 15% of the
value of its net assets in illiquid securities.
Purchasing Call Options--Strategic Income Fund may purchase call
options to the extent that premiums paid by the Fund do not aggregate more than
2% of the Fund's total assets. When the Fund purchases a call option, in return
for a premium paid by the Fund to the writer of the option, the Fund obtains the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
exercise price. The advantage of purchasing call options is that Strategic
Income Fund may alter portfolio characteristics and modify portfolio maturities
without incurring the cost associated with portfolio transactions.
Strategic Income Fund may, following the purchase of a call option,
liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the
-7-
<PAGE>
option previously purchased. Strategic Income Fund will realize a profit from a
closing sale transaction if the price received on the transaction is more than
the premium paid to purchase the original call option; the Fund will realize a
loss from a closing sale transaction if the price received on the transaction is
less than the premium paid to purchase the original call option.
Although Strategic Income Fund will generally purchase only those call
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange may exist. In such event, it may not be possible to effect
closing transactions in particular options, with the result that the Fund would
have to exercise its options in order to realize any profit and would incur
brokerage commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by Strategic Income Fund may expire
without any value to the Fund.
Purchasing Put Options--Strategic Income Fund may invest up to 2% of
its total assets in the purchase of put options. Strategic Income Fund will, at
all times during which it holds a put option, own the security covered by such
option.
A put option purchased by Strategic Income Fund gives it the right to
sell one of its securities for an agreed price up to an agreed date. The Fund
intends to purchase put options in order to protect against a decline in the
market value of the underlying security below the exercise price less the
premium paid for the option ("protective puts"). The ability to purchase put
options will allow Strategic Income Fund to protect unrealized gain in an
appreciated security in its portfolio without actually selling the security. If
the security does not drop in value, Strategic Income Fund will lose the value
of the premium paid. The Fund may sell a put option which it has previously
purchased prior to the sale of the securities underlying such option. Such sale
will result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid on
the put option which is sold.
Strategic Income Fund may sell a put option purchased on individual
portfolio securities. Additionally, the Fund may enter into closing sale
transactions. A closing sale transaction is one in which the Fund, when it is
the holder of an outstanding option, liquidates its position by selling an
option of the same series as the option previously purchased.
Futures and Options on Futures--Strategic Income Fund may enter into
contract for the purchase or sale for future delivery of securities or foreign
currencies. When the Fund engages in futures transactions, to the extent
required by the SEC, it will maintain with its custodian bank, assets in a
segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or high quality debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the margin payments made by the Fund with respect to such futures contracts.
The Fund may enter into such futures contracts to protect against the
adverse affects of fluctuations in interest or foreign exchange rates without
actually buying or selling the securities or foreign currency. For example, if
interest rates are expected to increase, the Fund might enter into futures
contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the debt securities owned by the Fund.
If interest rates did increase, the value of the
-8-
<PAGE>
debt securities in the portfolio would decline, but the value of the futures
contracts to the Fund would increase at approximately the same rate, thereby
keeping the net asset value of the Fund from declining as much as it otherwise
would have. Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, the Fund could
take advantage of the anticipated rise in value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Fund could then buy debt securities on the
cash market.
With respect to options on futures contracts, when Strategic Income
Fund is not fully invested, it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates. The writing
of a call option on a futures contract constitutes a partial hedge against
declining prices of the U.S. government securities which are deliverable upon
exercise of the futures contract. If the futures price at the expiration of the
option is below the exercise price, Strategic Income Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the portfolio holdings. The writing of a put option on
a futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price,
Strategic Income Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of U.S.
government securities which Strategic Income Fund intends to purchase.
If a put or call option that Strategic Income Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between the value of
its portfolio securities and changes in the value of its futures positions,
Strategic Income Fund's losses from existing options on futures may, to some
extent, be reduced or increased by changes in the value of portfolio securities.
Strategic Income Fund will purchase a put option on futures contracts to hedge
the Fund's portfolio against the risk of rising interest rates.
To the extent that interest rates move in an unexpected direction,
Strategic Income Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize a loss. For example, if
Strategic Income Fund hedged against the possibility of an increase in interest
rates which would adversely affect the price of U.S. government securities held
in its portfolio and interest rates decrease instead, Strategic Income Fund will
lose part or all of the benefit of the increased value of its U.S. government
securities which it has because it will have offsetting losses in its futures
position. In addition, in such situations, if the Fund had insufficient cash, it
may be required to sell U.S. government securities from its portfolio to meet
daily variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market. Strategic
Income Fund may be required to sell securities at a time when it may be
disadvantageous to do so.
Further, with respect to options on futures contracts, Strategic Income
Fund may seek to close out an option position by writing or buying an offsetting
position covering the same securities or contracts and have the same exercise
price and expiration date. The ability to establish and close out positions on
options will be subject to the maintenance of a liquid secondary market, which
cannot be assured.
Although not a fundamental policy, the Fund currently intends to limit
its investments in futures contracts and options threreon to the extent that not
more than 5% of the Fund's assets are required as futures contract margin
deposits and premiums on options and only to the extent that obligations under
such contracts and transactions represent not more than 20% of the Fund's
assets.
-9-
<PAGE>
Appendix B to Strategic Income Fund's Fund Classes' Prospectus
(Appendix A to the Fund's Institutional Class' Prospectus) describes the ratings
of S&P, Fitch Investors Service, Inc. and Moody's, and provides information
concerning the ratings of securities in the Fund's portfolio.
Non-Traditional Equity Securities
Strategic Income Fund may invest in convertible preferred stocks that
offer enhanced yield features, such as Preferred Equity Redemption Cumulative
Stock ("PERCS"), which provide an investor, such as the Fund, with the
opportunity to earn higher dividend income than is available on a company's
common stock. A PERCS is a preferred stock which generally features a mandatory
conversion date, as well as a capital appreciation limit which is usually
expressed in terms of a stated price. Upon the conversion date, most PERCS
convert into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after a predetermined
number of years the issuer's common stock is trading at a price below that set
by the capital appreciation limit, each PERCS would convert to one share of
common stock. If, however, the issuer's common stock is trading at a price above
that set by the capital appreciation limit, the holder of the PERCS would
receive less than one full share of common stock. The amount of that fractional
share of common stock received by the PERCS holder is determined by dividing the
price set by the capital appreciation limit of the PERCS by the market price of
the issuer's common stock. PERCS can be called at any time prior to maturity,
and hence do not provide call protection. However, if called early, the issuer
may pay a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date of the PERCS.
Strategic Income Fund may also invest in other enhanced convertible
securities. These include but are not limited to ACES (Automatically Convertible
Equity Securities), PEPS (Participating Equity Preferred Stock), PRIDES
(Preferred Redeemable Increased Dividend Equity Securities), SAILS (Stock
Appreciation Income Linked Securities), TECONS (Term Convertible Notes), QICS
(Quarterly Income Cumulative Securities) and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are company-issued convertible preferred stock; unlike
PERCS, they do not have capital appreciation limits; they seek to provide the
investor with high current income, with some prospect of future capital
appreciation; they are typically issued with three to four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and upon maturity, they will
automatically convert to either cash or a specified number of shares of common
stock.
Investment Policies Applicable to Both Funds
High-Yield Securities
Among the possible risks of investing in high-yield securities are the
possibility of legislative and regulatory action and proposals. There are a
variety of legislative actions which have been taken or which are considered
from time to time by the United States Congress which could adversely affect the
market for high-yield securities. For example, Congressional legislation limited
the deductibility of interest paid on certain high-yield securities used to
finance corporate acquisitions. Also, Congressional legislation has, with some
exceptions, generally prohibited federally-insured savings and loan institutions
from investing in high-yield securities. Regulatory actions have also affected
the high-yield market. For example, many insurance companies have restricted or
eliminated their purchases of high-yield securities as a result of, among other
factors, actions taken by the National Association of Insurance Commissioners.
If similar legislative and regulatory actions are taken in the future, they
could result in further tightening of the
-10-
<PAGE>
secondary market for high-yield issues, could reduce the number of new
high-yield securities being issued and could make it more difficult for either
Fund to attain its investment objective.
Restricted Securities
The Funds may purchase privately-placed debt and other securities whose
resale is restricted under applicable securities laws. Such restricted
securities generally offer a higher return than comparable registered securities
but involve some additional risk since they can be resold only in
privately-negotiated transactions or after registration under applicable
securities laws. The registration process may involve delays which could result
in the Funds obtaining a less favorable price on a resale. Delchester Fund will
not purchase illiquid assets if more than 10% of its total assets would then
consist of such illiquid securities. Strategic Income Fund will not purchase
illiquid assets if more than 15% of its net assets would then consist of such
illiquid securities.
Repurchase Agreements
The Funds are permitted to invest in repurchase agreements, but they
normally so only to invest cash balances. A repurchase agreement is a short-term
investment by which the purchaser acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the purchaser's holding period. Should an
issuer of a repurchase agreement fail to repurchase the underlying security, the
loss to a Fund, if any, would be the difference between the repurchase price and
the market value of the security. Each Fund will limit its investments in
repurchase agreements to those which Delaware Management Company, Inc. (the
"Manager"), under the guidelines of the Board of Directors, determines present
minimal credit risks and which are of high quality. In addition, each Fund must
have collateral of at least 100% of the repurchase price, including the portion
representing the Fund's yield under such agreements, which is monitored on a
daily basis.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the Investment Company Act of
1940 (the "1940 Act") to allow the Delaware Group funds jointly to invest cash
balances. The Funds may invest cash balances in a joint repurchase agreement in
accordance with the terms of the Order and subject generally to the conditions
described above.
Portfolio Loan Transactions
Each 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.
It is the understanding of the Manager that the staff of the Securities
and Exchange Commission (the "SEC" or the "Commission") permits portfolio
lending by registered investment companies if certain conditions are met. These
conditions are as follows: 1) each transaction must have 100% collateral in the
form of cash, short-term U.S. government securities, or irrevocable letters of
credit payable by banks acceptable to the Fund involved from the borrower; 2)
this collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund; 3) the Fund must be able to terminate any loan after notice, at any time;
4) the Fund must receive reasonable interest on any loan, and any dividends,
interest or other distributions on the lent securities, and any increase in the
market value of such securities; 5) the Fund may pay reasonable custodian fees
in connection with the loan; 6) the voting rights on the lent securities may
pass to the borrower; however, if the directors of Income Funds, Inc. know that
a material event will occur affecting an investment loan,
-11-
<PAGE>
they must either terminate the loan in order to vote the proxy or enter into an
alternative arrangement with the borrower to enable the directors to vote the
proxy.
The major risk to which a 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, each Fund will only enter into loan arrangements
after a review of all pertinent facts by the Manager, under the supervision of
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.
Investment Restrictions
Delchester Fund
Delchester Fund has the following investment restrictions which may not
be amended without approval of a majority of the outstanding voting securities,
which is the lesser of more than 50% of the outstanding voting securities of
Delchester Fund, or 67% of the voting securities of Delchester Fund present at a
shareholder meeting if 50% or more of the voting securities are present in
person or represented by proxy. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities.
1. Delchester Fund will not invest more than 5% of the value of its
assets in securities of any one company (except U.S. government bonds) or
purchase more than 10% of the voting or nonvoting securities of any one company.
2. Delchester Fund will not invest for the purpose of acquiring
control of any company.
3. Delchester Fund will not purchase or retain securities of a company
which has an officer or director who is an officer or director of Income Funds,
Inc., or an officer, director or partner of the Manager if, to the knowledge of
the Fund, one or more of such persons owns beneficially more than 1/2 of 1% of
the shares of the company, and in the aggregate more than 5% thereof.
4. Delchester Fund will not invest in securities of other investment
companies.
5. Delchester Fund will not make any investment in real estate. This
restriction does not preclude the Fund's purchase of securities issued by real
estate investment trusts.
6. Delchester Fund will not sell short any security or property.
7. Delchester Fund will not buy or sell commodities or commodity
contracts.
8. Delchester Fund will not borrow money in excess of 10% of the value
of its assets and then only as a temporary measure for extraordinary or
emergency purposes. Any borrowing will be done from a bank and to the extent
that such borrowing exceeds 5% of the value of the Fund's assets, asset coverage
of at least 300% is required. In the event that such asset coverage shall at any
time fall below 300%, the Fund shall, within three days thereafter (not
including Sundays and holidays) or such longer period as the SEC may prescribe
by rules and regulations, reduce the amount of its borrowings to an extent that
the asset coverage of such borrowings shall be at least 300%. The Fund shall not
issue senior securities as defined in the 1940 Act, except for notes to banks.
-12-
<PAGE>
9. Delchester Fund will not make loans. However, (i) the purchase of a
portion of an issue of publicly distributed bonds, debentures or other
securities, or of other securities authorized to be purchased by the Fund's
investment policies, whether or not the purchase was made upon the original
issuance of the securities, and the entry into "repurchase agreements" are not
to be considered the making of a loan by the Fund; and (ii) the Fund may loan up
to 25% of its assets to qualified broker/dealers or institutional investors for
their use relating to short sales and other security transactions.
10. Delchester Fund will not invest in the securities of companies
which have a record of less than three years' continuous operation, including
any predecessor company or companies, if such purchase at the time thereof would
cause more than 5% of the total Fund assets to be invested in the securities of
such company or companies.
11. Delchester Fund will not act as an underwriter of securities of
other issuers, except that the Fund may acquire restricted or not readily
marketable securities under circumstances where, if such securities are sold,
the Fund might be deemed to be an underwriter for purposes of the Securities Act
of 1933.
12. No long or short positions on shares of the Fund may be taken by
Income Funds, Inc.'s officers, directors or any of its affiliated persons. Such
persons may buy shares of the Fund for investment purposes, however, as
described under Purchasing Shares.
13. Delchester Fund will not invest more than 25% of its assets in any
one particular industry.
Although not a fundamental investment restriction, Delchester Fund
currently does not invest its assets in real estate limited partnerships or oil,
gas and other mineral leases.
Strategic Income Fund
Strategic Income Fund has the following investment restrictions which
may not be amended without approval of a majority of the outstanding voting
securities, which is the lesser of more than 50% of the outstanding voting
securities of Strategic Income Fund, or 67% of the voting securities of
Strategic Income Fund present at a shareholder meeting if 50% or more of the
voting securities are present in person or represented by proxy. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time of purchase of securities.
1. With respect to 75% of its total assets, Strategic Income Fund will
not invest more than 5% of the value of its total assets in securities of any
one issuer (except obligations issued, or guaranteed by, the U.S. government,
its agencies or instrumentalities or certificates of deposit for any such
securities, and cash and cash items) or purchase more than 10% of the voting
securities of any one company.
2. Strategic Income Fund will not make any investment in real estate.
This restriction does not preclude the Fund's purchase of securities issued by
real estate investment trusts, the purchase of securities issued by companies
that deal in real estate, or the investment in securities secured by real estate
or interests therein.
3. Strategic Income Fund will not sell short any security or property.
4. Strategic Income Fund will not buy or sell commodities or commodity
contracts, except that the Fund may enter into futures contracts and options
thereon.
-13-
<PAGE>
5. Strategic Income Fund will not borrow money in excess of one-third
of the value of its net assets. Any borrowing will be done in accordance with
the rules and regulations prescribed from time to time by the SEC with respect
to open-end investment companies.
6. Strategic Income Fund will not make loans. However, (i) the
purchase of a portion of an issue of publicly distributed bonds, debentures or
other securities, or of other securities authorized to be purchased by the
Fund's investment policies, whether or not the purchase was made upon the
original issuance of the securities, and the entry into "repurchase agreements"
are not to be considered the making of a loan by the Fund; and (ii) the Fund may
loan securities to qualified broker/dealers or institutional investors for their
use relating to short sales and other security transactions.
7. Strategic Income Fund will not act as an underwriter of securities
of other issuers, except that the Fund may acquire restricted or not readily
marketable securities under circumstances where, if such securities are sold,
the Fund might be deemed to be an underwriter for purposes of the Securities Act
of 1933.
8. Strategic Income Fund will not invest more than 25% of the value of
its total assets in securities of issuers all of which conduct their principal
business activities in the same industry. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
In addition to the above fundamental investment restrictions, Strategic
Income Fund has the following investment restrictions which may be amended or
changed without approval of shareholders.
1. Strategic Income Fund will not invest for the purpose of acquiring
control of any company.
2. Strategic Income Fund will not invest in securities of other
investment companies, except that the Fund may invest in securities of open-end,
closed-end and unregistered investment companies, in accordance with the
limitations contained in the Investment Company Act of 1940 at the time of the
investment.
3. Strategic Income Fund will not purchase or retain securities of a
company which has an officer or director who is an officer or director of Income
Funds, Inc., or an officer, director or partner of the Manager if, to the
knowledge of the Fund, one or more of such persons beneficially owns in the
aggregate more than 5% thereof.
4. Strategic Income Fund will not invest in the securities of
companies which have a record of less than three years' continuous operation,
including any predecessor company or companies, if such investment at the time
of purchase would cause more than 5% of the total Fund assets to be invested in
the securities of such company or companies.
Although not a fundamental investment restriction, Strategic Income
Fund currently does not invest its assets in real estate limited partnerships or
oil, gas and other mineral leases. In addition, Strategic Income Fund currently
does not purchase securities on margin except short-term credits that may be
necessary for the clearance of purchases and sales of securities, and the Fund
may make margin payments as may be necessary in connection with the futures and
options transactions described in the Fund's Prospectuses and this Part B.
-14-
<PAGE>
PERFORMANCE INFORMATION
From time to time, each Fund may state its Classes' total return in
advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life-of-fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information of its
Classes over additional periods of time.
The average annual total rate of return for each Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of $1,000
from which, in the case of only Class A Shares,
the maximum front-end sales charge is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical
$1,000 purchase at the end of the period
after the deduction of the applicable CDSC,
if any, with respect to Class B Shares and
Class C Shares.
In presenting performance information for Class A Shares, the Limited
CDSC applicable to only certain redemptions of those shares will not be deducted
from any computation of total return. See the Prospectuses for the Fund Classes
for a description of the Limited CDSC and the limited instances in which it
applies. All references to a CDSC in this Performance Information section will
apply to Class B Shares or Class C Shares of the Funds.
Aggregate or cumulative total return is calculated in a similar manner,
except that the results are not annualized. Each calculation assumes the maximum
front-end sales charge, if any, is deducted from the initial $1,000 investment
at the time it is made with respect to the Class A Shares and that all
distributions are reinvested at net asset value, and, with respect to Class B
Shares and Class C Shares, reflects the deduction of the CDSC that would be
applicable upon complete redemption of such shares. In addition, each Fund may
present total return information that does not reflect the deduction of the
maximum front-end sales charge or any applicable CDSC.
The performance of the Delchester Fund A Class and the Delchester Fund
Institutional Class, as shown below, is the average annual total return
quotations through July 31, 1996, computed as described above. The average
annual total return for the Delchester Fund A Class at offer reflects the
maximum front-end sales charge of 4.75% paid on the purchase of shares. The
average annual total return for the Delchester Fund A Class at net asset value
(NAV) does not reflect any front-end sales charge. Securities prices fluctuated
during the periods covered and past results should not be considered as
representative of future performance. Performance information for Strategic
Income Fund is not provided because such shares were not offered to the public
prior to the date of this Part B.
-15-
<PAGE>
Pursuant to applicable regulation, total return shown for the
Delchester Fund Institutional Class for the periods prior to the commencement of
operations of such Class is calculated by taking the performance of the
Delchester Fund A Class and adjusting it to reflect the elimination of all
front-end sales charges. However, for those periods, no adjustment has been made
to eliminate the impact of 12b-1 payments, and performance may have been
affected had such an adjustment been made.
Average Annual Total Return
Delchester Delchester Delchester
Fund Fund Fund
A Class A Class Institutional
(at Offer) (at NAV) Class (1)
1 year
ended
7/31/96 3.02% 8.10% 8.37%
3 years
ended
7/31/96 4.31% 6.00% 6.26%
5 years
ended
7/31/96 9.99% 11.06% 11.32%
10 years
ended
7/31/96 8.97% 9.49% 9.72%
15 years
ended
7/31/96 12.42% 12.79% 12.95%
Period
8/20/70(2)
through
7/31/96 9.39% 9.59% 9.68%
- ----------
(1) Date of initial public offering of the Delchester Fund Institutional
Class was June 1, 1992.
(2) Date of initial public offering of the Delchester Fund A Class.
-16-
<PAGE>
The performance of the Delchester Fund B Class, as shown below, is the
average annual total return quotation through July 31, 1996. The average annual
total return for the Delchester Fund B Class including deferred sales charge
reflects the deduction of the applicable CDSC that would be paid if the shares
were redeemed at July 31, 1996. The average annual total return for the
Delchester Fund B Class excluding deferred sales charge assumes the shares were
not redeemed at July 31, 1996 and therefore does not reflect the deduction of a
CDSC.
Average Annual Total Return
Delchester Fund Delchester Fund
B Class B Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
1 year
ended
7/31/96 3.39% 7.30%
Period
5/2/94(1)
through
7/31/96 4.70% 5.85%
- ---------
(1) Date of initial public offering of the Delchester Fund B Class.
The performance of the Delchester Fund C Class, as shown below, is the
aggregate total return quotation through July 31, 1996. The aggregate total
return for the Delchester Fund C Class including deferred sales charge reflects
the deduction of the applicable CDSC that would be paid if the shares were
redeemed at July 31, 1996. The aggregate total return for the Delchester Fund C
Class excluding deferred sales charge assumes the shares were not redeemed at
July 31, 1996 and therefore does not reflect the deduction of a CDSC.
Aggregate Total Return
Delchester Fund Delchester Fund
C Class C Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
Period
11/29/95(1)
through
7/31/96 4.21% 5.20%
- ----------
(1) Date of initial public offering of the Delchester Fund C Class; total
return for this short of a time period may not be representative of
longer-term results.
-17-
<PAGE>
As stated in the Funds' Prospectuses, each Fund may also quote the
current yield of each of its Classes in advertisements and investor
communications.
The yield computation is determined by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period and annualizing the resulting figure,
according to the following formula:
a-b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The above formula will be used in calculating quotations of yield for
each Class of the Funds, based on specified 30-day periods identified in
advertising by the Funds. The yields of the Delchester Fund A Class, the
Delchester Fund B Class, the Delchester Fund C Class and the Delchester Fund
Institutional Class as of July 31, 1996 using this formula were 9.47%, 9.22%,
9.22% and 10.22%, respectively. Yield calculations assume the maximum front-end
sales charge, if any, and do not reflect the deduction of any contingent
deferred sales charge. Actual yield on Class A Shares may be affected by
variations in sales charges on investments. Yield information for Strategic
Income Fund is not provided because such shares were not offered to the public
prior to the date of this Part B.
Past performance, such as is reflected in quoted yields, should not be
considered as a representation of the results which may be realized from an
investment in any Class of the Funds in the future.
Investors should note that the income earned and dividends paid by the
Funds will vary with the fluctuation of interest rates and performance of the
portfolio to the extent of the Funds' investments in debt securities. The net
asset values of the Funds may change. Unlike money market funds, the Funds
invest in longer-term securities that fluctuate in value and do so in a manner
inversely correlated with changing interest rates. The Funds' net asset values
will tend to rise when interest rates fall. Conversely, the Funds' net asset
values will tend to fall as interest rates rise. Normally, fluctuations in
interest rates have a greater effect on the prices of longer-term bonds. The
value of the securities held by the Funds will vary from day to day and
investors should consider the volatility of the Funds' net asset values as well
as their yields before making a decision to invest.
Delchester Fund's average weighted portfolio maturity at July 31, 1996
was 7 years.
Statistical and performance information and various indices compiled
and maintained by organizations such as the following may also be used in
preparing exhibits comparing certain industry
-18-
<PAGE>
trends and competitive mutual fund performance to comparable activities and
performances of the Funds and in illustrating general financial planning
principles. From time to time, certain mutual fund performance ranking
information, calculated and provided by these organizations, may also be used in
the promotion of sales of the Funds. Any indices used are not managed for any
investment goal.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and
Morningstar, Inc. are performance evaluation services that maintain
statistical performance databases, as reported by a diverse universe of
independently-managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety
of historical data including total return, capital appreciation and
income on the stock market as well as other investment asset classes,
and inflation. With its permission, this information will be used
primarily for comparative purposes and to illustrate general financial
planning principles.
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators, such
as historical and current price/earning information, individual equity
and fixed-income price and return information.
Compustat Industrial Databases, a service of S&P, may also be used in
preparing performance and historical stock and bond market exhibits.
This firm maintains fundamental databases that provide financial,
statistical and market information covering more than 7,000 industrial
and non-industrial companies.
Salomon Brothers and Lehman Brothers are statistical research firms
that maintain databases of international market, bond market, corporate
and government-issued securities of various maturities. This
information, as well as unmanaged indices compiled and maintained by
these firms, will be used in preparing comparative illustrations. In
addition, the performance of multiple indices compiled and maintained
by these firms may be combined to create a blended performance result
for comparative purposes. Generally, the indices selected will be
representative of the types of securities in which the Funds may invest
and the assumptions that were used in calculating the blended
performance will be described.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. In addition, current rate information on
municipal debt obligations of various durations, as reported daily by The Bond
Buyer, may also be used. The Bond Buyer is published daily and is an
industry-accepted source for current municipal bond market information.
From time to time, the Funds may quote actual total return performance
for each Class in advertising and other types of literature compared to indices
or averages of alternative financial products available to prospective
investors. For example, the performance comparisons may include the average
return of various bank instruments, some of which may carry certain return
guarantees, offered by leading banks and thrifts as monitored by Bank Rate
Monitor, and those of generally-accepted corporate bond and government security
price indices of various durations prepared by Lehman Brothers and Salomon
Brothers, Inc. These indices are not managed for any investment goal.
Comparative information on the Consumer Price Index may also be included. The
Consumer Price Index, as prepared by the U.S. Bureau of Labor Statistics, is the
most commonly used measure of inflation. It indicates the cost fluctuations of a
representative group of consumer goods. It does not represent a return from an
investment.
-19-
<PAGE>
The total return performance for each Class of the Funds will reflect
the appreciation or depreciation of principal, reinvestment of income and any
capital gains distributions paid during any indicated period, and, in the case
of Class A Shares, the impact of the maximum front-end sales charge, if any,
paid on the illustrated investment amount, annualized. Performance of Class A
Shares may also be shown without reflecting the impact of any front-end sales
charge. The results will not reflect any income taxes, if applicable, payable by
shareholders on the reinvested distributions included in the calculations. The
performance of Class B Shares and Class C Shares will be calculated both with
the applicable CDSC included and excluded. The net asset values of the Funds
fluctuate so shares, when redeemed, may be worth more or less than the original
investment, and the Funds' results should not be considered a guarantee of
future performance.
The following table is an example, for purposes of illustration only,
of cumulative total return performance for the Delchester Fund A Class, the
Delchester Fund B Class, the Delchester Fund C Class and the Delchester Fund
Institutional Class through July 31, 1996. Performance information for Strategic
Income Fund is not provided because such shares were not offered to the public
prior to the date of this Part B.
-20-
<PAGE>
Cumulative Total Return
Delchester Delchester
Fund Fund Consumer
A Class Institutional Price
(at Offer) Class(2) Index(3)
3 months
ended
7/31/96 (2.78%) 2.17% 0.45%
6 months
ended
7/31/96 (1.91%) 3.07% 1.68%
9 months
ended
7/31/96 1.02% 6.24% 2.15%
1 year
ended
7/31/96 3.02% 8.37% 2.95%
3 years
ended
7/31/96 13.50% 19.97% 8.73%
5 years
ended
7/31/96 61.01% 70.96% 15.27%
10 years
ended
7/31/96 136.01% 152.87% 43.39%
15 years
ended
7/31/96 479.28% 521.02% 71.40%
Period
8/20/70(1)
through
7/31/96 925.60% 999.60% 302.33%
- ----------
(1) Date of initial public offering of the Delchester Fund A Class.
(2) Date of initial public offering of the Delchester Fund Institutional
Class was June 1, 1992. Pursuant to applicable regulation, total return
shown for the Delchester Fund Institutional Class for the periods prior
to the commencement of operations of such Class is calculated by taking
the performance of the Delchester Fund A Class and adjusting it to
reflect the elimination of all sales charges. However, for those
periods, no adjustment has been made to eliminate the impact of 12b-1
payments, and performance may have been affected had such an adjustment
been made.
(3) Source--U.S. Department of Labor.
-21-
<PAGE>
Cumulative Total Return
Delchester Delchester
Fund Fund
B Class B Class Consumer
(Including (Excluding Price
Deferred Deferred Index(2)
Sales Charge) Sales Charge)
3 months
ended
7/31/96 (2.07%) 1.91% 0.45%
6 months
ended
7/31/96 (1.36%) 2.56% 1.68%
9 months
ended
7/31/96 0.49% 4.45% 2.15%
1 year
ended
7/31/96 3.39% 7.30% 2.95%
Period
5/2/94(1)
through
7/31/96 10.90% 13.63% 6.51%
- -----------
(1) Date of initial public offering of the Delchester Fund B Class.
(2) Source--U.S. Department of Labor.
-22-
<PAGE>
Cumulative Total Return
Delchester Delchester
Fund Fund
C Class C Class Consumer
(Including (Excluding Price
Deferred Deferred Index(2)
Sales Charge) Sales Charge)
3 months
ended
7/31/96 0.92% 1.91% 0.45%
6 months
ended
7/31/96 1.58% 2.56% 1.68%
Period
11/29/95(1)
through
7/31/96 4.21% 5.20% 2.21%
- ----------
(1) Date of initial public offering of the Delchester Fund C Class; total
return for this short of a time period may not be representative of
longer-term results.
(2) Source--U.S. Department of Labor.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for Income Funds, Inc. and other mutual funds in the
Delaware Group, will provide general information about investment alternatives
and scenarios that will allow investors to assess their personal goals. This
information will include general material about investing as well as materials
reinforcing various industry-accepted principles of prudent and responsible
personal financial planning. One typical way of addressing these issues is to
compare an individual's goals and the length of time the individual has to
attain these goals to his or her risk threshold. In addition, the Distributor
will provide information that discusses the Manager's overriding investment
philosophy and how that philosophy impacts the Funds', and other Delaware Group
funds', investment disciplines employed in seeking their objectives. The
Distributor may also from time to time cite general or specific information
about the institutional clients of the Manager, including the number of such
clients serviced by the Manager.
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Security prices tend to move up and down over various market cycles and logic
says to invest when prices are low. However, even experts can't always pick the
highs and the lows. By using a strategy known as dollar-cost averaging, you
schedule your investments ahead of time. If you invest a set amount on a regular
basis, that money will always buy more shares when the price is low and fewer
when the price is high. You can choose to invest at any regular interval--for
example, monthly or quarterly--as long as you stick to your regular schedule.
Dollar-cost averaging looks simple and it is, but there are important things to
remember.
-23-
<PAGE>
Dollar-cost averaging works best over longer time periods, and it
doesn't guarantee a profit or protect against losses in declining markets. If
you need to sell your investment when prices are low, you may not realize a
profit no matter what investment strategy you utilize. That's why dollar-cost
averaging can make sense for long-term goals. Since the potential success of a
dollar-cost averaging program depends on continuous investing, even through
periods of fluctuating prices, you should consider your dollar-cost averaging
program a long-term commitment and invest an amount you can afford and probably
won't need to withdraw. You also should consider your financial ability to
continue to purchase shares during periods of low fund share prices. Delaware
Group offers three services -- Automatic Investing Plan, Direct Deposit Purchase
Plan and the Wealth Builder Option -- that can help to keep your regular
investment program on track. See Investing by Electronic Fund Transfer - Direct
Deposit Purchase Plan and Automatic Investing Plan under Investment Plans and
Wealth Builder Option under Investment Plans for a complete description of these
services, including restrictions or limitations.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $ 5.00 20
Month 4 $100 $10.00 10
------------------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of the Funds.
-24-
<PAGE>
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional shares of
the Funds, your investment is given yet another opportunity to grow. It's called
the Power of Compounding and the following chart illustrates just how powerful
it can be.
COMPOUNDED RETURNS
Results of various assumed fixed rates of return on a $10,000
investment compounded monthly for 10 years:
7% Rate 9% Rate 11% Rate
of Return of Return of Return
1 year $10,723 $10,938 $11,157
2 years $11,498 $11,964 $12,448
3 years $12,330 $13,086 $13,889
4 years $13,221 $14,314 $15,496
5 years $14,177 $15,657 $17,289
6 years $15,201 $17,126 $19,289
7 years $16,300 $18,732 $21,522
8 years $17,479 $20,489 $24,012
9 years $18,743 $22,411 $26,791
10 years $20,098 $24,514 $29,891
These figures are calculated assuming a fixed constant investment
return and assume no fluctuation in the value of principal. These figures, which
do not reflect payment of applicable taxes or any sales charges, are not
intended to be a projection of investment results and do not reflect the actual
performance results of any of the classes.
-25-
<PAGE>
TRADING PRACTICES AND BROKERAGE
Delchester Fund and, in the case of its domestic securities, Strategic
Income Fund, each select banks, brokers or dealers to execute transactions for
the purchase or sale of portfolio securities on the basis of the Fund's judgment
of the professional capability of such banks, brokers or dealers to provide the
service. In the case of Strategic Income Fund, the Sub-Adviser to the Fund
selects banks, brokers or dealers to execute transactions for the purchase or
sale of foreign securities in managing the Fund's international sector. The
primary consideration is to have banks, brokers or dealers execute transactions
at best price and execution. Best price and execution refers to many factors,
including the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. In most instances, trades of fixed-income
securities are made on a net basis where the Funds either buy the securities
directly from the dealer or sell them to the dealer. In these instances, there
is no direct commission charged but there is a spread (the difference between
the buy and sell price) which is the equivalent of a commission. When a
commission is paid, the Fund involved pays reasonably competitive brokerage
commission rates based upon the professional knowledge of the Manager or the
Sub-Adviser as to rates paid and charged for similar transactions throughout the
securities industry. In some instances, a Fund pays a minimal share transaction
cost when the transaction presents no difficulty.
During the fiscal years ended July 31, 1994, 1995 and 1996, no
brokerage commissions were paid by Delchester Fund.
The Manager or the Sub-Adviser may allocate out of all commission
business generated by all of the funds and accounts under its management,
brokerage business to brokers or dealers who provide brokerage and research
services. These services include advice, either directly or through publications
or writings, as to the value of securities, the advisability of investing in,
purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing of analyses and reports
concerning issuers, securities or industries; providing information on economic
factors and trends; assisting in determining portfolio strategy; providing
computer software and hardware used in security analyses; and providing
portfolio performance evaluation and technical market analyses. Such services
are used by the Manager or the Sub-Adviser in connection with its investment
decision-making processes with respect to one or more funds and accounts managed
by it, and may not be used, or used exclusively, with respect to the fund or
account generating the brokerage.
During the fiscal year ended July 31, 1996, there were no portfolio
transactions of Delchester Fund resulting in brokerage commissions directed to
brokers for brokerage and research services.
As provided in the Securities Exchange Act of 1934, the Funds'
Investment Management Agreements and the Sub-Advisory Agreement (in the case of
Strategic Income Fund), higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the Funds believe that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
the Manager or Sub-Adviser which constitute in some part brokerage and research
services used by the Manager or Sub-Adviser in connection with its investment
decision-making process and constitute in some part services used by the
-26-
<PAGE>
Manager or Sub-Adviser in connection with administrative or other functions not
related to its investment decision-making process. In such cases, the Manager or
Sub-Adviser will make a good faith allocation of brokerage and research services
and will pay out of its own resources for services used by the Manager or
Sub-Adviser in connection with administrative or other functions not related to
its investment decision-making process. In addition, so long as no fund is
disadvantaged, portfolio transactions which generate commissions or their
equivalent are allocated to broker/dealers who provide daily portfolio pricing
services to the Funds and to other funds in the Delaware Group. Subject to best
price and execution, commissions allocated to brokers providing such pricing
services may or may not be generated by the funds receiving the pricing service.
The Manager or the Sub-Adviser may place a combined order for two or
more accounts or funds engaged in the purchase or sale of the same security if,
in its judgment, joint execution is in the best interest of each participant and
will result in best price and execution. Transactions involving commingled
orders are allocated in a manner deemed equitable to each account or fund. When
a combined order is executed in a series of transactions at different prices,
each account participating in the order may be allocated an average price
obtained from the executing broker. It is believed that the ability of the
accounts to participate in volume transactions will generally be beneficial to
the accounts and funds. Although it is recognized that, in some cases, the joint
execution of orders could adversely affect the price or volume of the security
that a particular account or fund may obtain, it is the opinion of the Manager,
the Sub-Adviser and Income Funds, Inc.'s Board of Directors that the advantages
of combined orders outweigh the possible disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. (the "NASD"), and subject to seeking best price and
execution, the Funds may place orders with broker/dealers that have agreed to
defray certain Fund expenses such as custodian fees, and may, at the request of
the Distributor, give consideration to sales of their shares as a factor in the
selection of brokers and dealers to execute the Funds' portfolio transactions.
Portfolio Turnover
The rate of portfolio turnover will not be a limiting factor when
portfolio changes are deemed appropriate. Delchester Fund anticipates that its
annual rate of portfolio turnover will not generally exceed 150%, and Strategic
Income Fund anticipates that its annual rate of portfolio turnover will not
generally exceed 100%. It is possible that in any particular year market
conditions or other factors might result in portfolio activity at a greater rate
than anticipated.
The degree of portfolio activity may affect taxes payable by the Funds'
shareholders. A turnover rate of 100% would occur, for example, if all the
investments in a Fund's portfolio at the beginning of the year were replaced by
the end of the year. In investing for liberal current income, in the case of
Delchester Fund, and for high current income with total return, in the case of
Strategic Income Fund, the Funds may hold securities for any period of time. To
the extent a Fund realizes gains on securities held for less than six months,
such gains are taxable to the shareholder or to the Fund at ordinary income tax
rates. The turnover rates also may be affected by cash requirements from
redemptions and repurchases of Fund shares.
Delchester Fund's portfolio turnover rates were approximately 92% for
the fiscal year ended July 31, 1995 and 108% for the fiscal year ended July 31,
1996.
-27-
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for each Fund's
classes of shares - Class A Shares, Class B Shares, Class C Shares and the
Institutional Class - and has agreed to use its best efforts to sell shares of
each Fund. See the Prospectuses for additional information on how to invest.
Shares of the Funds are offered on a continuous basis, and may be purchased
through authorized investment dealers or directly by contacting Income Funds,
Inc. or the Distributor.
The minimum initial investment generally is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases generally must be at
least $100. The initial and subsequent minimum investments for Class A Shares
will be waived for purchases by officers, directors and employees of any
Delaware Group fund, the Manager or the Sub-Adviser or any of the their
affiliates if the purchases are made pursuant to a payroll deduction program.
Shares purchased pursuant to the Uniform Gifts to Minors Act or Uniform
Transfers to Minors Act and shares purchased in connection with an Automatic
Investing Plan are subject to a minimum initial purchase of $250 and a minimum
subsequent purchase of $25. Accounts opened under the Delaware Group Asset
Planner service are subject to a minimum initial investment of $2,000 per Asset
Planner Strategy selected. There are no minimum purchase requirements for the
Funds' Institutional Classes, but certain eligibility requirements must be
satisfied.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. See Investment Plans for purchase limitations
applicable to retirement plans. Income Funds, Inc. will reject any purchase
order for more than $250,000 of Class B Shares and $1,000,000 or more of Class C
Shares. An investor may exceed these limitations by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers have the responsibility of transmitting orders
promptly. Income Funds, Inc. reserves the right to reject any order for the
purchase of shares of either Fund if in the opinion of management such rejection
is in such Fund's best interests.
The NASD has adopted Rules of Fair Practice relating to investment
company sales charges. Income Funds, Inc. and the Distributor intend to operate
in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 4.75%; however, lower front-end sales charges
apply for larger purchases. See the table below. Class A Shares are also subject
to annual 12b-1 Plan expenses.
Class B Shares are purchased at net asset value and are subject to a
CDSC of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; and (iv) 1% if
shares are redeemed during the sixth year following purchase. Class B Shares are
also subject to annual 12b-1 Plan expenses which are higher than those to which
Class A Shares are subject and are assessed against Class B Shares for
approximately eight years after purchase. See Automatic Conversion of Class B
Shares under Classes of Shares in the Fund Classes' Prospectuses.
-28-
<PAGE>
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
Institutional Class shares are purchased at the net asset value per
share without the imposition of a front-end or contingent deferred sales charge
or 12b-1 Plan expenses. See Determining Offering Price and Net Asset Value and
Plans Under Rule 12b-1 for the Fund Classes in this Part B.
Class A Shares, Class B Shares, Class C Shares and Institutional Class
shares represent a proportionate interest in a Fund's assets and will receive a
proportionate interest in that Fund's income, before application, as to the
Class A, Class B and Class C Shares, of any expenses under a Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
unless a shareholder submits a specific request. Certificates are not issued in
the case of Class B Shares or Class C Shares. However, purchases not involving
the issuance of certificates are confirmed to the investor and credited to the
shareholder's account on the books maintained by Delaware Service Company, Inc.
(the "Transfer Agent"). The investor will have the same rights of ownership with
respect to such shares as if certificates had been issued. An investor that is
permitted to obtain a certificate may receive a certificate representing shares
purchased by sending a letter to the Transfer Agent requesting the certificate.
No charge is assessed by Income Funds, Inc. for any certificate issued.
Investors who hold certificates representing any of their shares may only redeem
those shares by written request. The investor's certificate(s) must accompany
such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class C
Shares of each Fund permit investors to choose the method of purchasing shares
that is most suitable for their needs given the amount of their purchase, the
length of time they expect to hold their shares and other relevant
circumstances. Investors should determine whether, given their particular
circumstances, it is more advantageous to purchase Class A Shares of a Fund and
incur a front-end sales charge and annual 12b-1 Plan expenses of up to a maximum
of .30% of the average daily net assets of Class A Shares (currently, no more
than .25% of the average daily net assets of the Class A Shares of Strategic
Income Fund, pursuant to Board action) or to purchase either Class B or Class C
Shares of a Fund and have the entire initial purchase amount invested in the
Fund with the investment thereafter subject to a CDSC and annual 12b-1 Plan
expenses. Class B Shares are subject to a CDSC if the shares are redeemed within
six years of purchase, and Class C Shares are subject to a CDSC if the shares
are redeemed within 12 months of purchase. Class B and Class C Shares are each
subject to annual 12b-1 Plan expenses of up to a maximum of 1% (.25% of which
are service fees to be paid to the Distributor, dealers or others for providing
personal service and/or maintaining shareholder accounts) of average daily net
assets of the respective Class. Class B Shares will automatically convert to
Class A Shares at the end of approximately eight years after purchase and,
thereafter, be subject to annual 12b-1 Plan expenses of up to a maximum of .30%
of average daily net assets of such shares. Unlike Class B Shares, Class C
Shares do not convert to another class.
-29-
<PAGE>
Class A Shares - Delchester Fund and Strategic Income Fund
Purchases of $100,000 or more of Class A Shares at the offering price
carry reduced front-end sales charges as shown in the accompanying table, and
may include a series of purchases over a 13-month period under a Letter of
Intention signed by the purchaser. See Special Purchase Features -- Class A
Shares, below for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
Delchester Fund
Strategic Income Fund
Class A Shares
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- --------------------------------------------------------------------------------------------------------------
Strategic
Delchester Income
Fund Fund
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 5.05% 4.91% 4.00%
$100,000 but under $250,000 3.75 3.91 3.82 3.00
$250,000 but under $500,000 2.50 2.60 2.55 2.00
$500,000 but under $1,000,000* 2.00 2.12 2.00 1.60
</TABLE>
* There is no front-end sales charge on purchases of $1 million or more
of Class A Shares but, under certain limited circumstances, a 1%
contingent deferred sales charge may apply upon redemption of such
shares. The contingent deferred sales charge ("Limited CDSC") that may
be applicable arises only in the case of certain shares that were
purchased at net asset value and triggered the payment of a dealer's
commission.
** In the case of Delchester Fund, based on the net asset value per share
of the Class A Shares as of the end of Income Funds, Inc.'s most recent
fiscal year. In the case of Strategic Income Fund, based on an initial
net asset value of $5.50 per share.
*** Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
- -------------------------------------------------------------------------------
A Fund must be notified when a sale takes place which would qualify for
the reduced front-end sales charge on the basis of previous or current
purchases. The reduced front-end sales charge will be granted upon
confirmation of the shareholder's holdings by such Fund. Such reduced
front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
front-end sales charge shown above. Dealers who receive 90% or more of
the sales charge may be deemed to be underwriters under the Securities
Act of 1933.
- -------------------------------------------------------------------------------
-30-
<PAGE>
Certain dealers who enter into an agreement to provide extra training
and information on Delaware Group products and services and who increase sales
of Delaware Group funds may receive an additional commission of up to .15% of
the offering price in connection with sales of Class A Shares. Such dealers must
meet certain requirements in terms of organization and distribution capabilities
and their ability to increase sales. The Distributor should be contacted for
further information on these requirements as well as the basis and circumstances
upon which the additional commission will be paid. Participating dealers may be
deemed to have additional responsibilities under the securities laws.
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are effected in accordance with the following schedule:
Dealer's Commission
Amount (as a percentage of
of Purchase amount purchased)
Up to $2 million 1.00%
Next $1 million up to $3 million .75
Next $2 million up to $5 million .50
Amount over $5 million .25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Fund Classes' Prospectuses) may be aggregated with those of the
Class A Shares of a Fund. Financial advisers also may be eligible for a dealer's
commission in connection with certain purchases made under a Letter of Intention
or pursuant to an investor's Right of Accumulation. Financial advisers should
contact the Distributor concerning the applicability and calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B and Class C Shares are purchased without a front-end sales
charge. Class B Shares redeemed within six years of purchase may be subject to a
CDSC at the rates set forth below, and Class C Shares redeemed within 12 months
of purchase may be subject to a CDSC of 1%. CDSCs are charged as a percentage of
the dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the net asset value at the time of purchase of the shares
being redeemed or the net asset value of those shares at the time of redemption.
No CDSC will be imposed on increases in net asset value above the initial
purchase price, nor will a CDSC be assessed on redemptions of shares acquired
through reinvestment of dividends or capital gains distributions. See Waiver of
Contingent Deferred Sales Charge Class B and Class C Shares under Redemption and
Exchange in the Prospectuses for the Fund Classes for a list of the instances in
which the CDSC is waived.
-31-
<PAGE>
The following table sets forth the rates of the CDSC for Class B Shares
of each Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ --------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. At the end of approximately eight years after purchase, the investor's
Class B Shares will be automatically converted into Class A Shares of the same
Fund. See Automatic Conversion of Class B Shares under Classes of Shares in the
Fund Classes' Prospectuses. Such conversion will constitute a tax-free exchange
for federal income tax purposes. See Taxes in the Prospectuses for the Fund
Classes.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Income Funds, Inc. has
adopted a separate plan for each of the Class A Shares, Class B Shares and Class
C Shares of each Fund (the "Plans"). Each Plan permits the relevant Fund to pay
for certain distribution, promotional and related expenses involved in the
marketing of only the class to which the Plan applies. The Plans do not apply to
the Institutional Classes of shares. Such shares are not included in calculating
the Plans' fees, and the Plans are not used to assist in the distribution and
marketing of shares of the Institutional Classes. Shareholders of the
Institutional Classes may not vote on matters affecting the Plans.
The Plans permit a Fund, pursuant to its Distribution Agreement, to pay
out of the assets of the Class A Shares, Class B Shares and Class C Shares
monthly fees to the Distributor for its services and expenses in distributing
and promoting sales of shares of such classes. These expenses include, among
other things, preparing and distributing advertisements, sales literature and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, and paying distribution and maintenance fees to securities
brokers and dealers who enter into agreements with the Distributor. The Plan
expenses relating to Class B and Class C Shares are also used to pay the
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, each Fund may make payments out of the assets of the Class
A, Class B and Class C Shares directly to other unaffiliated parties, such as
banks, who either aid in the distribution of shares of, or provide services to,
such classes.
The maximum aggregate fee payable by a Fund under its Plans, and the
Funds' Distribution Agreements, is on an annual basis, up to .30% of the Class A
Shares' average daily net assets for the year, and up to 1% (.25% of which are
service fees to be paid to the Distributor, dealers and others for providing
personal service and/or maintaining shareholder accounts) of each of the Class B
-32-
<PAGE>
Shares' and the Class C Shares' average daily net assets for the year. Income
Funds, Inc.'s Board of Directors may reduce these amounts at any time. The
Distributor has agreed to waive the distribution fees with respect to Delchester
Fund to the extent such fee for any day exceeds the net investment income
realized by Delchester Fund's Class A, Class B and Class C Shares for such day.
Although the maximum fee payable under the 12b-1 Plan relating to the
Delchester Fund A Class is .30% of average daily net assets of such class, the
Board of Directors has determined that the annual fee, payable on a monthly
basis, under the Plan relating to the Delchester Fund A Class, will be equal to
the sum of: (i) the amount obtained by multiplying .10% by the average daily net
assets represented by the Delchester Fund A Class that were originally purchased
prior to June 1, 1992 in Delchester I class (which was converted into what is
now referred to as the Class A Shares on June 1, 1992 pursuant to a Plan of
Recapitalization approved by shareholders of the Delchester I class), and (ii)
the amount obtained by multiplying .30% by the average daily net assets
represented by all other Delchester Fund A Class shares. While this is the
method to be used to calculate the 12b-1 fees to be paid by the Delchester Fund
A Class under its Plan, the fee is a Class A Shares' expense so that all
shareholders of the Delchester Fund A Class, regardless of whether they
originally purchased or received shares in the Delchester I class, or in one of
the other classes that is now known as Class A Shares, will bear 12b-1 expenses
at the same rate. In addition, pursuant to Board action, the maximum aggregate
fee payable by the Class A Shares of Strategic Income Fund is .25%. While this
describes the current basis for calculating the fees which will be payable under
the Delchester Fund A Class' and Strategic Income Fund A Class' Plans, such
Plans permit a full .30% on all Class A Shares' assets to be paid at any time
following appropriate Board approval.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of Class
A, Class B and Class C Shares would be borne by such persons without any
reimbursement from such Fund Classes. Subject to seeking best price and
execution, a Fund may, from time to time, buy or sell portfolio securities from
or to firms which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from its
own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreements, as amended, have all been
approved by the Board of Directors of Income Funds, Inc., including a majority
of the directors who are not "interested persons" (as defined in the 1940 Act)
of Income Funds, Inc. and who have no direct or indirect financial interest in
the Plans, by vote cast in person at a meeting duly called for the purpose of
voting on the Plans and such Agreements. Continuation of the Plans and the
Distribution Agreements, as amended, must be approved annually by the Board of
Directors in the same manner as specified above.
Each year, the directors must determine whether continuation of the
Plans is in the best interest of shareholders of, respectively, Class A Shares,
Class B Shares and Class C Shares of each Fund and that there is a reasonable
likelihood of the Plan relating to a Fund Class providing a benefit to that
Class. The Plans and the Distribution Agreements, as amended, may be terminated
with respect to a Class at any time without penalty by a majority of those
directors who are not "interested persons" or by a majority vote of the
outstanding voting securities of the relevant Fund Class. Any amendment
materially increasing the percentage payable under the Plans must likewise be
approved by a majority vote of the outstanding voting securities of the relevant
Fund Class, as well as by a majority vote of those directors who are not
"interested persons." With respect to each Class A Shares' Plan, any material
increase in the maximum percentage payable thereunder must also be approved by a
majority of the outstanding voting Class B
-33-
<PAGE>
Shares of the same Fund. Also, any other material amendment to the Plans must be
approved by a majority vote of the directors including a majority of the
noninterested directors of Income Funds, Inc. having no interest in the Plans.
In addition, in order for the Plans to remain effective, the selection and
nomination of directors who are not "interested persons" of Income Funds, Inc.
must be effected by the directors who themselves are not "interested persons"
and who have no direct or indirect financial interest in the Plans. Persons
authorized to make payments under the Plans must provide written reports at
least quarterly to the Board of Directors for their review.
For the fiscal year ended July 31, 1996, payments from the Delchester
Fund A Class pursuant to its Plan amounted to $2,515,759 and such payments were
used for the following purposes: Advertising - $1,879; Annual/Semi-Annual
Reports - $74,570; Broker Trails - $2,056,535; Commissions to Wholesalers -
$184,026; Promotional-Broker Meetings - $50,569; Promotional-Other - $31,866;
Prospectus Printing - $28,155; Telephone - $17,346; and Wholesaler Expenses -
$70,813.
For the fiscal year ended July 31, 1996, payments from the Delchester
Fund B Class pursuant to its Plan amounted to $1,429,755 and such payments were
used for the following purposes: Broker Trails - $359,118; Broker Sales Charges
- - $479,266; Interest on Broker Sales Charges - $521,562; Commissions to
Wholesalers - $61,850; Promotional-Broker Meetings - $7,375; and Prospectus
Printing - $584.
For the period November 29, 1995 (date of initial public offering)
through July 31, 1996, payments from the Delchester Fund C Class pursuant to its
Plan amounted to $15,354 and such payments were used for the following purposes:
Broker Sales Charges - $13,874; Interest on Broker Sales Charges - $1,423; and
Other - $57.
The staff of the SEC has proposed amendments to Rule 12b-1 and other
related regulations that could impact Rule 12b-1 Distribution Plans. Income
Funds, Inc. intends to amend the Plans, if necessary, to comply with any new
rules or regulations the SEC may adopt with respect to Rule 12b-1.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of Fund Classes exceed certain limits as
set by the Distributor, may receive from the Distributor an additional payment
of up to .25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares.
Payments to dealers made in connection with seminars, conferences or
contests relating to the promotion of fund shares may be in an amount up to 100%
of the expenses incurred or awards made. The Distributor may also pay a portion
of the expense of preapproved dealer advertisements promoting the sale of
Delaware Group fund shares.
-34-
<PAGE>
Special Purchase Features -- Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased without a front-end sales charge under
the Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege.
Current and former officers, directors and employees of Income Funds,
Inc., any other fund in the Delaware Group, the Manager, the Sub-Adviser or any
of the Manager's affiliates that may in the future be created, legal counsel to
the funds and registered representatives and employees of broker/dealers who
have entered into Dealer's Agreements with the Distributor may purchase Class A
Shares of the Funds and any such class of shares of any of the funds in the
Delaware Group, including any fund that may be created, at the net asset value
per share. Family members of such persons at their direction, and any employee
benefit plan established by any of the foregoing funds, corporations, counsel or
broker/dealers may also purchase Class A Shares at net asset value. Purchases of
Class A Shares may also be made by clients of registered representatives of an
authorized investment dealer at net asset value within 12 months of a change of
the registered representative's employment, if the purchase is funded by
proceeds from an investment where a front-end sales charge, contingent deferred
sales charge or other sales charge has been assessed. Purchases of Class A
Shares may also be made at net asset value by bank employees who provide
services in connection with agreements between the bank and unaffiliated brokers
or dealers concerning sales of shares of Delaware Group funds. Officers,
directors and key employees of institutional clients of the Manager, the
Sub-Adviser or any of their affiliates, may purchase Class A Shares at net asset
value. Moreover, purchases may be effected at net asset value for the benefit of
the clients of brokers, dealers and registered investment advisers affiliated
with a broker or dealer, if such broker, dealer or investment adviser has
entered into an agreement with the Distributor providing specifically for the
purchase of Class A Shares in connection with special investment products, such
as wrap accounts or similar fee based programs. Such purchasers are required to
sign a letter stating that the purchase is for investment only and that the
securities may not be resold except to the issuer. Such purchasers may also be
required to sign or deliver such other documents as Income Funds, Inc. may
reasonably require to establish eligibility for purchase at net asset value.
Investors who held shares in any class of any Delaware Group fund as of
December 1, 1995, may purchase Class A Shares at net asset value through the
Delaware Group Asset Planner service if such shares are being purchased with
proceeds from the redemption of shares of a fund (other than a money market
fund) outside of the Delaware Group of funds. The Delaware Group Asset Planner
Account Registration Form and check for such a transaction should note that the
investment is being made under the "NAV/Asset Planner Accommodation Program."
Class A Shares may also be purchased at net asset value in an IRA through the
Delaware Group Asset Planner service if the assets being invested are being
transferred from an existing IRA held outside of the Delaware Group or are part
of a distribution received from an employer-sponsored or other retirement plan.
See Delaware Group Asset Planner under How To Buy Shares in the Prospectuses for
the Fund Classes.
Investments in Class A Shares made by plan level and/or participant
retirement accounts that are for the purpose of repaying a loan taken from such
accounts will be made at net asset value. Loan repayments made to a Delaware
Group account in connection with loans originated from accounts previously
maintained by another investment firm will also be invested at net asset value.
-35-
<PAGE>
The Funds must be notified in advance that the trade qualifies for
purchase at net asset value.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made
within a 13-month period pursuant to a written Letter of Intention provided by
the Distributor and signed by the purchaser, and not legally binding on the
signer or Income Funds, Inc., which provides for the holding in escrow by the
Transfer Agent of 5% of the total amount of the Class A Shares intended to be
purchased until such purchase is completed within the 13-month period. A Letter
of Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as noted
below, the purchaser will be asked to pay an amount equal to the difference
between the front-end sales charge on Class A Shares purchased at the reduced
rate and the front-end sales charge otherwise applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the Transfer Agent will surrender an appropriate number
of the escrowed shares for redemption in order to realize the difference. Such
purchasers may include the value (at offering price at the level designated in
their Letter of Intention) of all their shares of the Funds and of any class of
any of the other mutual funds in the Delaware Group (except shares of any
Delaware Group fund which do not carry a front-end sales charge, CDSC or Limited
CDSC, other than shares of Delaware Group Premium Fund, Inc. beneficially owned
in connection with the ownership of variable insurance products, unless they
were acquired through an exchange from a Delaware Group fund which carried a
front-end sales charge, CDSC or Limited CDSC) previously purchased and still
held as of the date of their Letter of Intention toward the completion of such
Letter.
Employers offering a Delaware Group retirement plan may also complete a
Letter of Intention to obtain a reduced front-end sales charge on investments in
Class A Shares made by the plan. The aggregate investment level of the Letter of
Intention will be determined and accepted by the Transfer Agent at the point of
plan establishment. The level and any reduction in front-end sales charge will
be based on actual plan participation and the projected investments in Delaware
Group funds that are offered with a front-end sales charge, CDSC or Limited CDSC
for a 13-month period. The Transfer Agent reserves the right to adjust the
signed Letter of Intention based on this acceptance criteria. The 13-month
period will begin on the date this Letter of Intention is accepted by the
Transfer Agent. If actual investments exceed the anticipated level and equal an
amount that would qualify the plan for further discounts, any front-end sales
charges will be automatically adjusted. In the event this Letter of Intention is
not fulfilled within the 13-month period, the plan level will be adjusted
(without completing another Letter of Intention) and the employer will be billed
for the difference in front-end sales charges due, based on the plan's assets
under management at that time. Employers may also include the value (at offering
price at the level designated in their Letter of Intention) of all their shares
intended for purchase that are offered with a front-end sales charge, CDSC or
Limited CDSC of any class. Class B Shares and Class C Shares of a Fund and other
Delaware Group funds which offer corresponding classes of shares may also be
aggregated for this purpose.
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of the Class A Shares, Class B Shares and/or
Class C Shares of the Funds, as well as shares of any other class of any of the
other Delaware Group funds (except shares of any Delaware Group fund which do
not carry a
-36-
<PAGE>
front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC).
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). If, for example, any such purchaser has previously purchased and still
holds Class A Shares and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $60,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $60,000 purchase would currently be 3.75%. For the purpose of this
calculation, the shares presently held shall be valued at the public offering
price that would have been in effect were the shares purchased simultaneously
with the current purchase. Investors should refer to the table of sales charges
for Class A Shares to determine the applicability of the Right of Accumulation
to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of a Fund (and of the Institutional Classes
holding shares which were acquired through an exchange from one of the other
mutual funds in the Delaware Group offered with a front-end sales charge) who
redeem such shares have one year from the date of redemption to reinvest all or
part of their redemption proceeds in Class A Shares of that Fund or in Class A
Shares of any of the other funds in the Delaware Group, subject to applicable
eligibility and minimum purchase requirements, in states where shares of such
other funds may be sold, at net asset value without the payment of a front-end
sales charge. This privilege does not extend to Class A Shares where the
redemption of the shares triggered the payment of a Limited CDSC. Persons
investing redemption proceeds from direct investments in mutual funds in the
Delaware Group offered without a front-end sales charge will be required to pay
the applicable sales charge when purchasing Class A Shares. The reinvestment
privilege does not extend to a redemption of either Class B Shares or Class C
Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
-37-
<PAGE>
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Funds' shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Fund Classes' Prospectuses) in connection with
the features described above.
Group Investment Plans
Group Investment Plans that are not eligible to purchase shares of the
Institutional Classes may also benefit from the reduced front-end sales charges
for investments in Class A Shares set forth in the table on page _____, based on
total plan assets. If a company has more than one plan investing in the Delaware
Group of funds, then the total amount invested in all plans would be used in
determining the applicable front-end sales charge reduction upon each purchase,
both initial and subsequent, upon notification to the Fund in which the
investment is being made at the time of each such purchase. Employees
participating in such Group Investment Plans may also combine the investments
made in their plan account when determining the applicable front-end sales
charge on purchases to non-retirement Delaware Group investment accounts if they
so notify the Fund in connection with each purchase. For other retirement plans
and special services, see Retirement Plans for the Fund Classes under Investment
Plans.
The Institutional Classes
The Institutional Class of each Fund is available for purchase only by:
(a) retirement plans introduced by persons not associated with brokers or
dealers that are primarily engaged in the retail securities business and
rollover individual retirement accounts from such plans; (b) tax-exempt employee
benefit plans of the Manager, the Sub-Adviser or their affiliates and securities
dealer firms with a selling agreement with the Distributor; (c) institutional
advisory accounts of the Manager, the Sub-Adviser or their 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) banks, trust companies and
similar financial institutions investing for their own account or for the
account of their trust customers for whom such financial institution is
exercising investment discretion in purchasing shares of the class; and (e)
registered investment advisers investing on behalf of clients that consist
solely of institutions and high net-worth individuals having at least $1,000,000
entrusted to the adviser for investment purposes, but only if the adviser is not
affiliated or associated with a broker or dealer and derives compensation for
its services exclusively from its clients for such advisory services.
Shares of the Institutional Classes are available for purchase at net
asset value, without the imposition of a front-end or contingent deferred sales
charge and are not subject to Rule 12b-1 expenses.
-38-
<PAGE>
INVESTMENT PLANS
Reinvestment Plan/Open Account
Unless otherwise designated by shareholders in writing, dividends from
net investment income and distributions from realized securities profits, if
any, will be automatically reinvested in additional shares of the respective
Fund Class in which an investor has an account (based on the net asset value in
effect on the reinvestment date) and will be credited to the shareholder's
account on that date. All dividends and distributions of the Institutional
Classes are reinvested in the accounts of the holders of such shares (based on
the net asset value in effect on the reinvestment date). A confirmation of each
distribution from realized securities profits, if any, will be mailed to
shareholders in the first quarter of the fiscal year.
Under the Reinvestment Plan/Open Account, shareholders may purchase and
add full and fractional shares to their plan accounts at any time either through
their investment dealers or by sending a check or money order to the specific
Fund and class in which shares are being purchased. Such purchases, which must
meet the minimum subsequent purchase requirements set forth in the Prospectuses
and this Part B, are made, for Class A Shares at the public offering price, and
for Class B Shares, Class C Shares and the Institutional Classes at the net
asset value, at the end of the day of receipt. A reinvestment plan may be
terminated at any time. This plan does not assure a profit nor protect against
depreciation in a declining market.
Reinvestment of Dividends in Other Delaware Group Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions in
any of the mutual funds in the Delaware Group, including the Funds, in states
where their shares may be sold. Such investments will be at net asset value at
the close of business on the reinvestment date without any front-end sales
charge or service fee. The shareholder must notify the Transfer Agent in writing
and must have established an account in the fund into which the dividends and/or
distributions are to be invested. Any reinvestment directed to a fund in which
the investor does not then have an account will be treated like all other
initial purchases of a fund's shares. Consequently, an investor should obtain
and read carefully the prospectus for the fund in which the investment is
intended to be made before investing or sending money. The prospectus contains
more complete information about the fund, including charges and expenses. See
also Additional Methods of Adding to Your Investment - Dividend Reinvestment
Plan under How to Buy Shares in the Prospectuses for the Fund Classes.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the Funds,
provided an account has been established. Dividends from Class A Shares may not
be directed to Class B Shares or Class C Shares. Dividends from Class B Shares
may only be directed to other Class B Shares and dividends from Class C Shares
may only be directed to other Class C Shares. See Classes of Shares in the Fund
Classes' Prospectuses for the funds in the Delaware Group that are eligible for
investment by holders of Fund shares.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, 403(b)(7) Deferred Compensation Plans or 457
Deferred Compensation Plans.
-39-
<PAGE>
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for a Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and Class
C Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date although no check is required to initiate the transaction. (2) If
the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, 403(b)(7) Deferred Compensation Plans or 457
Deferred Compensation Plans.
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
of either service must complete an authorization form. Either service can be
discontinued by the shareholder at any time without penalty by giving written
notice.
Payments to a Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
a Fund may liquidate sufficient shares from a shareholder's account to reimburse
the government or the private source. In the event there are insufficient shares
in the shareholder's account, the shareholder is expected to reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. A Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll allotments, by
mail directly from the third party. Investors should contact their employers or
financial institutions who in turn should contact Income Funds, Inc. for proper
instructions.
-40-
<PAGE>
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the Fund
Classes through regular liquidations of shares in their accounts in other mutual
funds in the Delaware Group. Shareholders of the Fund Classes may elect to
invest in one or more of the other mutual funds in the Delaware Group through
the Wealth Builder Option. See Wealth Builder Option and Redemption and Exchange
in the Prospectuses for the Fund Classes.
Under this automatic exchange program, shareholders can authorize
regular monthly investments (minimum of $100 per fund) to be liquidated from
their account and invested automatically into other mutual funds in the Delaware
Group, subject to the conditions and limitations set forth in the Fund Classes'
Prospectuses. The investment will be made on the 20th day of each month (or, if
the fund selected is not open that day, the next business day) at the public
offering price or net asset value, as applicable, of the fund selected on the
date of investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges. Shareholders can terminate their participation at any time by written
notice to their Fund.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, Profit Sharing and Money Purchase Pension Plans, 401(k)
Defined Contribution Plans, 403(b)(7) Deferred Compensation Plans or 457
Deferred Compensation Plans. This option also is not available to shareholders
of the Institutional Classes.
Retirement Plans for the Fund Classes
An investment in either Fund may be suitable for tax-deferred
retirement plans. Among the retirement plans noted below, Class B Shares are
available for investment only by Individual Retirement Accounts, Simplified
Employee Pension Plans, 457 Deferred Compensation Plans and 403(b)(7) Deferred
Compensation Plans. The CDSC may be waived on certain redemptions of Class B
Shares and Class C Shares. See Waiver of Contingent Deferred Sales Charge -
Class B and Class C Shares under Redemption and Exchange in the Prospectuses for
the Fund Classes for a list of the instances in which the CDSC is waived.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000 for retirement plans. Each purchase of Class C Shares
must be in an amount that is less than $1,000,000 for such plans. The maximum
purchase limitations apply only to the initial purchase of shares by the
retirement plan.
-41-
<PAGE>
Minimum investment limitations generally applicable to other investors
do not apply to retirement plans, other than Individual Retirement Accounts for
which there is a minimum initial purchase of $250, and a minimum subsequent
purchase of $25, regardless of which class is selected. Retirement plans may be
subject to plan establishment fees, annual maintenance fees and/or other
administrative or trustee fees. Fees are based upon the number of participants
in the plan as well as the services selected. Additional information about fees
is included in retirement plan materials. Fees are quoted upon request. Annual
maintenance fees may be shared by Delaware Management Trust Company, the
Transfer Agent, other affiliates of the Manager and others that provide services
to such plans.
Certain shareholder investment services available to non-retirement
plan shareholders may not be available to retirement plan shareholders. Certain
retirement plans may qualify to purchase shares of the Institutional Classes.
See The Institutional Classes, above. For additional information on any of the
plans and Delaware's retirement services, call the Shareholder Service Center
telephone number.
It is advisable for an investor considering any one of the retirement
plans described below to consult with an attorney, accountant or a qualified
retirement plan consultant. For further details, including applications for any
of these plans, contact your investment dealer or the Distributor.
Taxable distributions from the retirement plans described below may be
subject to withholding.
Please contact your investment dealer or the Distributor for the
special application forms required for the plans described below.
Prototype Profit Sharing or Money Purchase Pension Plans
Prototype Plans are available for self-employed individuals,
partnerships and corporations which replace the former Keogh and corporate
retirement plans. These Plans contain profit sharing or money purchase pension
plan provisions. Contributions for plans of this type may be invested only in
Class A and Class C Shares.
Individual Retirement Account ("IRA")
A document is available for an individual who wants to establish an IRA
by making contributions which may be tax-deductible, even if the individual is
already participating in an employer-sponsored retirement plan. Even if
contributions are not deductible for tax purposes, as indicated below, earnings
will be tax-deferred. In addition, an individual may make contributions on
behalf of a spouse who has no compensation for the year or elects to be treated
as having no compensation for the year. Investments in each of the Fund Classes
are permissible.
The Tax Reform Act of 1986 (the "Act") restructured, and in some cases
eliminated, the tax deductibility of IRA contributions. Under the Act, the full
deduction for IRAs ($2,000 for each working spouse and $2,250 for one-income
couples) was retained for all taxpayers who are not covered by an
employer-sponsored retirement plan. Even if a taxpayer (or his or her spouse) is
covered by an employer-sponsored retirement plan, the full deduction is still
available if the taxpayer's adjusted gross income is below $25,000 ($40,000 for
taxpayers filing joint returns). A partial deduction is allowed for married
couples with incomes between $40,000 and $50,000, and for single individuals
with incomes between $25,000 and $35,000. The Act does not permit deductions for
contributions to IRAs by taxpayers whose adjusted gross income before IRA
deductions exceeds $50,000 ($35,000 for singles) and who are active
-42-
<PAGE>
participants in an employer-sponsored retirement plan. Taxpayers who are not
allowed deductions on IRA contributions still can make nondeductible IRA
contributions of as much as $2,000 for each working spouse ($2,250 for
one-income couples), and defer taxes on interest or other earnings from the
IRAs. Special rules apply for determining the deductibility of contributions
made by married individuals filing separate returns.
A company or association may establish a Group IRA for employees or
members who want to purchase shares of a Fund. Purchases of $1 million or more
of Class A Shares qualify for purchase at net asset value but may, under certain
circumstances, be subject to a Limited CDSC. See Purchasing Shares for
information on reduced front-end sales charges applicable to Class A Shares.
Investments generally must be held in the IRA until age 59 1/2 in order
to avoid premature distribution penalties, but distributions generally must
commence no later than April 1 of the calendar year following the year in which
the participant reaches age 70 1/2. Individuals are entitled to revoke the
account, for any reason and without penalty, by mailing written notice of
revocation to Delaware Management Trust Company within seven days after the
receipt of the IRA Disclosure Statement or within seven days after the
establishment of the IRA, except, if the IRA is established more than seven days
after receipt of the IRA Disclosure Statement, the account may not be revoked.
Distributions from the account (except for the pro-rata portion of any
nondeductible contributions) are fully taxable as ordinary income in the year
received. Excess contributions removed after the tax filing deadline, plus
extensions, for the year in which the excess contributions were made are subject
to a 6% excise tax on the amount of excess. Premature distributions
(distributions made before age 59 1/2, except for death, disability and certain
other limited circumstances) will be subject to a 10% excise tax on the amount
prematurely distributed, in addition to the income tax resulting from the
distribution. See Alternative Purchase Arrangements - Class B Shares and Class C
Shares under Classes of Shares, Contingent Deferred Sales Charge-Class B Shares
and Class C Shares under Classes of Shares, and Waiver of Contingent Deferred
Sales Charge - Class B and Class C Shares under Redemption and Exchange in the
Fund Classes' Prospectuses concerning the applicability of a CDSC upon
redemption.
See Appendix A--IRA Information for additional IRA information.
Simplified Employee Pension Plan ("SEP/IRA")
A SEP/IRA may be established by an employer who wishes to sponsor a
tax-sheltered retirement program by making contributions on behalf of all
eligible employees. Each of the Fund Classes is available for investment by a
SEP/IRA.
Salary Reduction Simplified Employee Pension Plan ("SAR/SEP")
Employers with 25 or fewer eligible employees can establish this plan
which permits employer contributions and salary deferral contributions in Class
A Shares and Class C Shares only.
Prototype 401(k) Defined Contribution Plan
Section 401(k) of the Code permits employers to establish qualified
plans based on salary deferral contributions. Plan documents are available to
enable employers to establish a plan. An employer may also elect to make profit
sharing contributions and/or matching contributions with investments in only
Class A Shares and Class C Shares or certain other funds in the Delaware Group.
Purchases under the plan may be combined for purposes of computing the reduced
front-end sales charge applicable to Class A Shares as set forth in the table on
page_________.
-43-
<PAGE>
Deferred Compensation Plan for Public Schools and Non-Profit Organizations
("403(b)(7)")
Section 403(b)(7) of the Code permits public school systems and certain
non-profit organizations to use mutual fund shares held in a custodial account
to fund deferred compensation arrangements for their employees. A custodial
account agreement is available for those employers who wish to purchase any of
the Fund Classes in conjunction with such an arrangement. Applicable front-end
sales charges with respect to Class A Shares for such purchases are set forth in
the table on page _____.
Deferred Compensation Plan for State and Local Government Employees ("457")
Section 457 of the Code permits state and local governments, their
agencies and certain other entities to establish a deferred compensation plan
for their employees who wish to participate. This enables employees to defer a
portion of their salaries and any federal (and possibly state) taxes thereon.
Such plans may invest in shares of any of the Fund Classes. Although investors
may use their own plan, there is available a Delaware Group 457 Deferred
Compensation Plan. Interested investors should contact the Distributor or their
investment dealers to obtain further information. Applicable front-end sales
charges for such purchases of Class A Shares are set forth in the table on
page _____.
-44-
<PAGE>
DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund or its agent. Orders for purchases of Class B
Shares, Class C Shares and the Institutional Classes are effected at the net
asset value per share next calculated after receipt of the order by the Fund in
which shares are being purchased or its agent. Selling dealers have the
responsibility of transmitting orders promptly.
The offering price for Class A Shares consists of the net asset value
per share plus any applicable sales charges. Offering price and net asset value
are computed as of the close of regular trading on the New York Stock Exchange
(ordinarily, 4 p.m., Eastern time) on days when the Exchange is open. The New
York Stock Exchange is scheduled to be open Monday through Friday throughout the
year except for New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. When the New York Stock
Exchange is closed, the Funds will generally be closed, pricing calculations
will not be made and purchase and redemption orders will not be processed.
An example showing how to calculate the net asset value per share and,
in the case of Class A Shares, the offering price per share, is included in
Delchester Fund's financial statements which are incorporated by reference into
this Part B.
Each Fund's net asset value per share is computed by adding the value
of all the securities and other assets in the portfolio, deducting any
liabilities and dividing by the number of shares outstanding. Expenses and fees
are accrued daily. In determining a Fund's total net assets, portfolio
securities listed or traded on a national securities exchange, except for bonds,
are valued at the last sale price on the exchange upon which such securities are
primarily traded. Securities not traded on a particular day, over-the-counter
securities and government and agency securities are valued at the mean value
between bid and asked prices. Money market instruments having a maturity of less
than 60 days are valued at amortized cost. Debt securities (other than
short-term obligations) are valued on the basis of valuations provided by a
pricing service when such prices are believed to reflect the fair value of such
securities. Use of a pricing service has been approved by the Board of
Directors. Prices provided by a pricing service take into account appropriate
factors such as institutional trading in similar groups of securities, yield,
quality, coupon rate, maturity, type of issue, trading characteristics and other
market data. If no quotations are available, all other securities and assets are
valued at fair value as determined in good faith and in a method approved by the
Board of Directors.
Each Class of a Fund will bear, pro-rata, all of the common expenses of
that Fund. The net asset values of all outstanding shares of each Class of a
Fund will be computed on a pro-rata basis for each outstanding share based on
the proportionate participation in that Fund represented by the value of shares
of that Class. All income earned and expenses incurred by a Fund will be borne
on a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in the Fund represented by the value of shares of such Classes,
except that Institutional Classes will not incur any of the expenses under
Income Funds, Inc.'s 12b-1 Plans and the Class A, Class B and Class C Shares
alone will bear the 12b-1 Plan expenses payable under their respective Plans.
Due to the specific distribution expenses and other costs that may be allocable
to each Class of a Fund, the dividends paid to each Class of the Fund may vary.
The net asset value per share of each Class of Delchester Fund is expected to be
equivalent. However, the net asset value of each Class of Strategic Income Fund
is expected to vary.
-45-
<PAGE>
REDEMPTION AND REPURCHASE
Any shareholder may require a Fund to redeem shares by sending a
written request, signed by the record owner or owners exactly as the shares are
registered, to the Fund at 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. Certificates are issued for Class
A Shares and Institutional Class shares only if a shareholder specifically
requests them. Certificates are not issued for Class B Shares or Class C Shares.
If stock certificates have been issued for shares being redeemed, they must
accompany the written request. For redemptions of $50,000 or less paid to the
shareholder at the address of record, the request must be signed by all owners
of the shares or the investment dealer of record, but a signature guarantee is
not required. When the redemption is for more than $50,000, or if payment is
made to someone else or to another address, signatures of all record owners are
required and a signature guarantee may be required. Each signature guarantee
must be supplied by an eligible guarantor institution. Each Fund reserves the
right to reject a signature guarantee supplied by an eligible institution based
on its creditworthiness. The Funds may request further documentation from
corporations, retirement plans, executors, administrators, trustees or
guardians.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Funds, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the respective Fund or
its agent, less any applicable CDSC or Limited CDSC. This is computed and
effective at the time the offering price and net asset value are determined. See
Determining Offering Price and Net Asset Value. The Funds and the Distributor
end their business days at 5 p.m., Eastern time. This offer is discretionary and
may be completely withdrawn without further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to the applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then settled
as an ordinary transaction with the broker/dealer (who may make a charge to the
shareholder for this service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectuses for the Fund Classes. Class B Shares
are subject to a CDSC of: (i) 4% if shares are redeemed within two years of
purchase; (ii) 3% if shares are redeemed during the third or fourth year
following purchase; (iii) 2% if shares are redeemed during the fifth year
following purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. Class C Shares are subject to a CDSC of 1% if shares are
redeemed within 12 months following purchase. See Contingent Deferred Sales
Charge - Class B Shares and Class C Shares under Classes of Shares in the
Prospectuses for the Fund Classes. Except for the applicable CDSC or Limited
CDSC and, with respect to the expedited payment by wire described below for
which there is currently a $7.50 bank wiring cost, neither the Funds nor the
Funds' Distributor charges a fee for redemptions or repurchases, but such fees
could be charged at any time in the future.
-46-
<PAGE>
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order; provided, however, that each commitment to mail or wire
redemption proceeds by a certain time, as described below, is modified by the
qualifications described in the next paragraph.
Each Fund will process written or telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. A Fund will honor redemption requests as to shares for which a check
was tendered as payment, but a Fund will not mail or wire the proceeds until it
is reasonably satisfied that the check has cleared. This potential delay can be
avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for insufficient funds or for any other reason, the
Fund involved will automatically redeem from the shareholder's account the
shares purchased by the check plus any dividends earned thereon. Shareholders
may be responsible for any losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practical,
or it is not reasonably practical for a Fund fairly to value its assets, or in
the event that the SEC has provided for such suspension for the protection of
shareholders, a Fund may postpone payment or suspend the right of redemption or
repurchase. In such case, the shareholder may withdraw the request for
redemption or leave it standing as a request for redemption at the net asset
value next determined after the suspension has been terminated.
Payment for shares redeemed or repurchased may be made either in cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid or
distributed in kind would be valued as described in Determining Offering Price
and Net Asset Value. Subsequent sale by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, Income
Funds, Inc. has elected to be governed by Rule 18f-1 under the Investment
Company Act of 1940 pursuant to which each Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of such
Fund during any 90-day period for any one shareholder.
The value of a Fund's investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Fund may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
Small Accounts
Before a Fund involuntarily redeems shares from an account that, under
the circumstances listed in the relevant Prospectus, has remained below the
minimum amounts required by the Fund's Prospectuses and sends the proceeds to
the shareholder, the shareholder will be notified in writing that the value of
the shares in the account is less than the minimum required and will be allowed
60 days from the date of notice to make an additional investment to meet the
required minimum. See The Conditions of Your Purchase under How to Buy Shares in
the Prospectuses. Any redemption in an inactive account established with a
minimum investment may trigger mandatory redemption. No CDSC or Limited CDSC
will apply to the redemptions described in this paragraph.
-47-
<PAGE>
Effective November 29, 1995, the minimum initial investment in
Delchester Fund A Class was increased from $250 to $1,000. Class A accounts of
Delchester Fund that were established prior to November 29, 1995 and maintain a
balance in excess of $250 will not presently be subject to the $9 quarterly
service fee that may be assessed against accounts with balances below the stated
minimum nor subject to involuntary redemption.
* * *
Each Fund has made available certain redemption privileges, as
described below. The Funds reserve the right to suspend or terminate these
expedited payment procedures upon 60 days' written notice to shareholders.
Expedited Telephone Redemptions
Shareholders of the Fund Classes or their investment dealers of record
wishing to redeem any amount of shares of $50,000 or less for which certificates
have not been issued may call the Shareholder Service Center at 800-523-1918 or,
in the case of shareholders of the Institutional Classes, their Client Services
Representative at 800-828-5052 prior to the time the offering price and net
asset value are determined, as noted above, and have the proceeds mailed to them
at the address of record. Checks payable to the shareholder(s) of record will
normally be mailed the next business day, but no later than seven days, after
the receipt of the redemption request. This option is only available to
individual, joint and individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the relevant Fund before the request is received.
Payment will be made by wire or check to the bank account designated on the
authorization form as follows:
1. Payment by Wire: Request that Federal Funds be wired to the bank
account designated on the authorization form. Redemption proceeds will normally
be wired on the next business day following receipt of the redemption request.
There is a $7.50 wiring fee (subject to change) charged by CoreStates Bank, N.A.
which will be deducted from the withdrawal proceeds each time the shareholder
requests a redemption. If the proceeds are wired to the shareholder's account at
a bank which is not a member of the Federal Reserve System, there could be a
delay in the crediting of the funds to the shareholder's bank account.
2. Payment by Check: Request a check be mailed to the bank account
designated on the authorization form. Redemption proceeds will normally be
mailed the next business day, but no later than seven days, from the date of the
telephone request. This procedure will take longer than the Payment by Wire
option (1 above) because of the extra time necessary for the mailing and
clearing of the check after the bank receives it.
Redemption Requirements: In order to change the name of the bank and
the account number it will be necessary to send a written request to the
relevant Fund and a signature guarantee may be required. Each signature
guarantee must be supplied by an eligible guarantor institution. The Funds
reserve the right to reject a signature guarantee supplied by an eligible
institution based on its creditworthiness.
-48-
<PAGE>
To reduce the shareholder's risk of attempted fraudulent use of the
telephone redemption procedure, payment will be made only to the bank account
designated on the authorization form.
If expedited payment under these procedures could adversely affect a
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Funds nor the Funds' Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, each Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, such Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders of the Fund Classes are generally tape recorded. A written
confirmation will be provided for all purchase, exchange and redemption
transactions initiated by telephone.
Systematic Withdrawal Plan
Shareholders of Class A, Class B and Class C Shares who own or purchase
$5,000 or more of shares at the offering price, or net asset value, as
applicable, for which certificates have not been issued may establish a
Systematic Withdrawal Plan for monthly withdrawals of $25 or more, or quarterly
withdrawals of $75 or more, although the Funds do not recommend any specific
amount of withdrawal. This $5,000 minimum does not apply for a Fund's prototype
retirement plans. Shares purchased with the initial investment and through
reinvestment of cash dividends and realized securities profits distributions
will be credited to the shareholder's account and sufficient full and fractional
shares will be redeemed at the net asset value calculated on the third business
day preceding the mailing date.
Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the class at net asset value. This plan is not recommended
for all investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital and the share balance
may, in time, be depleted, particularly in a declining market.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated. Premature withdrawals from
Retirement Plans may have adverse tax consequences.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is a participant in one of our
retirement plans or is investing in Delaware Group funds which do not carry a
sales charge. Redemptions of Class A Shares pursuant to a Systematic Withdrawal
Plan may be subject to a Limited CDSC if the purchase was made at net asset
value and a dealer's commission has been paid on that purchase. Redemptions of
Class B Shares or Class C Shares pursuant to a Systematic Withdrawal Plan may be
subject to a CDSC, unless the annual amount selected to be withdrawn is less
than 12% of the account balance on the date that the Systematic Withdrawal Plan
was established. See Waiver of Contingent Deferred Sales Charge - Class B and
Class C Shares and Waiver of Limited Contingent Deferred Sales Charge - Class A
Shares under Redemption and Exchange in
-49-
<PAGE>
the Prospectuses for the Fund Classes. Shareholders should consult their
financial advisers to determine whether a Systematic Withdrawal Plan would be
suitable for them.
An investor wishing to start a Systematic Withdrawal Plan must complete
an authorization form. If the recipient of Systematic Withdrawal Plan payments
is other than the registered shareholder, the shareholder's signature on this
authorization must be guaranteed. Each signature guarantee must be supplied by
an eligible guarantor institution. The Funds reserve the right to reject a
signature guarantee supplied by an eligible institution based on its
creditworthiness. This plan may be terminated by the shareholder or the Transfer
Agent at any time by giving written notice.
The Systematic Withdrawal Plan is not available for the Institutional
Classes.
-50-
<PAGE>
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Delchester Fund declares a dividend to shareholders of each Class of
the Fund's shares from net investment income on a daily basis. Dividends are
declared each day the Fund is open and paid monthly. Net investment income
earned on days when Delchester Fund is not open will be declared as a dividend
on the next business day. Purchases of shares of Delchester Fund by wire begin
earning dividends when converted into Federal Funds and are available for
investment, normally the next business day after receipt. However, if Delchester
Fund is given prior notice of Federal Funds wire and an acceptable written
guarantee of timely receipt from an investor satisfying the Fund's credit
policies, the purchase will start earning dividends on the date the wire is
received. Investors desiring to guarantee wire payments must have an acceptable
financial condition and credit history in the sole discretion of Delchester
Fund. Income Funds, Inc. reserves the right to terminate this option at any
time. Purchases by check earn dividends upon conversion to Federal Funds,
normally one business day after receipt. Strategic Income Fund expects to
declare and pay dividends to shareholders of each Class of the Fund's shares
from net investment income monthly. However, the Fund does not anticipate
declaring or paying dividends during the first few months following the
commencement of its operations. Payment by check of cash dividends will
ordinarily be mailed within three business days after the payable date.
Each Class of shares of a Fund will share proportionately in the
investment income and expenses of that Fund, except that Class A Shares, Class B
Shares and Class C Shares alone will incur distribution fees under their
respective 12b-1 Plans.
Dividends are automatically reinvested in additional shares of the same
Class of the respective Fund at net asset value, unless, in the case of
shareholders of the Fund Classes, an election to receive dividends in cash has
been made. Dividend payments of $1.00 or less will be automatically reinvested,
notwithstanding a shareholder's election to receive dividends in cash. If such a
shareholder's dividends increase to greater than $1.00, the shareholder would
have to file a new election in order to begin receiving dividends in cash again.
If a shareholder redeems an entire account, all dividends accrued to the time of
the withdrawal will be paid by separate check at the end of that particular
monthly dividend period, consistent with the payment and mailing schedule
described above. Any check in payment of dividends or other distributions which
cannot be delivered by the United States Post Office or which remains uncashed
for a period of more than one year may be reinvested in the shareholder's
account at the then-current net asset value and the dividend option may be
changed from cash to reinvest. A Fund may deduct from a shareholder's account
the costs of the Fund's effort to locate a shareholder if a shareholder's mail
is returned by the United States Post Office or the Fund is otherwise unable to
locate the shareholder or verify the shareholder's mailing address. These costs
may include a percentage of the account when a search company charges a
percentage fee in exchange for their location services.
Any distributions from net realized securities profits will be made
twice a year. The first payment would be made during the first quarter of the
next fiscal year. The second payment would be made near the end of the calendar
year to comply with certain requirements of the Code. Such distributions will be
reinvested in shares, unless the shareholders of the Fund Classes elect to
receive them in cash. The Funds will mail a quarterly statement showing the
dividends paid and all the transactions made during the period.
-51-
<PAGE>
TAXES
It is each Fund's policy to pay out substantially all net investment
income and net realized gains to relieve each Fund of federal income tax
liability on that portion of its income paid to shareholders under Subchapter M
of the Code. Delchester Fund has met these requirements in previous years, and
Delchester Fund and Strategic Income Fund intend to meet the requirements this
year. The Funds also intend to meet the calendar year distribution requirements
imposed by the Code to avoid the imposition of a 4% excise tax.
The Funds have no fixed policy with regard to distributions of realized
securities profits when such realized securities profits may be offset by
capital losses carried forward. Presently, however, the Funds intend to offset
realized securities profits to the extent of the capital losses carried forward.
Delchester Fund had an accumulated capital loss carryforward of approximately
$238,687,000 at July 31, 1996 which for federal income tax purposes may be
carried forward and applied against future capital gains. The capital loss
carryforward expires as follows: 1998--$58,204,000, 1999--$89,261,000,
2002--$3,628,000 and 2003--$87,594,000.
Distributions of net investment income and short-term realized
securities profits are taxable as ordinary income to shareholders. Since the
major portion of Delchester Fund's investment income is derived from interest
rather than dividends, no portion of such distributions will be eligible for the
dividends-received deduction available to corporations. It is expected that
either none or a nominal portion of Strategic Income Fund's dividends will be
eligible for the dividends-received deduction. Distributions of long-term
capital gains, if any, are taxable as long-term capital gains, for federal
income tax purposes, regardless of the length of time an investor has held such
shares, and these gains are currently taxed at long-term capital gain rates. The
tax status of dividends and distributions paid to shareholders will not be
affected by whether they are paid in cash or in additional shares. Long-term
capital gains distributions are not eligible for the dividends-received
exclusion. Advice as to the tax status of each year's dividends and
distributions, when paid, will be mailed annually. Shares of the Funds are
exempt from Pennsylvania county personal property taxes.
Net long-term gain from the sale of securities when realized and
distributed (actually or constructively) is taxable as capital gain. If the net
asset value of shares were reduced below a shareholder's cost by distribution of
gain realized on sale of securities, such distribution would be a return of
investment though taxable as stated above. Delchester Fund's portfolio
securities had an unrealized net appreciation for tax purposes of $10,241,699 as
of July 31, 1996.
-52-
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
The Manager, located at One Commerce Square, Philadelphia, PA 19103,
furnishes investment management services to the Funds, subject to the
supervision and direction of Income Funds, Inc.'s Board of Directors.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On July 31, 1996, the Manager and its affiliates in
the Delaware Group, including the Sub-Adviser, were supervising in the aggregate
more than $28 billion in assets in various institutional or separately managed
(approximately $17,646,238,000) and investment company (approximately
$10,764,119,000) accounts.
The Investment Management Agreement for Delchester Fund is dated April
3, 1995 and was approved by shareholders on March 29, 1995. The Investment
Management Agreement for Strategic Income Fund is dated September 30, 1996 and
was approved by the initial shareholder on September 30, 1996. Each Agreement
has an initial term of two years and may be renewed each year only so long as
such renewal and continuance are specifically approved at least annually by the
Board of Directors or by vote of a majority of the outstanding voting securities
of the Fund to which the Agreement relates, and only if the terms and the
renewal thereof have been approved by the vote of a majority of the directors of
Income Funds, Inc. who are not parties thereto or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. Each Agreement is terminable without penalty on 60 days' notice by the
directors of Income Funds, Inc. or by the Manager. Each Agreement will terminate
automatically in the event of its assignment.
The annual compensation paid by Delchester Fund for investment
management services is equal to .60% on the first $500 million of the Fund's
average daily net assets, .575% of the next $250 million and .55% of the average
daily net assets in excess of $750 million, less Delchester Fund's proportionate
share of all directors' fees paid to the unaffiliated directors of Income Funds,
Inc. On July 31, 1996, the total net assets of Delchester Fund were
$1,214,671,209. The Manager makes all investment decisions which are implemented
by Delchester Fund. The Manager pays the salaries of all directors, officers and
employees who are affiliated with both the Manager and Income Funds, Inc.
Investment management fees paid by Delchester Fund during the past three fiscal
years were $6,090,393 for 1994, $6,469,140 for 1995 and $6,921,586 for 1996.
The annual compensation paid by Strategic Income Fund for investment
management services is equal to .65% on the first $500 million of the Fund's
average daily net assets, .625% of the next $500 million and .60% of the average
daily net assets in excess of $1 billion. The Manager pays the salaries of all
directors, officers and employees who are affiliated with both the Manager and
Income Funds, Inc.
Subject to the overall supervision of the Manager, the Sub-Adviser
manages the international sector of Strategic Income Fund's portfolio and
furnishes the Manager with investment recommendations, asset allocation advice,
research and other investment services with respect to foreign securities. For
the services provided to the Manager, the Manager pays the Sub-Adviser a fee
equal to one-third of the investment management fees paid to the Manager under
the terms of the Investment Management Agreement.
-53-
<PAGE>
The Manager has elected voluntarily to waive that portion, if any, of
the annual management fees payable by Strategic Income Fund and to pay certain
expenses of the Fund to the extent necessary to ensure that the total operating
expenses of each Class do not exceed .75% (exclusive of taxes, interest,
brokerage commissions, extraordinary expenses and 12b-1 expenses) during the
commencement of the public offering of the Fund through July 30, 1997.
Except for those expenses borne by the Manager under the Investment
Management Agreements and the Distributor under the Distribution Agreements, the
Funds are responsible for all of their own expenses. Among others, these include
a Fund's proportionate share of rent and certain other administrative expenses;
the investment management fees; transfer and dividend disbursing agent fees and
costs; custodian expenses; federal and state securities registration fees; proxy
costs; and the costs of preparing prospectuses and reports sent to shareholders.
The ratios of expenses to average daily net assets for the Class A Shares, the
Class B Shares and the Institutional Class of Delchester Fund for the fiscal
year ended July 31, 1996 were 1.02%, 1.77% and .77%, respectively. The ratios
for the Class A Shares and the Class B Shares reflect the impact of their
respective 12b-1 Plans. Delchester Fund anticipates that the ratio of expenses
to average daily net assets of Class C Shares will be approximately equal to
that of the Class B Shares.
By California regulation, the Manager is required to waive certain fees
and reimburse a Fund for certain expenses to the extent that such Fund's annual
operating expenses, exclusive of taxes, interest, brokerage commissions and
extraordinary expenses, exceed 2 1/2% of its first $30 million of average daily
net assets, 2% of the next $70 million of average daily net assets and 1/2% of
any additional average daily net assets. For the fiscal year ended July 31,
1996, no such reimbursement was necessary or paid for Delchester Fund.
Distribution and Service
The Distributor, Delaware Distributors, L.P. (which formerly conducted
business as Delaware Distributors, Inc.), located at 1818 Market Street,
Philadelphia, PA 19103, serves as the national distributor of each Fund's shares
under a Distribution Agreement dated as of April 3, 1995, as amended on November
29, 1995 for Delchester Fund and under a separate Distribution Agreement dated
as of September 30, 1996 for Strategic Income Fund. The Distributor is an
affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by each Fund on behalf of its Class A Shares,
Class B Shares and Class C Shares under the 12b-1 Plan for each such class.
Prior to January 3, 1995, Delaware Distributors, Inc. ("DDI") served as the
national distributor of Delchester Fund's shares. On that date, Delaware
Distributors, L.P., a newly formed limited partnership, succeeded to the
business of DDI. All officers and employees of DDI became officers and employees
of Delaware Distributors, L.P. DDI is the corporate general partner of Delaware
Distributors, L.P. and both DDI and Delaware Distributors, L.P. are indirect,
wholly owned subsidiaries of Delaware Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
the Funds' shareholder servicing, dividend disbursing and transfer agent
pursuant to an Amended and Restated Shareholders Services Agreement dated as of
September 30, 1996. The Transfer Agent also provides accounting services to the
Funds pursuant to the terms of a separate Fund Accounting Agreement. The
Transfer Agent is also an indirect, wholly owned subsidiary of Delaware
Management Holdings, Inc.
-54-
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of Income Funds, Inc. are managed under the
direction of its Board of Directors. Certain officers and directors of Income
Funds, Inc. hold identical positions in each of the other funds in the Delaware
Group. On August 31, 1996, Income Funds, Inc.'s officers and directors owned
less than 1% of the outstanding shares of the Class A Shares, Class B Shares and
Class C Shares of Delchester Fund and approximately 3.39% of the outstanding
shares of the Institutional Class shares of Delchester Fund. Shares of
Strategic Income Fund were not offered for investment prior to the date of
this Part B.
As of August 31, 1996, management believes the following accounts held
5% or more of the outstanding shares of a Class of shares of Delchester Fund:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
<S> <C> <C> <C>
Delchester Fund
B Class Merrill Lynch, Pierce,
Fenner & Smith Mutual
Fund Operations
Attention Book Entry 4800 Deer Lake
Dr East 3rd Fl.
Jacksonville, FL 32246 2,280,208(1) 7.62%
Delchester Fund
C Class Donaldson Lufkin Jenrette
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303 83,334(1) 8.61%
Merrill Lynch, Pierce, Fenner
& Smith Mutual Fund Operations
Attention Book Entry
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville, FL 32246 80,386(1) 8.31%
Donaldson Lufkin Jenrette
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303 50,237(1) 5.19%
Joel L. Vittori
Trust AAA South Jersey
Pension Plan
201 Kings Highway South
Cherry Hill, NJ 08034 49,135 5.08%
</TABLE>
(1) Income Funds, Inc. believes that these shares are held by the record owner
for the benefit of others.
-55-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class Name and Address of Account Share Amount Percentage
Delchester Fund
Institutional Class Nationwide Life Insurance Co.
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218 2,096,389 21.60%
Bear Stearns
FBO Raymond G. Perelman
Charitable Remainder Unitrust
One Metrotech Center North
Brooklyn, NY 11201 1,955,732 20.15%
Charles Schwab & Co. Inc.
Attention Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104 1,572,915 16.21%
Delaware Management Company
Employee Profit Sharing Trust
1818 Market Street
Philadelphia, PA 19103 1,067,349(2) 11.00%
Ogden Financial Services Inc.
Attention George Warren
3411 Silverside Road
103 Springer Building
Wilmington, DE 19810 632,864 6.52%
General Refractories Co.
Pension Salaried Plan
c/o Bankers Trust
P.O. Box 1742
Church Street Station
New York, NY 10008 524,563 5.40%
</TABLE>
(2) Shares held of record by Delaware Management Company Employee Profit
Sharing Trust are held for the benefit of others.
DMH Corp., Delaware Management Company, Inc., Delaware Distributors,
L.P., Delaware Distributors, Inc., Delaware Service Company, Inc., Delaware
Management Trust Company, Delaware International Holdings Ltd., Founders
Holdings, Inc., Delaware International Advisers Ltd., Delaware Capital
Management, Inc. and Delaware Investment & Retirement Services, Inc. are direct
or indirect, wholly owned subsidiaries of Delaware Management Holdings, Inc.
("DMH"). On April 3, 1995, a merger between DMH and a wholly owned subsidiary of
Lincoln National Corporation ("Lincoln National") was completed. In connection
with the merger, a new Investment Management Agreement between Delchester Fund
and the Manager was executed following shareholder approval. DMH and the Manager
are now indirect, wholly owned subsidiaries, and subject to the ultimate
control, of Lincoln
-56-
<PAGE>
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.
Directors and principal officers of Income Funds, Inc. are noted below
along with their ages and their business experience for the past five years.
Unless otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
*Wayne A. Stork (59)
Chairman,President, Chief Executive Officer, Director and/or Trustee
of Income Funds, Inc., 16 other investment companies in the
Delaware Group (which excludes Delaware Pooled Trust, Inc.),
Delaware Management Holdings, Inc., DMH Corp., Delaware
International Holdings Ltd. and Founders Holdings, Inc.
Chairman and Director of Delaware Pooled Trust, Inc., Delaware
Distributors, Inc., Delaware Capital Management, Inc. and
Delaware Investment & Retirement Services, Inc.
Chairman,President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
Winthrop S. Jessup (51)
Executive Vice President of Income Funds, Inc., 16 other investment
companies in the Delaware Group (which excludes Delaware
Pooled Trust, Inc.) and Delaware Management Holdings, Inc.
President and Chief Executive Officer of Delaware Pooled Trust, Inc.
President and Director of Delaware Capital Management, Inc.
Executive Vice President and Director of DMH Corp., Delaware
Management Company, Inc., Delaware International Holdings
Ltd. and Founders Holdings, Inc.
Vice Chairman and Director of Delaware Distributors, Inc.
Vice Chairman of Delaware Distributors, L.P.
Director of Delaware Service Company, Inc., Delaware International
Advisers Ltd., Delaware Management Trust Company and Delaware
Investment & Retirement Services, Inc. During the past five
years, Mr. Jessup has served in various executive capacities
at different times within the Delaware organization.
- --------
*Director affiliated with the Income Funds, Inc.'s investment manager and
considered an "interested person" as defined in the 1940 Act.
-57-
<PAGE>
(SAI-SIF/PART B)
Richard G. Unruh, Jr. (56)
Executive Vice President of Income Funds, Inc. and each of the other
17 investment companies in the Delaware Group.
Executive Vice President and Director of Delaware Management
Company, Inc.
Senior Vice President of Delaware Management Holdings, Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
Paul E. Suckow (49)
ExecutiveVice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc., each of the other 17 investment companies
in the Delaware Group and Delaware Management Company, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Senior Vice President/Chief Investment Officer, Fixed Income of
Delaware Management Holdings, Inc.
Director of Founders CBO Corporation.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
Walter P. Babich (68)
Director and/or Trustee of Income Funds, Inc. and each of the other
17 investment companies in the Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (57)
Director and/or Trustee of Income Funds, Inc. and each of the other
17 investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance and
Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University.
In addition, Mr. Knerr was Chairman of The Publishing Group,
Inc., New York, from 1988 to 1990. Mr. Knerr founded The
Publishing Group, Inc. in 1988.
-58-
<PAGE>
Ann R. Leven (55)
Director and/or Trustee of Income Funds, Inc. and each of the other
17 investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (75)
Director and/or Trustee of Income Funds, Inc. and each of the other
17 investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Charles E. Peck (70)
Director and/or Trustee of Income Funds, Inc. and each of the other
17 investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive
Officer of The Ryland Group, Inc., Columbia, MD.
David K. Downes (56)
Senior Vice President/Chief Administrative Officer/Chief Financial
Officer of Income Funds, Inc., each of the other 17 investment
companies in the Delaware Group and Delaware Management
Company, Inc.
Chairman and Director of Delaware Management Trust Company.
Chief Executive Officer and Director of Delaware Investment &
Retirement Services, Inc.
Executive Vice President/Chief Operating Officer/Chief Administrative
Officer/Chief Financial Officer/Treasurer of Delaware
Management Holdings, Inc.
Senior Vice President/Chief Financial Officer/Treasurer and Director
of DMH Corp.
Senior Vice President/Chief Administrative Officer and Director of
Delaware Distributors, Inc.
Senior Vice President/Chief Administrative Officer of Delaware
Distributors, L.P.
Senior Vice President/Chief Administrative Officer/Chief Financial
Officer and Director of Delaware Service Company, Inc.
Chief Financial Officer and Director of Delaware International
Holdings Ltd.
Senior Vice President/Chief Financial Officer/Treasurer of Delaware
Capital Management, Inc.
Senior Vice President/Chief Financial Officer and Director of Founders
Holdings, Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer
of Equitable Capital Management Corporation, New York, from
December 1985 through August 1992, Executive Vice President
from December 1985 through March 1992 and Vice Chairman from
March 1992 through August 1992.
-59-
<PAGE>
George M. Chamberlain, Jr. (49)
Senior Vice President and Secretary of Income Funds, Inc., each of
the other 17 investment companies in the Delaware Group,
Delaware Management Holdings, Inc. and Delaware Distributors,
L.P.
Executive Vice President, Secretary and Director of Delaware
Management Trust Company.
Senior Vice President, Secretary and Director of DMH Corp., Delaware
Management Company, Inc., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Investment &
Retirement Services, Inc., Founders Holdings, Inc. and
Delaware Capital Management, Inc.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
Paul A. Matlack (36)
Vice President/Senior Portfolio Manager of Income Funds, Inc., of
11 other investment companies in the Delaware Group and of
Delaware Management Company, Inc.
President and Director of Founders CBO Corporation.
Vice President of Founders Holdings, Inc.
During the past five years, Mr. Matlack has served in various
capacities at different times within the Delaware
organization.
Gerald T. Nichols (38)
Vice President/Senior Portfolio Manager of Income Funds, Inc., of
11 other investment companies in the Delaware Group and of
Delaware Management Company, Inc.
Vice President of Founders Holdings, Inc.
Assistant Secretary, Treasurer and Director of Founders CBO
Corporation.
During the past five years, Mr. Nichols has served in various
capacities at different times within the Delaware
organization.
Babak Zenouzi (33)
Vice President/Portfolio Manager of Income Funds, Inc. and 10 other
investment companies in the Delaware Group.
Vice President/Assistant Portfolio Manager of Delaware Investment
Advisers.
Before joining the Delaware Group in 1992, he was with The Boston
Company where he held the positions of assistant vice
president, senior financial analyst, financial analyst and
portfolio accountant.
-60-
<PAGE>
Paul Grillo (37)
Assistant Vice President/Portfolio Manager of Income Funds, Inc.
and of 11 other investment companies in the Delaware Group.
Before joining the Delaware Group in 1992, Mr. Grillo was a Mortgage
Strategist and Trader at the Dreyfus Corporation.
Joseph H. Hastings (46)
Vice President/Corporate Controller of Income Funds, Inc., each of
the other 17 investment companies in the Delaware Group,
Delaware Management Holdings, Inc., DMH Corp., Delaware
Management Company, Inc., Delaware Distributors, L.P.,
Delaware Distributors, Inc., Delaware Service Company, Inc.,
Delaware Capital Management, Inc., Founders Holdings, Inc. and
Delaware International Holdings Ltd.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
Before joining the Delaware Group in 1992, Mr. Hastings was Chief
Financial Officer for Prudential Residential Services, L.P.,
New York, NY from 1989 to 1992. Prior to that, Mr. Hastings
served as Controller and Treasurer for Fine Homes
International, L.P., Stamford, CT from 1987 to 1989.
Michael P. Bishof (34)
Vice President/Treasurer of Income Funds, Inc., each of the other
17 investment companies in the Delaware Group, Delaware
Management Company, Inc., Delaware Distributors, Inc.,
Delaware Distributors, L.P., Delaware Service Company, Inc.
and Founders Holdings, Inc.
Vice President/Manager of Investment Accounting of Delaware
International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995,
a Vice President for CS First Boston Investment Management,
New York, NY from 1993 to 1994 and an Assistant Vice
President for Equitable Capital
Management Corporation, New York, NY from 1987 to 1993.
-61-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation received from
Income Funds, Inc. and the total compensation received from all Delaware Group
funds for the fiscal year ended July 31, 1996 and an estimate of annual benefits
to be received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of July 31, 1996.
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits
Accrued Estimated Total
Aggregate as Part Annual Compensation
Compensation of Income Benefits from all 18
from Income Funds, Inc. Upon Delaware
Name Funds, Inc. Expenses Retirement* Group Funds
<S> <C> <C> <C> <C>
W. Thacher Longstreth $3,436 None $30,000 $47,993
Ann R. Leven $3,992 None $30,000 $56,129
Walter P. Babich $3,743 None $30,000 $51,993
Anthony D. Knerr $3,914 None $30,000 $55,129
Charles E. Peck $3,605 None $30,000 $51,129
</TABLE>
* Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director who, at the time of his or
her retirement from the Board, has attained the age of 70 and served on the
Board for at least five continuous years, is entitled to receive payments
from each fund in the Delaware Group for a period equal to the lesser of the
number of years that such person served as a director or the remainder of
such person's life. The amount of such payments will be equal, on an annual
basis, to the amount of the annual retainer that is paid to directors of
each fund at the time of such person's retirement. If an eligible director
retired as of July 31, 1996, he or she would be entitled to annual payments
totaling $30,000, in the aggregate, from all of the funds in the Delaware
Group, based on the number of funds in the Delaware Group as of that date.
-62-
<PAGE>
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of the Classes and
for shareholders of classes of other funds in the Delaware Group are set forth
in the relevant prospectuses for such classes. The following supplements that
information. The Funds may modify, terminate or suspend the exchange privilege
upon 60 days' notice to shareholders.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and carefully
read that fund's prospectus before buying shares in an exchange. The prospectus
contains more complete information about the fund, including charges and
expenses. A shareholder requesting an exchange will be sent a current prospectus
and an authorization form for any of the other mutual funds in the Delaware
Group. Exchange instructions must be signed by the record owner(s) exactly as
the shares are registered.
An exchange constitutes, for tax purposes, the sale of one fund and the
purchase of another. The sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes.
In addition, investment advisers and dealers may make exchanges between
funds in the Delaware Group on behalf of their clients by telephone or other
expedited means. This service may be discontinued or revised at any time by the
Transfer Agent. Such exchange requests may be rejected if it is determined that
a particular request or the total requests at any time could have an adverse
effect on any of the funds. Requests for expedited exchanges may be submitted
with a properly completed exchange authorization form, as described above.
Telephone Exchange Privilege
Shareholders owning shares for which certificates have not been issued
or their investment dealers of record may exchange shares by telephone for
shares in other mutual funds in the Delaware Group. This service is
automatically provided unless the relevant Fund receives written notice from the
shareholder to the contrary.
Shareholders or their investment dealers of record may contact the
Shareholder Service Center at 800-523-1918 or, in the case of shareholders of
the Institutional Classes, their Client Services Representative at 800-828-5052,
to effect an exchange. The shareholder's current Fund account number must be
identified, as well as the registration of the account, the share or dollar
amount to be exchanged and the fund into which the exchange is to be made.
Requests received on any day after the time the offering price and net asset
value are determined will be processed the following day. See Determining
Offering Price and Net Asset Value. Any new account established through the
exchange will automatically carry the same registration, shareholder information
and dividend option as the account from which the shares were exchanged. The
exchange requirements of the fund into which the exchange is being made, such as
sales charges, eligibility and investment minimums, must be met. (See the
prospectus of the fund desired or inquire by calling the Transfer Agent or, as
relevant, your Client Services Representative.) Certain funds are not available
for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Group. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and the Funds reserve the right
to record exchange instructions received by telephone and to reject exchange
requests at any time in the future.
-63-
<PAGE>
As described in the Funds' Prospectuses, neither the Funds nor the
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.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), each Fund will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Group funds from Timing Firms. Each Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific purchase
order for any person whose transactions seem to follow a timing pattern who: (i)
makes an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund's net assets. Accounts
under common ownership or control, including accounts administered so as to
redeem or purchase shares based upon certain predetermined market indicators,
will be aggregated for purposes of the exchange limits.
Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Group funds: (1) Decatur
Income Fund, (2) Decatur Total Return Fund, (3) Delaware Fund, (4) Limited-Term
Government Fund, (5) Tax-Free USA Fund, (6) Delaware Cash Reserve, (7)
Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other Delaware Group
funds are available for timed exchanges. Assets redeemed or exchanged out of
Timing Accounts in Delaware Group funds not listed above may not be reinvested
back into that Timing Account. Each Fund reserves the right to apply these same
restrictions to the account(s) of any person whose transactions seem to follow a
timing pattern (as described above).
Each Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if a
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
* * *
Following is a summary of the investment objectives of the other
Delaware Group funds:
Delaware Fund seeks long-term growth by a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. Devon Fund
seeks current income and capital appreciation by investing primarily in
income-producing common stocks, with a focus on common stocks the Manager
believes have the potential for above average dividend increases over time.
-64-
<PAGE>
Trend Fund seeks long-term growth by investing in common stock issued
by emerging growth companies exhibiting strong capital appreciation potential.
Value Fund seeks capital appreciation by investing primarily in common
stocks whose market values appear low relative to their underlying value or
future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return Fund
seeks long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to principal.
U.S. Government Fund seeks high current income by investing primarily
in long-term debt obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities.
Limited-Term Government Fund seeks high, stable income by investing
primarily in a portfolio of short- and intermediate-term securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
instrumentalities secured by such securities. U.S. Government Money Fund seeks
maximum current income with preservation of principal and maintenance of
liquidity by investing only in short-term securities issued or guaranteed as to
principal and interest by the U.S. government, its agencies or
instrumentalities, and repurchase agreements collateralized by such securities,
while maintaining a stable net asset value.
Delaware Cash Reserve seeks the highest level of income consistent with
the preservation of capital and liquidity through investments in short-term
money market instruments, while maintaining a stable net asset value.
Tax-Free USA Fund seeks high current income exempt from federal income
tax by investing in municipal bonds of geographically-diverse issuers. Tax-Free
Insured Fund invests in these same types of securities but with an emphasis on
municipal bonds protected by insurance guaranteeing principal and interest are
paid when due. Tax-Free USA Intermediate Fund seeks a high level of current
interest income exempt from federal income tax, consistent with the preservation
of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while maintaining
a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital.
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital
-65-
<PAGE>
appreciation. Global Assets Fund seeks to achieve long-term total return by
investing in global securities which will provide higher current income than a
portfolio comprised exclusively of equity securities, along with the potential
for capital growth. Emerging Markets Fund seeks long-term capital appreciation
by investing primarily in equity securities of issuers located or operating in
emerging countries.
Enterprise Fund seeks to provide maximum appreciation of capital by
investing in medium-sized companies which have a dominant position within their
industry, are undervalued, or have potential for growth in earnings. U.S. Growth
Fund seeks to maximize capital appreciation by investing in companies of all
sizes which have low dividend yields, strong balance sheets and high expected
earnings growth rates relative to their industry. World Growth Fund seeks to
maximize total return (capital appreciation and income), principally through
investments in an internationally diversified portfolio of equity securities.
New Pacific Fund seeks long-term capital appreciation by investing primarily in
companies which are domiciled in or have their principal business activities in
the Pacific Basin. Federal Bond Fund seeks to maximize current income consistent
with preservation of capital. The fund attempts to achieve this objective by
investing primarily in securities issued by the U.S. government, its agencies
and instrumentalities. Corporate Income Fund seeks to provide high current
income consistent with preservation of capital. The fund attempts to achieve
this objective primarily by investing in a diversified portfolio of investment
grade fixed-income securities issued by U.S. corporations.
Delaware Group Premium Fund offers ten funds available exclusively as
funding vehicles for certain insurance company separate accounts. Equity/Income
Series seeks the highest possible total rate of return by selecting issues that
exhibit the potential for capital appreciation while providing higher than
average dividend income. High Yield Series seeks as high a current income as
possible by investing in rated and unrated corporate bonds, U.S. government
securities and commercial paper. Capital Reserves Series seeks a high stable
level of current income while minimizing fluctuations in principal by investing
in a diversified portfolio of short- and intermediate-term securities. Money
Market Series seeks the highest level of income consistent with preservation of
capital and liquidity through investments in short-term money market
instruments. Growth Series seeks long-term capital appreciation by investing its
assets in a diversified portfolio of securities exhibiting the potential for
significant growth. Multiple Strategy Series seeks a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. International
Equity Series seeks long-term growth without undue risk to principal by
investing primarily in equity securities of foreign issuers that provide the
potential for capital appreciation and income. Value Series seeks capital
appreciation by investing in small- to mid-cap common stocks whose market values
appear low relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that may be
temporarily out of favor or whose value is not yet recognized by the market.
Emerging Growth Series seeks long-term capital appreciation by investing
primarily in small-cap common stocks and convertible securities of emerging and
other growth-oriented companies. These securities will have been judged to be
responsive to changes in the marketplace and to have fundamental characteristics
to support growth. Income is not an objective. Global Bond Series seeks to
achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation.
-66-
<PAGE>
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
-67-
<PAGE>
GENERAL INFORMATION
The Manager is the investment manager of the Funds. The Manager and the
Sub-Adviser also provide investment management services to certain of the other
funds in the Delaware Group. The Manager, through a separate division, also
manages private investment accounts. While investment decisions of the Funds are
made independently from those of the other funds and accounts, investment
decisions for such other funds and accounts may be made at the same time as
investment decisions for the Funds.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, the Sub-Adviser or their affiliates, are permitted to
engage in personal securities transactions subject to the exceptions set forth
in Rule 17j-1 and the following general restrictions and procedures: (1) certain
blackout periods apply to personal securities transactions of those persons; (2)
transactions must receive advance clearance and must be completed on the same
day as the clearance is received; (3) certain persons are prohibited from
investing in initial public offerings of securities and other restrictions apply
to investments in private placements of securities; (4) opening positions may
only be closed-out at a profit after a 60-day holding period has elapsed; and
(5) the Compliance Officer must be informed periodically of all securities
transactions and duplicate copies of brokerage confirmations and account
statements must be supplied to the Compliance Officer.
The Distributor acts as national distributor for Income Funds, Inc. and
for the other mutual funds in the Delaware Group. As previously described, prior
to January 3, 1995, DDI served as the national distributor for Delchester Fund.
The Distributor and, in its capacity as such, DDI received net commissions from
Delchester Fund on behalf of Class A Shares, after reallowances to dealers, as
follows:
<TABLE>
<CAPTION>
Total
Amount of Amounts Net
Underwriting Reallowed Commission
Fiscal Year Ended Commission to Dealers to Distributor
----------------- ------------ ---------- --------------
<S> <C> <C> <C>
July 31, 1996 $3,186,228 $2,659,208 $ 527,020
July 31, 1995 5,089,170 4,248,856 840,314
July 31, 1994 8,625,370 7,218,669 1,406,701
</TABLE>
The Distributor and, in its capacity as such, DDI received in the
aggregate Limited CDSC payments with respect to the Delchester Fund A Class as
follows:
Fiscal Year Ended Limited CDSC Payments
----------------- ---------------------
July 31, 1996 $2,090
July 31, 1995 966
July 31, 1994 6,497
-68-
<PAGE>
The Distributor and, in its capacity as such, DDI received in the
aggregate CDSC payments with respect to the Class B Shares of the Delchester
Fund as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1996 $407,317
July 31, 1995 184,351
July 31, 1994* 1,555
*Date of initial public offering was May 2, 1994.
The Distributor received CDSC payments with respect to the Class C
Shares of the Delchester Fund as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1996* $502
*Date of initial public offering was November 29, 1995.
Effective as of January 3, 1995, all such payments described above have
been paid to the Distributor.
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for Income Funds, Inc. and for
the other mutual funds in the Delaware Group. The Transfer Agent is paid a fee
by the Funds for providing these services consisting of an annual per account
charge of $11.00, in the case of Delchester Fund, and $5.50, in the case of
Strategic Income Fund, plus, in both cases, transaction charges for particular
services according to a schedule. Compensation is fixed each year and approved
by the Board of Directors, including a majority of the disinterested directors.
The Transfer Agent also provides accounting services to the Funds. Those
services include performing all functions related to calculating each Fund's net
asset value and providing all financial reporting services, regulatory
compliance testing and other related accounting services. For its services, the
Transfer Agent is paid a fee based on total assets of all funds in the Delaware
Group for which it provides such accounting services. Such fee is equal to 0.25%
multiplied by the total amount of assets in the complex for which the Transfer
Agent furnishes accounting services, where such aggregate complex assets are $10
billion or less, and 0.20% of assets if such aggregate complex assets exceed $10
billion. The fees are charged to each fund, including the Funds, on an aggregate
pro rata basis. The asset-based fee payable to the Transfer Agent is subject to
a minimum fee calculated by determining the total number of investment
portfolios and associated classes.
The Manager and its affiliates own the name "Delaware Group." Under
certain circumstances, including the termination of the Funds' advisory
relationships with the Manager or their distribution relationships with the
Distributor, the Manager and its affiliates could cause Income Funds, Inc. to
delete the words "Delaware Group" from Income Funds, Inc.'s name.
The Chase Manhattan Bank ("Chase"), 4 Chase Metrotech Center, Brooklyn,
NY 11245 is custodian of Delchester Fund's securities and cash. Bankers Trust
Company ("Bankers"), One Bankers Trust Plaza, New York, NY 10006, is custodian
of Strategic Income Fund's securities and cash. As custodian for a Fund, Chase
or, as relevant, Bankers maintains a separate account or accounts for the Fund;
receives, holds and releases portfolio securities on account of the Fund;
receives and disburses money on behalf of the Fund; and collects and receives
income and other payments and distributions on account of the Fund's portfolio
securities.
The legality of the issuance of the shares offered hereby, registered
pursuant to Rule 24f-2 under the 1940 Act, has been passed upon for Income
Funds, Inc. by Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
Pennsylvania.
-69-
<PAGE>
Shares of the Funds are exempt from Pennsylvania personal property
taxes and qualify as an authorized investment for trustees in Pennsylvania if
such an investment is otherwise appropriate.
Capitalization
Income Funds, Inc. has a present authorized capitalization of one
billion shares of capital stock with a $1.00 par value per share. Five hundred
million shares have been allocated to the Delchester Fund series of shares, and
two hundred million shares have been allocated to the Strategic Income Fund
series of shares. Each Fund offers four classes of shares, each representing a
proportionate interest in the assets of that Fund, and each having the same
voting and other rights and preferences as the other classes, except that shares
of a Fund's Institutional Class may not vote on matters affecting the Fund's
Distribution Plans under Rule 12b-1. Similarly, as a general matter,
shareholders of Class A Shares, Class B Shares and Class C Shares of a Fund may
vote only on matters affecting the 12b-1 Plan that relates to the class of
shares that they hold. However, Class B Shares of a Fund may vote on any
proposal to increase materially the fees to be paid by the Fund under the Rule
12b-1 Plans relating to its Class A Shares. General expenses of a Fund will be
allocated on a pro-rata basis to the classes according to asset size, except
that expenses of the Rule 12b-1 Plans of each Fund's Class A, Class B and Class
C Shares will be allocated solely to those classes. The Board of Directors of
Income Funds, Inc. has allocated three hundred fifty million shares to the
Delchester Fund A Class, and fifty million shares each to the Delchester Fund B
Class, the Delchester Fund C Class and the Delchester Fund Institutional Class.
The Board of Directors of Income Funds, Inc. has allocated one hundred million
shares to the Strategic Income Fund A Class, twenty-five million shares each to
the Strategic Income Fund B Class and the Strategic Income Fund C Class and
fifty million shares to the Strategic Income Fund Institutional Class.
Shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable.
Until May 31, 1992, the Delchester Fund offered shares of two retail
classes, Delchester I class and Delchester II class (now, the Class A Shares of
the Delchester Fund). Delchester I class shares were offered with a higher sales
charge than that applicable to the Delchester II class, but without the
imposition of a Rule 12b-1 fee. Effective June 1, 1992, following shareholder
approval of a Plan of Recapitalization on May 8, 1992, shareholders of the
Delchester I class had their shares converted into shares of the Delchester II
class and became subject to that class' Rule 12b-1 charges. Effective at the
same time, following approval by shareholders, the name of the Delchester II
class was changed to the Delchester Fund class. Effective May 2, 1994, the
Delchester Fund class became known as the Delchester Fund A Class and the
Delchester Fund (Institutional) class became known as the Delchester Fund
Institutional Class.
Until September 30, 1996, Income Funds, Inc. had operated as Delaware
Group Delchester High- Yield Bond Fund, Inc., which offered one series of
shares, the Delchester Fund.
Noncumulative Voting
Income Funds, Inc.'s shares have noncumulative voting rights which
means that the holders of more than 50% of the shares of Income Funds, Inc.
voting for the election of directors can elect all the directors if they choose
to do so, and, in such event, the holders of the remaining shares will not be
able to elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
-70-
<PAGE>
APPENDIX A--IRA INFORMATION
The Tax Reform Act of 1986 (the "Act") restructured, and in some cases
eliminated, the tax deductibility of IRA contributions. Under the Act, the full
deduction for IRAs ($2,000 for each working spouse and $2,250 for one-income
couples) was retained for all taxpayers who are not covered by an
employer-sponsored retirement plan. Even if a taxpayer (or his or her spouse) is
covered by an employer-sponsored retirement plan, the full deduction is still
available if the taxpayer's adjusted gross income is below $25,000 ($40,000 for
taxpayers filing joint returns). A partial deduction is allowed for married
couples with incomes between $40,000 and $50,000, and for single individuals
with incomes between $25,000 and $35,000. The Act does not permit deductions for
contributions to IRAs by taxpayers whose adjusted gross income before IRA
deductions exceeds $50,000 ($35,000 for singles) and who are active participants
in an employer-sponsored retirement plan. Taxpayers who were not allowed
deductions on IRA contributions still can make nondeductible IRA contributions
of as much as $2,000 for each working spouse ($2,250 for one-income couples),
and defer taxes on interest or other earnings from the IRAs. Special rules apply
for determining the deductibility of contributions made by married individuals
filing separate returns.
As illustrated in the following tables, maintaining an IRA remains a
valuable opportunity.
For many, an IRA will continue to offer both an up-front tax break with
its tax deduction each year and the real benefit that comes with tax-deferred
compounding. For others, losing the tax deduction will impact their taxable
income status each year. Over the long term, however, being able to defer taxes
on earnings still provides an impressive investment opportunity--a way to have
money grow faster due to tax-deferred compounding.
-71-
<PAGE>
Even if your IRA contribution is no longer deductible, the benefits of
saving on a tax-deferred basis can be substantial. The following tables
illustrate the benefits of tax-deferred versus taxable compounding. Each
reflects a constant 10% rate of return, compounded annually, with the
reinvestment of all proceeds. The tables do not take into account any sales
charges or fees. Of course, earnings accumulated in your IRA will be subject to
tax upon withdrawal. If you choose a mutual fund with a fluctuating net asset
value, like the Funds, your bottom line at retirement could be lower--it could
also be much higher.
$2,000 Invested Annually Assuming a 10% Annualized Return
15% Tax Bracket Single -- $0 - $24,000
--------------- Joint -- $0 - $40,100
<TABLE>
<CAPTION>
How Much
Cumulative How Much You Have
End of Investment You Have With Full
Year Amount Without IRA IRA Deduction
<S> <C> <C> <C>
1 $ 2,000 $ 1,844 $ 2,200
5 10,000 10,929 13,431
10 20,000 27,363 35,062
15 30,000 52,074 69,899
20 40,000 89,231 126,005
25 50,000 145,103 216,364
30 60,000 229,114 361,887
35 70,000 355,438 596,254
40 80,000 545,386 973,704
</TABLE>
[Without IRA--investment of $1,700 ($2,000 less 15%) earning 8.5%
(10% less 15%)]
28% Tax Bracket Single -- $24,001 - $58,150
--------------- Joint -- $40,101 - $96,900
<TABLE>
<CAPTION>
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
<S> <C> <C> <C> <C>
1 $ 2,000 $ 1,544 $ 1,584 $ 2,200
5 10,000 8,913 9,670 13,431
10 20,000 21,531 25,245 35,062
15 30,000 39,394 50,328 69,899
20 40,000 64,683 90,724 126,005
25 50,000 100,485 155,782 216,364
30 60,000 151,171 260,559 361,887
35 70,000 222,927 429,303 596,254
40 80,000 324,512 701,067 973,704
</TABLE>
[Without IRA--investment of $1,440 ($2,000 less 28%) earning 7.2%
(10% less 28%)]
[With IRA--No Deduction--investment of $1,440 ($2,000 less 28%) earning 10%]
-72-
<PAGE>
31% Tax Bracket Single -- $58,151 - $121,300
--------------- Joint -- $96,901 - $147,700
<TABLE>
<CAPTION>
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
<S> <C> <C> <C> <C>
1 $ 2,000 $ 1,475 $ 1,518 $ 2,200
5 10,000 8,467 9,268 13,431
10 20,000 20,286 24,193 35,062
15 30,000 36,787 48,231 69,899
20 40,000 59,821 86,943 126,005
25 50,000 91,978 149,291 216,364
30 60,000 136,868 249,702 361,887
35 70,000 199,536 411,415 596,254
40 80,000 287,021 671,855 973,704
</TABLE>
[Without IRA--investment of $1,380 ($2,000 less 31%) earning 6.9%
(10% less 31%)]
[With IRA--No Deduction--investment of $1,380 ($2,000 less 31%) earning 10%]
36% Tax Bracket* Single -- $121,301 - $263,750
--------------- Joint -- $147,701 - $263,750
<TABLE>
<CAPTION>
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
<S> <C> <C> <C> <C>
1 $ 2,000 $ 1,362 $ 1,408 $ 2,200
5 10,000 7,739 8,596 13,431
10 20,000 18,292 22,440 35,062
15 30,000 32,683 44,736 69,899
20 40,000 52,308 80,643 126,005
25 50,000 79,069 138,473 216,364
30 60,000 115,562 231,608 361,887
35 70,000 165,327 381,602 596,254
40 80,000 233,190 623,170 973,704
</TABLE>
[Without IRA--investment of $1,280 ($2,000 less 36%) earning 6.4%
(10% less 36%)]
[With IRA--No Deduction--investment of $1,280 ($2,000 less 36%) earning 10%]
-73-
<PAGE>
39.6% Tax Bracket* Single -- over $263,750
----------------- Joint -- over $263,750
<TABLE>
<CAPTION>
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
<S> <C> <C> <C> <C>
1 $ 2,000 $ 1,281 $ 1,329 $ 2,200
5 10,000 7,227 8,112 13,431
10 20,000 16,916 21,178 35,062
15 30,000 29,907 42,219 69,899
20 40,000 47,324 76,107 126,005
25 50,000 70,677 130,684 216,364
30 60,000 101,986 218,580 361,887
35 70,000 143,965 360,137 596,254
40 80,000 200,249 588,117 973,704
</TABLE>
[Without IRA--investment of $1,208 ($2,000 less 39.6%) earning 6.04% (10% less
39.6%)]
[With IRA--No Deduction--investment of $1,208 ($2,000 less 39.6%) earning 10%]
- -----------------------
* For tax years beginning after 1992, a 36% tax rate applies to all
taxable income in excess of the maximum dollar amounts subject to the
31% tax rate. In addition, a 10% surtax (not applicable to capital
gains) applies to certain high-income taxpayers. It is computed by
applying a 39.6% rate to taxable income in excess of $263,750. The
above tables do not reflect the personal exemption phaseout nor the
limitations of itemized deductions that may apply.
-74-
<PAGE>
(SAI-SIF/PART B)
$2,000 SINGLE INVESTMENT AT A RETURN OF 10%
COMPOUNDED MONTHLY
TAXABLE-- TAXABLE-- TAXABLE--
YEARS 39.6%* 36%* 31%
- -------------------------------------------------------------------------------
10 $ 3,653 $ 3,787 $ 3,980
15 4,938 5,210 5,614
20 6,673 7,169 7,918
30 12,190 13,572 15,756
40 22,267 25,696 31,351
TAXABLE-- TAXABLE-- TAX
YEARS 28% 15% DEFERRED
- -------------------------------------------------------------------------------
10 $ 4,100 $ 4,665 $ 5,414
15 5,870 7,125 8,908
20 8,405 10,882 14,656
30 17,231 25,385 39,675
40 35,323 59,214 107,401
$2,000 INVESTED ANNUALLY AT A RETURN OF 10%
COMPOUNDED MONTHLY
TAXABLE-- TAXABLE-- TAXABLE--
YEARS 39.6%* 36%* 31%
- -------------------------------------------------------------------------------
10 $ 28,276 $ 28,891 $ 29,773
15 50,241 51,913 54,348
20 79,928 83,590 89,014
30 174,276 187,150 206,891
40 347,756 383,214 441,441
TAXABLE-- TAXABLE-- TAX
YEARS 28% 15% DEFERRED
- -------------------------------------------------------------------------------
10 $ 30,317 $ 32,819 $ 36,018
15 55,875 63,110 72,877
20 92,468 109,373 133,521
30 219,878 287,948 397,466
40 481,071 704,501 1,111,974
- -----------------------
* For tax years beginning after 1992, a 36% tax rate applies to all
taxable income in excess of the maximum dollar amounts subject to the
31% tax rate. In addition, a 10% surtax (not applicable to capital
gains) applies to certain high-income taxpayers. It is computed by
applying a 39.6% rate to taxable income in excess of $263,750. The
above tables do not reflect the personal exemption phaseout nor the
limitations of itemized deductions that may apply.
-75-
<PAGE>
THE VALUE OF STARTING YOUR IRA EARLY
The following illustrates how much more you would have contributing
$2,000 each January--the earliest opportunity--compared to contributing on April
15th of the following year--the latest, for each tax year.
After 5 years $3,528 more
10 years $6,113
20 years $17,228
30 years $47,295
Compounded returns for the longest period of time is the key. The above
illustration assumes a 10% rate of return and the reinvestment of all proceeds.
And it pays to shop around. If you get just 2% more per year, it can
make a big difference when you retire. A constant 8% versus 10% return,
compounded monthly, illustrates the point. This chart is based on a yearly
investment of $2,000 on January 1. After 30 years the difference can mean as
much as 50% more!
8% 10%
--- ---
10 years $ 31,828 $ 36,018
30 years 259,288 397,466
The statistical exhibits above are for illustration purposes only and
do not reflect the actual performance for the Funds either in the past or in the
future.
-76-
<PAGE>
FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditors for Income Funds,
Inc. (formerly, Delaware Group Delchester High-Yield Bond Fund, Inc.) and, in
its capacity as such, audits the financial statements contained in Income Funds,
Inc.'s Annual Report. Delchester Fund's Statement of Net Assets, Statement of
Operations, Statement of Changes in Net Assets and Notes to Financial
Statements, as well as the report of Ernst & Young LLP, independent auditors,
for the fiscal year ended July 31, 1996 are included in Delchester Fund's Annual
Report to shareholders. The financial statements, the notes relating thereto and
the report of Ernst & Young LLP listed above are incorporated by reference from
the Annual Report into this Part B. Strategic Income Fund was not offered to the
public prior to the date of this Part B.
-77-
<PAGE>
PART C
Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Part A - Financial Highlights for Delchester Fund
* Part B - Statement of Net Assets
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Accountant's Report
* The financial statements and Accountant's Report listed above for
Delchester Fund for the fiscal year ended July 31, 1996 are
incorporated into Part B by reference. Strategic Income Fund is
expected to commence operations on or about September 30, 1996.
(b) Exhibits:
(1) Articles of Incorporation.
(a) Articles of Incorporation, as amended and supplemented
through November 22, 1995, incorporated into this filing
by reference to Post-Effective Amendment No. 52 filed
November 22, 1995.
(b) Executed Articles Supplementary (November 28, 1995)
incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
(c) Form of Articles of Amendment (1996) incorporated into
this filing by reference to Post-Effective Amendment No.
53 filed July 17, 1996.
(d) Form of Articles Supplementary (1996) incorporated into
this filing by reference to Post-Effective Amendment No.
53 filed July 17, 1996.
(2) By-Laws. By-Laws, as amended to date, incorporated into this
filing by reference to Post-Effective Amendment No. 52 filed
November 22, 1995.
(3) Voting Trust Agreement. Inapplicable.
<PAGE>
PART C - Other Information
(Continued)
(4) Copies of All Instruments Defining the Rights of Holders.
(a) Articles of Incorporation, Articles of Amendment and
Articles Supplementary.
(i) Article Second of Articles Supplementary (June 1,
1992 and April 29, 1995), Article Fifth of Articles
of Incorporation (March 4, 1983) and Article Tenth
of Articles of Amendment (May 2, 1985) incorporated
into this filing by reference to Post-Effective
Amendment No. 52 filed November 22, 1995.
(ii) Article Third of Articles Supplementary (November
28, 1995) incorporated into this filing by reference
to Post-Effective Amendment No. 53 filed July 17,
1996.
(iii) Form of Articles Supplementary (1996) incorporated
into this filing by reference to Post-Effective
Amendment No. 53 filed July 17, 1996.
(b) By-Laws. Article II, Article III, as amended, and Article
XIII, which was subsequently redesignated as Article XIV,
incorporated into this filing by reference to
Post-Effective Amendment No. 52 filed November 22, 1995.
(5) Investment Management Agreements.
(a) Executed Investment Management Agreement (April 3, 1995)
between Delaware Management Company, Inc. and the
Registrant on behalf of Delchester Fund incorporated into
this filing by reference to Post-Effective Amendment No.
52 filed November 22, 1995.
(b) Form of Investment Management Agreement (1996) between
Delaware Management Company, Inc. and the Registrant on
behalf of Strategic Income Fund incorporated into this
filing by reference to Post-Effective Amendment No. 53
filed July 17, 1996.
(c) Form of Sub-Advisory Agreement (1996) between Delaware
Management Company, Inc. and Delaware International
Advisers Ltd. with respect to Strategic Income Fund
incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
<PAGE>
PART C - Other Information
(Continued)
6) (a) Distribution Agreements.
(i) Executed Distribution Agreement (April 3, 1995)
between Delaware Distributors, L.P. and the
Registrant on behalf of Delchester Fund incorporated
into this filing by reference to Post-Effective
Amendment No. 53 filed July 17, 1996.
(ii) Executed Amendment No. 1 to Distribution Agreement
(November 29, 1995) between Delaware Distributors,
L.P. and the Registrant on behalf of Delchester Fund
incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
(iii) Form of Distribution Agreement (1996) between
Delaware Distributors, L.P. and the Registrant on
behalf of Strategic Income Fund incorporated into
this filing by reference to Post-Effective
Amendment No. 53 filed July 17, 1996.
(b) Administration and Service Agreement. Form of
Administration and Service Agreement (as amended November
1995) incorporated into this filing by reference to
Post-Effective Amendment No. 52 filed November 22, 1995.
(c) Dealer's Agreement. Dealer's Agreement (as amended
November 1995) incorporated into this filing by reference
to Post-Effective Amendment No. 52 filed November 22,
1995.
(d) Mutual Fund Agreement for the Delaware Group of Funds (as
amended November 1995) incorporated into this filing by
reference to Post-Effective Amendment No. 53 filed July
17, 1996.
(7) Bonus, Profit Sharing, Pension Contracts.
(a) Amended and Restated Profit Sharing Plan (November 17,
1994) incorporated into this filing by reference to
Post-Effective Amendment No. 52 filed November 22, 1995.
(b) Amendment to Profit Sharing Plan (December 21, 1995)
incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
<PAGE>
PART C - Other Information
(Continued)
(8) Custodian Agreements.
(a) Executed Custodian Agreement (May 1, 1996) between The
Chase Manhattan Bank and the Registrant on behalf of
Delchester Fund incorporated into this filing by reference
to Post-Effective Amendment No. 53 filed July 17, 1996.
(b) Form of Securities Lending Agreement (1996) between The
Chase Manhattan Bank and the Registrant on behalf of
Delchester Fund incorporated into this filing by reference
to Post-Effective Amendment No. 53 filed July 17, 1996.
(c) Form of Custodian Agreement (1996) between Bankers Trust
Company and the Registrant on behalf of Strategic Income
Fund incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
(d) Form of Securities Lending Agreement (1996) between
Bankers Trust Company and the Registrant on behalf of
Strategic Income Fund incorporated into this filing by
reference to Post-Effective Amendment No. 53 filed July
17, 1996.
(9) Other Material Contracts.
(a) Form of Amended and Restated Shareholders Services
Agreement (September 1996) between Delaware Service
Company, Inc. and the Registrant on behalf of Delchester
Fund and Strategic Income Fund attached as Exhibit.
(b) Executed Delaware Group of Funds Fund Accounting Agreement
between Delaware Service Company, Inc. and the Registrant
(August 19, 1996) attached as Exhibit.
(i) Form of Amendment No. 1 (September 30, 1996) to
Schedule A to Delaware Group of Funds Fund
Accounting Agreement attached as Exhibit.
(10) Opinion of Counsel. To be filed with letter relating to Rule
24f-2 on or about September 30, 1996.
(11) Consent of Auditors. Attached as Exhibit.
(12-13) Inapplicable.
<PAGE>
PART C - Other Information
(Continued)
(14) Model Plans. Incorporated into this filing by reference to
Post-Effective Amendment No. 49 filed September 28, 1993 and
Post-Effective Amendment No. 52 filed November 22, 1995.
**(15) Plans under Rule 12b-1.
(a) Plan under Rule 12b-1 for Delchester Fund A Class
(November 29, 1995) incorporated into this filing by
reference to Post-Effective Amendment No. 53 filed July
17, 1996.
(b) Plan under Rule 12b-1 for Delchester Fund B Class
(November 29, 1995) incorporated into this filing by
reference to Post-Effective Amendment No. 53 filed July
17, 1996.
(c) Plan under Rule 12b-1 for Delchester Fund C Class
(November 29, 1995) incorporated into this filing by
reference to Post-Effective Amendment No. 53 filed July
17, 1996.
(d) Form of Plan under Rule 12b-1 for Strategic Income Fund A
Class (1996) incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
(e) Form of Plan under Rule 12b-1 for Strategic Income Fund B
Class (1996) incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
(f) Form of Plan under Rule 12b-1 for Strategic Income Fund C
Class (1996) incorporated into this filing by reference to
Post-Effective Amendment No. 53 filed July 17, 1996.
(16) Schedules of Computation for each Performance Quotation.
(a) Incorporated into this filing by reference to
Post-Effective Amendment No. 52 filed November 22, 1995.
(b) Schedules of Computation for each Performance Quotation
for Delchester Fund for periods not previously
electronically filed attached as Exhibit.
(17) Financial Data Schedules. Attached as Exhibit.
**Relates to the A, B and C Classes of Delchester Fund and Strategic Income
Fund.
<PAGE>
PART C - Other Information
(Continued)
***(18) Plan under Rule 18f-3.
(a) Plan under Rule 18f-3 (as amended May 1, 1996) included as
Module.
(b) Amended Appendix A (September 30, 1996) to Plan under Rule
18f-3 attached as Exhibit.
(19) Other: Directors' Power of Attorney. Incorporated into this
filing by reference to Post-Effective Amendment No. 52 filed
November 22, 1995.
***Relates only to Strategic Income Fund.
Item 25. Persons Controlled by or under Common Control with Registrant. None.
Item 26. Number of Holders of Securities.
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Delaware Group Delchester
High-Yield Bond Fund, Inc.'s
Delchester Fund series:
Delchester Fund A Class
Common Stock Par Value 45,548 Accounts as of
$1.00 Per Share August 31, 1996
Delchester Fund B Class
Common Stock Par Value 7,203 Accounts as of
$1.00 Per Share August 31, 1996
Delchester Fund C Class
Common Stock Par Value 239 Accounts as of
$1.00 Per Share August 31, 1996
Delchester Fund Institutional Class
Common Stock Par Value 39 Accounts as of
$1.00 Per Share August 31, 1996
<PAGE>
PART C - Other Information
(Continued)
Number of
Title of Class Record Holders*
-------------- ---------------
Delaware Group Delchester
High-Yield Bond Fund, Inc.'s
Strategic Income Fund series:
Strategic Income Fund A Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1996
Strategic Income Fund B Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1996
Strategic Income Fund C Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1996
Strategic Income Fund Institutional Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1996
* Shares of the Strategic Income Fund were not offered prior to the effective
date of this Registration Statement.
Item 27. Indemnification. Incorporated into this filing by reference to
Post-Effective Amendment No. 30 filed July 28, 1983 and Article VII of
the By-Laws, as amended, incorporated into this filing by reference to
Post-Effective Amendment No. 52 filed November 22, 1995.
Item 28. Business and Other Connections of Investment Adviser and
Sub-Investment Adviser.
Delaware Management Company, Inc. (the "Manager") serves as
investment manager to the Registrant and also serves as investment manager or
sub-adviser to certain of the other funds in the Delaware Group (Delaware Group
Delaware Fund, Inc., Delaware Group Trend Fund, Inc., Delaware Group Value Fund,
Inc., Delaware Group DelCap Fund, Inc., Delaware Group Decatur Fund, Inc.,
Delaware Group Government Fund, Inc., Delaware Group Limited-Term Government
Funds, Inc., Delaware Group Cash Reserve, Inc., Delaware Group Tax-Free Fund,
Inc., DMC Tax-Free Income Trust-Pennsylvania, Delaware Group Tax-Free Money
Fund, Inc., Delaware Group Premium Fund, Inc., Delaware Group Global &
International Funds, Inc., Delaware Pooled Trust, Inc., Delaware Group Adviser
Funds, Inc., Delaware Group Dividend and Income Fund, Inc. and Delaware Group
Global Dividend and Income Fund, Inc.) and provides investment advisory services
to institutional accounts, primarily retirement plans and endowment funds. In
addition, certain directors of the Manager also serve as directors/trustees of
the other Delaware Group funds, and certain officers are also officers of these
other funds. A company indirectly owned by the Manager's parent company acts as
principal underwriter to the mutual funds in the Delaware Group (see Item 29
below) and another such company acts as the shareholder servicing, dividend
disbursing, fund accounting and transfer agent for all of the mutual funds in
the Delaware Group.
<PAGE>
PART C - Other Information
(Continued)
The following persons serving as directors or officers of the
Manager have held the following positions during the past two years:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address* Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Wayne A. Stork Chairman of the Board, President, Chief Executive Officer, Chief Investment
Officer and Director of Delaware Management Company, Inc.; President,
Chief Executive Officer, Chairman of the Board and Director of the
Registrant and, with the exception of Delaware Pooled Trust, Inc., each of the
other funds in the Delaware Group, Delaware Management Holdings, Inc.,
DMH Corp., Delaware International Holdings Ltd. and Founders Holdings,
Inc.; Chairman of the Board and Director of Delaware Pooled Trust, Inc.,
Delaware Distributors, Inc., Delaware Capital Management, Inc. and Delaware
Investment & Retirement Services, Inc.; Chairman, Chief Executive Officer
and Director of Delaware International Advisers Ltd.; and Director of
Delaware Service Company, Inc.
Winthrop S. Jessup Executive Vice President and Director of Delaware Management Company,
Inc., DMH Corp., Delaware International Holdings Ltd. and Founders
Holdings, Inc.; Executive Vice President of the Registrant and, with the
exception of Delaware Pooled Trust, Inc., each of the other funds in the
Delaware Group and Delaware Management Holdings, Inc.; President and
Chief Executive Officer of Delaware Pooled Trust, Inc.; Vice Chairman of
Delaware Distributors, L.P.; Vice Chairman and Director of Delaware
Distributors, Inc.; Director of Delaware Service Company, Inc., Delaware
Management Trust Company, Delaware International Advisers Ltd. and
Delaware Investment & Retirement Services, Inc.; and President and Director
of Delaware Capital Management, Inc.
Richard G. Unruh, Jr. Executive Vice President and Director of Delaware Management Company,
Inc.; Executive Vice President of the Registrant and each of the other funds in
the Delaware Group; Senior Vice President of Delaware Management
Holdings, Inc.; and Director of Delaware International Advisers Ltd.
Board of Directors, Chairman of Finance Committee, Keystone Insurance Company
since 1989, 2040 Market Street, Philadelphia, PA; Board of Directors, Chairman
of Finance Committee, Mid Atlantic, Inc. since 1989, 2040 Market Street,
Philadelphia, PA
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address* Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Paul E. Suckow Executive Vice President/Chief Investment Officer, Fixed Income of Delaware
Management Company, Inc., the Registrant and each of the other funds in the
Delaware Group; Senior Vice President/Chief Investment Officer, Fixed
Income of Delaware Management Holdings, Inc.; Executive Vice President
and Director of Founders Holdings, Inc.; and Director of Founders CBO
Corporation
David K. Downes Senior Vice President, Chief Administrative Officer and Chief Financial
Officer of Delaware Management Company, Inc., the Registrant and each of
the other funds in the Delaware Group; Chairman and Director of Delaware
Management Trust Company; Executive Vice President, Chief Operating
Officer, Chief Administrative Officer, Chief Financial Officer and Treasurer
of Delaware Management Holdings, Inc.; Senior Vice President, Chief
Financial Officer, Treasurer and Director of DMH Corp.; Senior Vice
President and Chief Administrative Officer of Delaware Distributors, L.P.;
Senior Vice President, Chief Administrative Officer and Director of Delaware
Distributors, Inc.; Senior Vice President, Chief Administrative Officer, Chief
Financial Officer and Director of Delaware Service Company, Inc.; Chief
Financial Officer and Director of Delaware International Holdings Ltd.;
Senior Vice President, Chief Financial Officer and Treasurer of Delaware
Capital Management, Inc.; Senior Vice President, Chief Financial Officer and
Director of Founders Holdings, Inc.; Chief Executive Officer and Director of
Delaware Investment & Retirement Services, Inc.; and Director of Delaware
International Advisers Ltd.
Chief Executive Officer, Chief Financial Officer and Treasurer of Forewarn,
Inc. since 1992, 8 Clayton Place, Newtown Square, PA
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address* Affiliates and Other Positions and Offices Held
- ------------------ ------------------------------------------------
<S> <C>
George M. Chamberlain, Jr. Senior Vice President, Secretary and Director of Delaware Management
Company, Inc., DMH Corp., Delaware Distributors, Inc., Delaware Service
Company, Inc., Founders Holdings, Inc., Delaware Capital Management, Inc.
and Delaware Investment & Retirement Services, Inc.; Senior Vice President
and Secretary of the Registrant, each of the other funds in the Delaware
Group, Delaware Distributors, L.P. and Delaware Management Holdings, Inc.;
Executive Vice President, Secretary and Director of Delaware Management
Trust Company; Secretary and Director of Delaware International Holdings
Ltd.; and Director of Delaware International Advisers Ltd.
Director of ICI Mutual Insurance Co. since 1992, P.O. Box 730, Burlington,
VT
Richard J. Flannery Managing Director/Corporate Tax & Affairs of Delaware Management
Company, Inc., Delaware Management Holdings, Inc., DMH Corp., Delaware
Distributors, L.P., Delaware Distributors, Inc., Delaware Service Company,
Inc., Delaware Management Trust Company, Founders CBO Corporation,
Delaware Capital Management, Inc. and Delaware Investment & Retirement
Services, Inc.; Vice President of the Registrant and each of the other funds in
the Delaware Group; Managing Director/Corporate Tax & Affairs and
Director of Founders Holdings, Inc.; Managing Director and Director of
Delaware International Holdings Ltd.; and Director of Delaware International
Advisers Ltd.
Limited Partner of Stonewall Links, L.P. since 1991, Bulltown Rd., Elverton,
PA; Director and Member of Executive Committee of Stonewall Links, Inc.
since 1991, Bulltown Rd., Elverton, PA
Michael P. Bishof(1) Vice President and Treasurer of Delaware Management Company, Inc., the
Registrant, each of the other funds in the Delaware Group, Delaware
Distributors, L.P., Delaware Distributors, Inc., Delaware Service Company,
Inc. and Founders Holdings, Inc.; Assistant Treasurer of Founders CBO
Corporation; and Vice President and Manager of Investment Accounting of
Delaware International Holdings Ltd.
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address* Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Eric E. Miller Vice President and Assistant Secretary of Delaware Management Company,
Inc., the Registrant, each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., DMH Corp., Delaware Distributors, L.P.,
Delaware Distributors Inc., Delaware Service Company, Inc., Delaware
Management Trust Company, Founders Holdings, Inc., Delaware Capital
Management, Inc. and Delaware Investment & Retirement Services, Inc.
Richelle S. Maestro Vice President and Assistant Secretary of Delaware Management Company,
Inc., the Registrant, each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., DMH Corp., Delaware
Management Trust Company, Delaware Capital Management, Inc., Delaware
Investment & Retirement Services, Inc. and Founders Holdings, Inc.;
Secretary of Founders CBO Corporation; and Assistant Secretary of Delaware
International Holdings Ltd.
General Partner of Tri-R Associates since 1989, 10001 Sandmeyer Ln.,
Philadelphia, PA
John M. Zerr(2) Vice President and Assistant Secretary of Delaware Management Company,
Inc., the Registrant, each of the other funds in the Delaware Group, DMH
Corp., Delaware Distributors, L.P., Delaware Capital Management, Inc. and
Delaware Investment & Retirement Services, Inc.
Joseph H. Hastings Vice President/Corporate Controller of Delaware Management Company, Inc.,
the Registrant, each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., DMH Corp., Delaware Distributors, L.P.,
Delaware Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc., Founders Holdings, Inc. and Delaware
International Holdings Ltd.; Executive Vice President, Chief Financial Officer
and Treasurer of Delaware Management Trust Company; Chief Financial
Officer and Treasurer of Delaware Investment & Retirement Services, Inc.;
and Assistant Treasurer of Founders CBO Corporation
Bruce A. Ulmer Vice President/Director of Internal Audit of Delaware Management Company,
Inc., the Registrant, each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., DMH Corp. and Delaware Management Trust
Company; and Vice President/Internal Audit of Delaware Investment &
Retirement Services, Inc.
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address* Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Steven T. Lampe(3) Vice President/Taxation of Delaware Management Company, Inc., the
Registrant, each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., DMH Corp., Delaware Distributors, L.P.,
Delaware Distributors, Inc., Delaware Service Company, Inc., Delaware
Management Trust Company, Founders Holdings, Inc., Founders CBO
Corporation, Delaware Capital Management, Inc. and Delaware Investment &
Retirement Services, Inc.
Lisa O. Brinkley Vice President/Compliance of Delaware Management Company, Inc., the Registrant,
each of the other funds in the Delaware Group, DMH Corp., Delaware
Distributors, L.P., Delaware Distributors, Inc., Delaware Service Company,
Inc., Delaware Management Trust Company, Delaware Capital Management, Inc. and
Delaware Investment & Retirement Services, Inc.
Rosemary E. Milner Vice President/Legal of Delaware Management Company, Inc., the Registrant, each
of the other funds in the Delaware Group, Delaware Distributors, L.P. and
Delaware Distributors, Inc.
Douglas L. Anderson Vice President/Operations of Delaware Management Company, Inc. and Delaware
Service Company, Inc.; and Vice President/Operations and Director of Delaware
Management Trust Company
Michael T. Taggart Vice President/Facilities Management and Administrative Services of
Delaware Management Company, Inc.
Gerald T. Nichols Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds, the fixed income funds and the
closed-end funds in the Delaware Group; Vice President of Founders Holdings,
Inc.; and Treasurer, Assistant Secretary and Director of Founders CBO
Corporation
J. Michael Pokorny Vice President/Senior Portfolio Manager of Delaware Management Company,
Inc., the Registrant, each of the tax-exempt funds and the fixed income funds
in the Delaware Group
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address* Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Gary A. Reed Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds and the fixed income funds in the
Delaware Group and Delaware Capital Management, Inc.
Paul A. Matlack Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds, the fixed income funds and the
closed-end funds in the Delaware Group; Vice President of Founders Holdings,
Inc.; and President and Director of Founders CBO Corporation
Patrick P. Coyne Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds and the fixed income funds in the
Delaware Group
Roger A. Early Vice President/Senior Portfolio Manager of Delaware Management Company, Inc.,
the Registrant, each of the tax-exempt funds and the fixed income funds in the
Delaware Group
Edward N. Antoian Vice President/Senior Portfolio Manager of Delaware Management Company,
Inc. and each of the equity funds in the Delaware Group
General Partner of Zeke Investment Partners since 1991, 569 Canterbury Lane,
Berwyn, PA
George H. Burwell Vice President/Senior Portfolio Manager of Delaware Management Company,
Inc. and each of the equity funds in the Delaware Group
John B. Fields Vice President/Senior Portfolio Manager of Delaware Management Company,
Inc., each of the equity funds in the Delaware Group and Delaware Capital
Management, Inc.
David C. Dalrymple Vice President/Senior Portfolio Manager of Delaware Management Company,
Inc. and each of the equity funds in the Delaware Group
Gerald S. Frey(4) Vice President/Senior Portfolio Manager of Delaware Management Company,
Inc. and each of the equity funds in the Delaware Group
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address* Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
Faye P. Staples(5) Vice President/Human Resources of Delaware Management Company, Inc.,
Delaware Distributors, L.P. and Delaware Distributors, Inc.; and Vice
President/Director of Human Resources of Delaware Service Company, Inc.
Daniel H. Carlson(6) Vice President/Marketing Manager of Delaware Management Company, Inc.,
Delaware Distributors, L.P. and Delaware Investment & Retirement Services,
Inc.
</TABLE>
1 VICE PRESIDENT/GLOBAL INVESTMENT MANAGEMENT OPERATIONS, Bankers Trust and
VICE PRESIDENT, CS First Boston Investment Management prior to June 1995.
2 ATTORNEY, Ballard Spahr Andrews & Ingersoll prior to July 1995.
3 TAX MANAGER, Price Waterhouse prior to October 1995.
4 SENIOR DIRECTOR, Morgan Grenwell Capital Management prior to June 1996.
5 VICE PRESIDENT/HUMAN RESOURCES, Nova Care prior to September 1995.
6 PRINCIPAL AND CONSULTANT, Buck Consultants prior to October 1995.
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
Delaware International Advisers Ltd. ("Delaware International") serves as
sub-investment adviser to the Strategic Income Fund of the Registrant and also
serves as investment manager or sub-investment adviser to certain of the other
funds in the Delaware Group (Delaware Group Global Dividend and Income Fund,
Inc., Delaware Group Global & International Funds, Inc., Delaware Pooled Trust,
Inc. and Delaware Group Premium Fund, Inc.) and provides investment advisory
services to institutional accounts, primarily retirement plans and endowment
funds.
<PAGE>
PART C - Other Information
(Continued)
The following persons serving as directors or officers of Delaware
International have held the following positions during the past two years:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Delaware International Advisers Ltd.
Business Address and its Affiliates and Other Positions and Offices Held
- ------------------ ---------------------------------------------------------------
<S> <C>
*Wayne A. Stork Chairman of the Board, Chief Executive Officer and Director of Delaware
International Advisers Ltd.; President, Chief Executive Officer, Chairman of
the Board and Director of the Registrant and, with the exception of Delaware
Pooled Trust, Inc., each of the other funds in the Delaware Group, Delaware
Management Holdings, Inc., DMH Corp., Delaware International Holdings Ltd. and
Founders Holdings, Inc.; Chairman of the Board, President, Chief Executive
Officer, Chief Investment Officer and Director of Delaware Management Company,
Inc.; Chairman of the Board and Director of Delaware Pooled Trust, Inc.,
Delaware Distributors, Inc., Delaware Capital Management, Inc. and Delaware
Investment & Retirement Services, Inc.; and Director of Delaware Service
Company, Inc.
**G. Roger H. Kitson Vice Chairman and Director of Delaware International Advisers Ltd.
**David G. Tilles Managing Director, Chief Investment Officer and Director of Delaware
International Advisers Ltd.
**John Emberson Secretary/Compliance Officer/Finance Director and Director of Delaware
International Advisers Ltd.
</TABLE>
* Business address is 1818 Market Street, Philadelphia, PA 19103.
** Business address is Veritas House, 125 Finsbury Pavement, London, England
EC2A 1NQ.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Delaware International Advisers Ltd.
Business Address and its Affiliates and Other Positions and Offices Held
- ------------------ ---------------------------------------------------------------
<S> <C>
*David K. Downes Director of Delaware International Advisers Ltd.; Executive Vice President,
Chief Operating Officer, Chief Administrative Officer, Chief Financial Officer
and Treasurer of Delaware Management Holdings, Inc.; Senior Vice
President, Chief Administrative Officer, Chief Financial Officer of Delaware
Management Company, Inc., the Registrant and each of the other funds in the
Delaware Group; Chairman and Director of Delaware Management Trust
Company; Senior Vice President, Chief Financial Officer, Treasurer and
Director of DMH Corp.; Senior Vice President and Chief Administrative
Officer of Delaware Distributors, L.P.; Senior Vice President, Chief
Administrative Officer and Director of Delaware Distributors, Inc.; Senior
Vice President, Chief Administrative Officer, Chief Financial Officer and
Director of Delaware Service Company, Inc.; Chief Financial Officer and
Director of Delaware International Holdings Ltd.; Senior Vice President,
Chief Financial Officer and Treasurer of Delaware Capital Management, Inc.;
Senior Vice President, Chief Financial Officer and Director of Founders
Holdings, Inc.; and Chief Executive Officer and Director of Delaware
Investment & Retirement Services, Inc.
Chief Executive Officer, Chief Financial Officer and Treasurer of Forewarn,
Inc. since 1992, 8 Clayton Place, Newtown Square, PA
*Winthrop S. Jessup Director of Delaware International Advisers Ltd., Delaware Service Company,
Inc., Delaware Management Trust Company and Delaware Investment &
Retirement Services, Inc.; Executive Vice President of the Registrant and,
with the exception of Delaware Pooled Trust, Inc., each of the other funds in
the Delaware Group and Delaware Management Holdings, Inc.; President and
Chief Executive Officer of Delaware Pooled Trust, Inc.; Executive Vice
President and Director of DMH Corp., Delaware Management Company, Inc.,
Delaware International Holdings Ltd. and Founders Holdings, Inc.; Vice
Chairman of Delaware Distributors, L.P.; Vice Chairman and Director of
Delaware Distributors, Inc.; and President and Director of Delaware Capital
Management, Inc.
</TABLE>
* Business address is 1818 Market Street, Philadelphia, PA 19103.
** Business address is Veritas House, 125 Finsbury Pavement, London, England
EC2A 1NQ.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Delaware International Advisers Ltd.
Business Address and its Affiliates and Other Positions and Offices Held
- ------------------ ----------------------------------------------------------------
<S> <C>
*Richard G. Unruh, Jr. Director of Delaware International Advisers Ltd.; Executive Vice President and
Director of Delaware Management Company, Inc.; Executive Vice President of the
Registrant and each of the other funds in the Delaware Group; and Senior Vice
President of Delaware Management Holdings, Inc.
Board of Directors, Chairman of Finance Committee, Keystone Insurance Company
since 1989, 2040 Market Street, Philadelphia, PA; Board of Directors, Chairman
of Finance Committee, Mid Atlantic, Inc. since 1989, 2040 Market Street,
Philadelphia, PA
*Richard J. Flannery Director of Delaware International Advisers Ltd.; Managing Director/Corporate
Tax & Affairs of Delaware Management Holdings, Inc., DMH Corp., Delaware
Management Company, Inc., Delaware Distributors, L.P., Delaware Distributors,
Inc., Delaware Service Company, Inc., Delaware Management Trust Company,
Delaware Capital Management, Inc., Founders CBO Corporation and Delaware
Investment & Retirement Services, Inc.; Vice President of the Registrant and
each of the other funds in the Delaware Group; Managing Director/Corporate &
Tax Affairs and Director of Founders Holdings, Inc.; and Managing Director and
Director of Delaware International Holdings Ltd.
Limited Partner of Stonewall Links, L.P. since 1991, Bulltown Rd., Elverton,
PA; Director and Member of Executive Committee of Stonewall Links, Inc. since
1991, Bulltown Rd., Elverton, PA
*John C. E. Campbell Director of Delaware International Advisers Ltd.
*George M. Chamberlain, Jr. Director of Delaware International Advisers Ltd.; Senior Vice President and
Secretary of the Registrant, each of the other funds in the Delaware Group,
Delaware Distributors, L.P. and Delaware Management Holdings, Inc.;
Senior Vice President, Secretary and Director of Delaware Management
Company, Inc., DMH Corp., Delaware Distributors, Inc., Delaware Service
Company, Inc., Founders Holdings, Inc., Delaware Capital Management,
Inc. and Delaware Investment & Retirement Services, Inc.; Executive Vice
President, Secretary and Director of Delaware Management Trust Company;
and Secretary and Director of Delaware International Holdings Ltd.
Director of ICI Mutual Insurance Co. since 1992, P.O. Box 730, Burlington, VT
</TABLE>
* Business address is 1818 Market Street, Philadelphia, PA 19103.
** Business address is Veritas House, 125 Finsbury Pavement, London, England
EC2A 1NQ.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Delaware International Advisers Ltd.
Business Address and its Affiliates and Other Positions and Offices Held
- ------------------ ---------------------------------------------------------------
<S> <C>
*George E. Deming Director of Delaware International Advisers Ltd.
**Timothy W. Sanderson Senior Portfolio Manager, Deputy Compliance Officer, Director Equity
Research and Director of Delaware International Advisers Ltd.
**Clive A. Gillmore Senior Portfolio Manager, Director U.S. Mutual Fund Liaison and Director
of Delaware International Advisers Ltd.
**Hamish O. Parker Senior Portfolio Manager, Director U.S. Marketing Liaison and Director of
Delaware International Advisers Ltd.
**Ian G. Sims Senior Portfolio Manager, Deputy Managing Director and Director of
Delaware International Advisers Ltd.
**Elizabeth A. Desmond Senior Portfolio Manager of Delaware International Advisers Ltd.
**Gavin A. Hall Senior Portfolio Manager of Delaware International Advisers Ltd.
</TABLE>
* Business address is 1818 Market Street, Philadelphia, PA 19103.
** Business address is Veritas House, 125 Finsbury Pavement, London, England
EC2A 1NQ.
Item 29. Principal Underwriters.
(a) Delaware Distributors, L.P. serves as principal underwriter for
all the mutual funds in the Delaware Group.
(b) Information with respect to each director, officer or partner of
principal underwriter:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Delaware Distributors, Inc. General Partner None
Delaware Management
Company, Inc. Limited Partner Investment Manager
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Delaware Capital
Management, Inc. Limited Partner None
Winthrop S. Jessup Vice Chairman Executive Vice President
Keith E. Mitchell President and Chief None
Executive Officer
David K. Downes Senior Vice President and Senior Vice President/Chief
Chief Administrative Officer Administrative Officer/Chief
Financial Officer
George M. Chamberlain, Jr. Senior Vice President/ Senior Vice President/
Secretary Secretary
J. Lee Cook Senior Vice President/ None
Eastern Sales Division
Thomas E. Sawyer Senior Vice President/ None
Western Sales Division
Stephen H. Slack Senior Vice President/ None
Wholesaler
William F. Hostler Senior Vice President/ None
Marketing Services
Dana B. Hall Senior Vice President/ None
Key Accounts
Minette van Noppen Senior Vice President/ None
Retirement Services
J. Chris Meyer Senior Vice President/ None
Product Development
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Richard J. Flannery Managing Director/Corporate Vice President
& Tax Affairs
Eric E. Miller Vice President/ Vice President/
Assistant Secretary Assistant Secretary
Richelle S. Maestro Vice President/ Vice President/
Assistant Secretary Assistant Secretary
John M. Zerr Vice President/ Vice President/
Assistant Secretary Assistant Secretary
Michael P. Bishof Vice President/Treasurer Vice President/Treasurer
Steven T. Lampe Vice President/Taxation Vice President/Taxation
Joseph H. Hastings Vice President/ Vice President/
Corporate Controller Corporate Controller
Lisa O. Brinkley Vice President/ Vice President/
Compliance Compliance
Rosemary E. Milner Vice President/Legal Vice President/Legal
Susan J. Black Vice President/ None
Manager Key Accounts
Daniel H. Carlson Vice President/ None
Marketing Manager
Diane M. Anderson Vice President/ None
Retirement Services
Denise F. Guerriere Vice President/Client Services None
Julia R. Vander Els Vice President/ None
Client Services
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Jerome J. Alrutz Vice President/ None
Client Services
Joanne A. Mettenheimer Vice President/ None
National Accounts
Christopher H. Price Vice President/Annuity None
Marketing & Administration
Steven J. DeAngelis Vice President/ None
Product Development
Susan T. Friestedt Vice President/ None
Customer Service
Dinah J. Huntoon Vice President/ None
Product Development
Soohee Lee Vice President/ None
Product Development
Ellen M. Krott Vice President/ None
Communications
Holly W. Riemel Vice President/ None
Telemarketing
Frank Albanese Vice President/Wholesaler None
Terrence L. Bussard Vice President/Wholesaler None
William S. Carroll Vice President/Wholesaler None
William S. Castetter Vice President/Wholesaler None
Thomas J. Chadie Vice President/Wholesaler None
Douglas R. Glennon Vice President/Wholesaler None
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
William M. Kimbrough Vice President/Wholesaler None
Mac McAuliffe Vice President/Wholesaler None
Patrick L. Murphy Vice President/Wholesaler None
Henry W. Orvin Vice President/Wholesaler None
Philip G. Rickards Vice President/Wholesaler None
Michael W. Rose Vice President/Wholesaler None
Robert E. Stansbury Vice President/Wholesaler None
Larry D. Stone Vice President/Wholesaler None
Faye P. Staples Vice President/Human Resources None
</TABLE>
*Business address of each is 1818 Market Street, Philadelphia, PA 19103.
(c) Not Applicable.
Item 30. Location of Accounts and Records.
---------------------------------
All accounts and records are maintained in Philadelphia at 1818
Market Street, Philadelphia, PA 19103 or One Commerce Square,
Philadelphia, PA 19103 and in London at Veritas House, 125
Finsbury Pavement, London, England EC2A 1NQ.
Item 31. Management Services. None.
--------------------
Item 32. Undertakings.
-------------
(a) Not applicable.
(b) The Registrant hereby undertakes to file a post-effective
amendment, using financial statements which need not be
certified, within four to six months from the public offering
of shares of the Strategic Income Fund.
<PAGE>
PART C - Other Information
(Continued)
(c) The Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's annual report to shareholders, upon request and
without charge.
(d) The Registrant hereby undertakes to promptly call a meeting
of shareholders for the purpose of voting upon the question
of removal of any director when requested in writing to do so
by the record holders of not less than 10% of the outstanding
shares.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, this Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Philadelphia and Commonwealth of Pennsylvania on
this 24th day of September, 1996.
DELAWARE GROUP DELCHESTER
HIGH-YIELD BOND FUND, INC.
(to be renamed Delaware Group Income
Funds, Inc.)
By/s/Wayne A. Stork
------------------------
Wayne A. Stork
Chairman of the Board, President,
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ------------------------------------ ------------------
<S> <C> <C>
Chairman of the Board, President,
/s/Wayne A. Stork Chief Executive Officer and Director September 24, 1996
- --------------------------------------
Wayne A. Stork
Senior Vice President/Chief Financial
Officer/Chief Administrative Officer
(Principal Financial Officer and
/s/David K. Downes Principal Accounting Officer) September 24, 1996
- --------------------------------------
David K. Downes
/s/Walter P. Babich * Director September 24, 1996
- --------------------------------------
Walter P. Babich
/s/Anthony D. Knerr * Director September 24, 1996
- --------------------------------------
Anthony D. Knerr
/s/Ann R. Leven *
- -------------------------------------- Director September 24, 1996
Ann R. Leven
/s/W. Thacher Longstreth * Director September 24, 1996
- --------------------------------------
W. Thacher Longstreth
/s/Charles E. Peck * Director September 24, 1996
- --------------------------------------
Charles E. Peck
*By/s/Wayne A. Stork
-----------------------
Wayne A. Stork
as Attorney-in-Fact for
each of the persons indicated
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Exhibits
to
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
EX-99.B9A Form of Amended and Restated Shareholders Services Agreement
between Delaware Service Company Inc. and the Registrant on
behalf of Delchester Fund and Strategic Income Fund (September
1996)
EX-99.B9B Executed Delaware Group of Funds Fund Accounting Agreement
between Delaware Service Company, Inc. and the Registrant (August
19, 1996)
EX-99.B9BI Form of Amendment No. 1 (September 30, 1996) to Schedule A to
Delaware Group of Funds Fund Accounting Agreement
EX-99.B11 Consent of Auditors
EX-99.B16B Schedules of Computation for each Performance Quotation for
Delchester Fund for periods not previously electronically filed
EX-99.B18A Plan under Rule 18f-3 (as amended May 1, 1996)
Module Name
(MOD18F3)
EX-99.B18B Amended Appendix A (September 30, 1996) to Plan under Rule 18f-3
EX-27 Financial Data Schedules
<PAGE>
FORM OF AGREEMENT
SUBJECT TO BOARD APPROVAL
DELAWARE GROUP INCOME FUNDS, INC.
DELCHESTER FUND SERIES
STRATEGIC INCOME FUND SERIES
FIRST AMENDED AND RESTATED
SHAREHOLDERS SERVICES AGREEMENT
THIS AGREEMENT, made as of the 30th day of September, 1996 by and
between DELAWARE GROUP INCOME FUNDS, INC. ("Fund"), a Maryland corporation, for
the DELCHESTER FUND series and the STRATEGIC INCOME FUND series (together, the
"Series"), and DELAWARE SERVICE COMPANY, INC. ("DSC"), a Delaware corporation.
W I T N E S S E T H:
WHEREAS, the Investment Management Agreements between the Fund on
behalf of the Series and Delaware Management Company, Inc. provide that the Fund
shall conduct its own business affairs and shall bear the expenses and salaries
necessary and incidental thereto including, but not in limitation of the
foregoing, the costs incurred in: the maintenance of its corporate existence;
the maintenance of its own books, records and procedures; dealing with its own
shareholders; the payment of dividends; transfers of stock, including issuance,
redemption and repurchase of shares; preparation of share certificates; reports
and notices to stockholders; calling and holding of stockholders' meetings;
miscellaneous office expenses; brokerage commissions; custodian fees; legal and
accounting fees; taxes; and federal and state registration fees; and
<PAGE>
WHEREAS, the FUND and DSC desire to have a written agreement concerning
the performance of the foregoing services and providing compensation therefor;
and
WHEREAS, the Fund and DSC previously entered into a Shareholders
Services Agreement dated as of June 29, 1988, providing for the provision of
services to the Delchester Fund series; and
WHEREAS, the Fund and DSC wish to amend the Shareholders Services
Agreement dated as of June 29, 1988, to add the Strategic Income Fund series;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, and intending legally to be bound, it is agreed:
I. APPOINTMENT AS AGENT
1.1 The Fund hereby appoints DSC Shareholder Services Agent for the
Series to provide as agent for the Fund services as Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing Agent and DSC hereby accepts such
appointment and agrees to provide the Fund, as its agent, the services described
herein.
1.2 The Fund shall pay DSC and DSC shall accept, for the services
provided hereunder, the compensation provided for in Section VIII hereof. The
Fund also shall reimburse DSC for expenses incurred or advanced by it for the
Fund in connection with its services hereunder.
-3-
<PAGE>
II. DOCUMENTATION
2.1 The Fund represents that it has provided or made available to DSC
(or has given DSC an opportunity to examine) copies of, and DSC represents that
it has received from the Fund (or is otherwise familiar with), the following
documents:
(a) The Articles of Incorporation or other documents
evidencing the Fund's form of organization and any current amendments or
supplements thereto;
(b) The By-Laws of the Fund;
(c) Any resolution or other action of the Fund or the Board of
Directors of the Fund establishing or affecting the rights, privileges or other
status of each class or series of shares of the Fund, including those relating
to the Series, or altering or abolishing such class or series;
(d) A certified copy of a resolution of the Board of Directors
of the Fund appointing DSC as Shareholder Services Agent for the Series and
authorizing the execution of this Agreement;
(e) The forms of share certificates for the Series in the form
approved by the Board of Directors of the Fund;
(f) A copy of the Fund's currently effective Prospectuses and
Statement of Additional Information under the Securities Act of 1933, if
effective;
(g) Copies of all account application forms and other
documents relating to stockholder accounts in the Series;
(h) Copies of documents relating to Plans of the Fund for the
purchase, sale or repurchase of its shares, including
-4-
<PAGE>
periodic payment or withdrawal plans, reinvestment plans or retirement plans, if
any;
(i) Any opinion of counsel to the Fund relating to the
authorization and validity of the shares of the Series issued or proposed to be
issued under the law of the State of the Fund's organization, including the
status thereof under any applicable securities laws;
(j) A certified copy of any resolution of the Board of
Directors of the Fund authorizing any person to give instructions to DSC under
this Agreement (with a specimen signature of such person if not already
provided), setting forth the scope of such authority; and
(k) Any amendment, revocation or other documents altering,
adding, qualifying or repealing any document or authority called for under this
Section 2.1.
2.2 The Fund and DSC may consult as to forms or documents that may be
required in performing services hereunder.
2.3 The Fund shall provide or make available to DSC a certified copy of
any resolution of the stockholders or the Board of Directors of the Fund
providing for a dividend, capital gains distribution, distribution of capital,
stock dividend, stock split or other similar action affecting the authorization
or issuance of shares of the Series or the payment of dividends.
2.4 In the case of any recapitalization or other capital adjustment
requiring a change in the form of stock certificates or
-5-
<PAGE>
the books recording the same, the Fund shall deliver or make available to DSC:
(a) A certified copy of any document authorizing or effecting
such change;
(b) Written instructions from an authorized officer
implementing such change; and
(c) An opinion of counsel to the Fund as to the validity of
such action, if requested by DSC.
2.5 The Fund warrants the following:
(a) The Fund is, or will be, a properly registered investment
company under the Investment Company Act of 1940 and any and all Series shares
which it issues will be properly registered and lawfully issued under applicable
federal and state laws.
(b) The provisions of this Agreement do not violate the terms
of any instrument by which the Fund is bound; nor do they violate any law or
regulation of any body having jurisdiction over the Fund or its property.
2.6 DSC warrants the following:
(a) DSC is and will be properly registered as a transfer agent
under the Securities Exchange Act of 1934 and is duly authorized to serve, and
may lawfully serve as such.
(b) The provisions of this Agreement do not violate the terms
of any instrument by which DSC is bound; nor do they violate any law or
regulation of any body having jurisdiction over DSC or its property.
-6-
<PAGE>
III. STOCK CERTIFICATES
3.1 The Fund shall furnish or authorize DSC to obtain, at the Fund's
expense, a sufficient supply of blank stock certificates for the Series, and
from time to time will replenish such supply upon the request of DSC. The Fund
agrees to indemnify and exonerate, save and hold DSC harmless, from and against
any and claims or demands that may be asserted against DSC concerning the
genuineness of any stock certificate supplied to DSC pursuant to this Section.
3.2 DSC shall safeguard, and shall account to the Fund, upon its demand
for, all such stock certificates: (a) as issued, showing to whom issued, or (b)
as unissued, establishing the safekeeping, cancellation or destruction thereof.
3.3 The Fund shall promptly inform DSC in writing of any change in the
officers authorized to sign stock certificates or in the form thereof. If an
officer whose manual or facsimile signature is affixed to any blank share
certificate shall die, resign or be removed prior to the issuance of such
certificate, DSC may nevertheless issue such certificate notwithstanding such
death, resignation or removal, and the Fund shall with respect thereto promptly
provide to DSC any approval, adoption or ratification as may be required by DSC.
IV. TRANSFER AGENT
4.1 As Transfer Agent for the Fund, DSC shall issue, redeem and
transfer shares of the Series, and, in connection therewith but not in
limitation thereof, it shall:
-7-
<PAGE>
(a) Upon receipt of authority to issue shares, determine the
total shares to be issued and issue such shares by crediting shares to accounts
created and maintained in the registration forms provided; as applicable,
prepare, issue and deliver stock certificates.
(b) Upon proper transfer authorization, transfer shares by
debiting transferor-stockholder accounts and crediting such shares to accounts
created and/or maintained for transferee- stockholders; if applicable, issue
and/or cancel stock certificates.
(c) Upon proper redemption authorization, determine the total
shares redeemed and to be redeemed; determine the total redemption payments made
and to be made; redeem shares by debiting stockholder accounts; as applicable,
receive and cancel stock certificates for shares redeemed; and remit or cause to
be remitted the redemption proceeds to stockholders.
(d) Create and maintain accounts; reconcile and control cash
due and paid, shares issued and to be issued, cash remitted and to be remitted
and shares debited and credited to accounts; provide such notices, instructions
or authorizations as the Fund may require.
4.2 DSC shall not be required to issue, transfer or redeem Series
shares upon receipt of DSC from the Fund, or from any federal or state
regulatory agency or authority, written notice that the issuance, transfer or
redemption of Series shares has been suspended or discontinued.
-8-
<PAGE>
V. DIVIDEND DISBURSING AGENT
5.1 As Dividend Disbursing Agent for the Fund, DSC shall disburse and
cause to be disbursed to stockholders of each Series dividends, capital gains
distributions or any payments from other sources as directed by the Fund. In
connection therewith, but not in limitation thereof, DSC shall:
(a) Calculate the total disbursement due and payable and the
disbursement to each stockholder as to shares owned, in accordance with the
Fund's authorization.
(b) Calculate the total disbursements for each stockholder, as
aforesaid, to be disbursed in cash; prepare and mail checks therefor.
(c) Calculate the total disbursement for each stockholder of
each Series, as aforesaid, for which shares are to be issued and authorized and
instruct the issuance of such shares in accordance with Section IV hereof.
(d) Prepare and mail or deliver such forms and notices
pertaining to disbursements as required by federal or state authority.
(e) Create and maintain records, reconcile and control
disbursements to be made and made, both as to cash and shares, as aforesaid;
provide such notices, instruction or authorization as the Fund may require.
5.2 DSC shall not be required to make any disbursement upon the receipt
of DSC from the Fund, or from any federal or state
-9-
<PAGE>
agency or authority, written notice that such disbursement shall not be made.
VI. SHAREHOLDER SERVICING AGENT
6.1 As Shareholder Servicing Agent for the Fund, DSC shall provide
those services ancillary to but in implementation of the services provided under
Sections I through V hereof, and those generally defined and accepted as
shareholder services. In connection therewith, but not in limitation thereof,
DSC shall:
(a) Except where instructed in writing by the Fund not to do
so, and where in compliance with applicable law, accept orders on behalf of the
Fund; receive and process investments and applications; remit to the Fund or its
custodian payments for shares acquired and to be issued; and direct the issuance
of shares in accordance with Section IV hereof.
(b) Receive, record and respond to communications of
stockholders and their agents.
(c) As instructed by the Fund, prepare and mail stockholder
account information, mail Series stockholder reports and Series prospectuses.
(d) Prepare and mail proxies and material for Fund stockholder
meetings, receive and process proxies from stockholders, and deliver such
proxies as directed by the Fund.
(e) Administer investment plans offered by the Fund to
investors and stockholders of each Series, including retirement plans, including
activities not otherwise provided in Sections I through V of this Agreement
-10-
<PAGE>
VII. PERFORMANCE OF DUTIES
7.1 The parties hereto intend that Series stockholders and their
stockholdings shall be confidential, and any information relating thereto shall
be released by DSC only to those persons or authorities who DSC has reason to
believe are authorized to receive such information; or, as instructed by the
Fund.
7.2 DSC may, in performing this Agreement, require the Fund or the
Fund's distributor to provide it with an adequate number of copies of
prospectuses, reports or other documents required to be furnished to investors
or stockholders.
7.3 DSC may request or receive instructions from the Fund and may, at
the Fund's expense, consult with counsel for the Fund or its own counsel with
respect to any matter arising in connection with the performance of its duties
hereunder, and shall not be liable for any action taken or omitted by it in good
faith in accordance with such instructions or opinions of counsel.
7.4 DSC shall maintain reasonable insurance coverage for errors and
omissions and reasonable bond coverage for fraud.
7.5 Upon notice thereof to the Fund, DSC may employ others to provide
services to DSC in its performance of this Agreement.
7.6 Personnel and facilities of DSC used to perform services hereunder
may be used to perform similar services to other funds of the Delaware Group and
to others, and may be used to perform other services for the Fund, the other
funds of the Delaware Group and others.
-11-
<PAGE>
7.7 DSC shall provide its services as transfer agent hereunder in
accordance with Section 17 of the Securities Exchange Act of 1934, and the rules
and regulations thereunder. Further, the parties intend that the processes,
procedures, safeguard and controls employed should be those generally applied
and accepted for the type services provided hereunder by other institutions
providing the same or similar services, and, those which should provide
efficient, safe and economical services so as to promote promptness and accuracy
and to maintain the integrity of the Fund's records.
7.8 The Fund and DSC may, from time to time, set forth in writing
Guidelines For Selective Procedures to be applicable to the services hereunder.
VIII. COMPENSATION
8.1 The Fund and DSC acknowledge that because DSC has common ownership
and close management ties with the Fund's investment advisor and the Fund's
distributor and serves the other funds of the Delaware Group (DSC having been
originally established to provide the services hereunder for the funds of the
Delaware Group), advantages and benefits to the Fund in the employment of DSC
hereunder can be available which may not generally be available to it from
others providing similar services.
8.2 The Fund and DSC further acknowledge that the compensation by the
Fund to DSC is intended to induce DSC to provide services under this Agreement
of a nature and quality which the Board of Directors of the Fund, including a
majority who are
-12-
<PAGE>
not parties to this Agreement or interested persons of the parties hereto, has
determined after due consideration to be necessary for the conduct of the
business of the Fund, in the best interests of the Fund, the Series and their
stockholders.
8.3 Compensation by the Fund to DSC hereunder shall be determined in
accordance with Schedule A hereto as it shall be amended from time to time as
provided for herein and which is incorporated herein as a part hereof.
8.4 Compensation as provided in Schedule A shall be reviewed and
approved in the manner set forth in Section 10.1 hereof by the Board of
Directors of the Fund at least annually and may be reviewed and approved more
frequently at the request of either party. The Board may request, and DSC shall
provide, such information as the Board may reasonably require to evaluate the
basis of and approve the compensation.
IX. STANDARD OF CARE
9.1 The Fund acknowledges that DSC shall not be liable for, and in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of the performance of its duties under this Agreement, agrees to
indemnify DSC against, any claim or deficiency arising from the performance of
DSC's duties hereunder, including DSC's costs, counsel fees and expenses
incurred in investigating or defending any such claim or any administrative or
other proceeding, and acknowledges that any risk of loss or damage arising from
the conduct of the Fund's affairs in accordance
-13-
<PAGE>
herewith or in accordance with Guidelines or instructions given hereunder, shall
be borne by the Fund.
X. CONTRACTUAL STATUS
10.1 This Agreement shall be executed and become effective on the date
first written above if approved by a vote of the Board of Directors of the Fund,
including an affirmative vote of a majority of the non-interested members of the
Board, cast in person at a meeting called for the purpose of voting on such
approval. It shall continue in effect for an indeterminate period, and is
subject to termination on sixty (60) days notice by either party unless earlier
terminated or amended by agreement among the parties. Compensation under this
Agreement shall require approval by a majority vote of the Board of Directors of
the Fund, including an affirmative vote of the majority of the non-interested
members of the Board cast in person at a meeting called for the purpose of
voting on such approval.
10.2 This Agreement may not be assigned without the approval of the
Fund.
-14-
<PAGE>
10.3 This Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania.
DELAWARE SERVICE COMPANY, INC.
Attest: By:
------------------- --------------------------
Name: Name:
Title: Title:
DELAWARE GROUP INCOME FUNDS, INC.
for the DELCHESTER FUND series and
the STRATEGIC INCOME FUND series
Attest: By:
------------------- --------------------------
Name: Name:
Title: Title:
-15-
<PAGE>
SCHEDULE A
DELAWARE GROUP INCOME FUNDS, INC.
FIRST AMENDED AND RESTATED
SHAREHOLDERS SERVICES AGREEMENT
COMPENSATION SCHEDULE
1. Delaware Service Company, Inc. ("DSC") will determine and
report to the Fund, at least annually, the compensation
for services to be provided to the Fund for DSC's
forthcoming fiscal year or period.
2. In determining such compensation, DSC will fix and report a
fee to be charged per account and/or transaction, as may be
applicable, for services provided. DSC will bill, and the Fund
will pay, such compensation monthly.
3. For the period commencing on September 30, 1996, the charge
will consist of two charges for each Series of the Fund, an
annual charge and a per transaction charge for each account on
DSC's records and each account on an automated retirement
processing system. These charges are as follows:
A. ANNUAL CHARGE
Delchester Fund $11.00 Per Annum
Strategic Income Fund $ 5.50 Per Annum
Merrill Lynch - Omnibus Accounts:
Regular Accounts $11.00 Per Annum
Accounts with a Contingent
Deferred Sales Charge $14.00 Per Annum
Networked Accounts $3.00-$6.00 Per Annum
<PAGE>
SCHEDULE A
DELAWARE GROUP INCOME FUNDS, INC.
FIRST AMENDED AND RESTATED
SHAREHOLDERS SERVICES AGREEMENT
COMPENSATION SCHEDULE
PAGE 2
B. TRANSACTION CHARGE
Transaction Charge
1. Dividend Payment $ 0.25
2. New Account $ 6.00
3. Purchase:
a. Wire $ 8.00
b. Automated $ 1.50
c. Other $ 2.60
4. Transfer $ 8.00
5. Certificate Issuance $ 4.00
6. Liquidations
a. Wires $12.25
b. Drafts $ 0.75
c. Money Market Regular $ 4.50
d. Other Regular $ 4.50
7. Exchanges
a. Dividend Exchanges $ 3.00
b. Other $10.00
<PAGE>
DELAWARE GROUP OF FUNDS
FUND ACCOUNTING AGREEMENT
THIS AGREEMENT, made as of this 19th day of August, 1996 by and between
the registered investment companies in the Delaware Group listed on Schedule A,
which Schedule may be amended from time to time as provided in Section 8 hereof
(each corporation or common law or business trust, hereinafter referred to as a
"Company," and all such entities collectively hereinafter referred to as, the
"Companies"), on behalf of the portfolio(s) of securities of such Companies
listed on Schedule A, which Schedule may be amended from time to time (when used
in this Agreement in the context of a Company that offers only a single
portfolio/series of shares, the term "Portfolio" shall be a reference to such
Company, and when used in the context of a Company that offers multiple
portfolios/series of shares, shall be a reference to each portfolio/series of
such Company) and DELAWARE SERVICE COMPANY, INC. ("DSC"), a Delaware
corporation, having its principal office and place of business at 1818 Market
Street, Philadelphia, Pennsylvania 19103.
W I T N E S S E T H:
WHEREAS, the Investment Management Agreements between the
Companies with respect to each Portfolio and either Delaware
Management Company, Inc. or its U.K. affiliate, Delaware
-2-
<PAGE>
International Advisers Ltd., provide, in part, that each Portfolio shall conduct
its business and affairs and shall bear the expenses necessary and incidental
thereto including, but not in limitation of the foregoing, the costs incurred
with respect to accounting services; and
WHEREAS, the services to be provided under this agreement
previously were provided by employees of the Companies; and
WHEREAS, the Companies and DSC desire to have a written agreement
concerning the performance of accounting services for each Portfolio and
providing compensation therefor;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, and intending legally to be bound, it is agreed:
I. APPOINTMENT AS AGENT
Section 1.1 The Companies hereby appoint DSC the accounting
agent ("Accounting Agent") for all of the classes of each Portfolio, to provide
such accounting services as are set forth herein and DSC hereby accepts such
appointment and agrees to provide the Companies, as their agent, the services
described herein.
Section 1.2 The Companies shall pay DSC and DSC shall accept,
for the services provided hereunder, the compensation provided for in Section VI
hereof. The Companies
-3-
<PAGE>
also shall reimburse DSC for expenses incurred or advanced by it for the
Companies in connection with its services hereunder.
II. DOCUMENTATION
Section 2.1 Each Company represents that it has provided or
made available to DSC (or has given DSC an opportunity to examine) copies of,
and, DSC represents that it has received from the Companies (or is otherwise
familiar with), the following documents:
A. The Articles of Incorporation or Agreement and
Declaration of Trust or other document, as relevant, evidencing each Company's
form of organization and any current amendments thereto;
B. The By-Laws or Procedural Guidelines of each
Company;
C. Any resolution or other action of each Company or
the Board of Directors or Trustees of each Company establishing or affecting the
rights, privileges or other status of any class of shares of a Portfolio, or
altering or abolishing any such class;
D. A certified copy of a resolution of the Board of
Directors or Trustees of each Company appointing DSC as Accounting Agent for
each Portfolio and authorizing the execution of this Agreement or an amendment
to Schedule A of this Agreement;
-4-
<PAGE>
E. A copy of each Company's currently effective
prospectus[es] and Statement[s] of Additional Information under the Securities
Act of 1933, if effective;
F. A certified copy of any resolution of the Board of
Directors or Trustees of each Company authorizing any person to give
instructions to DSC under this Agreement (with a specimen signature of such
person if not already provided), setting forth the scope of such authority; and
G. Any amendment, revocation or other document
altering, adding, qualifying or repealing any document or authority called for
under this Section 2.1.
Section 2.2 Each Company and DSC may consult as to forms or
documents that may be required in performing services hereunder.
Section 2.3 Each Company warrants the following:
A. The Company is, or will be, a properly registered
investment company under the Investment Company Act of 1940 (the "1940 Act") and
any and all shares of a Portfolio which it issues will be properly registered
and lawfully issued under applicable federal and state laws.
B. The provisions of this contract do not violate the
terms of any instrument by which the Company or the Company on behalf of a
Portfolio is bound; nor do they violate any law or regulation of any body having
jurisdiction over the Company or its property.
Section 2.4 DSC warrants the following:
-5-
<PAGE>
A. The provisions of this contract do not violate the
terms of any instrument by which DSC is bound; nor do they violate any law or
regulation of any body having jurisdiction over DSC or its property.
III. SERVICES TO BE PROVIDED BY DSC
Section 3.1 Daily Net Asset Value ("NAV") Calculation. As
Accounting Agent for each Portfolio of the Companies, DSC will perform all
functions necessary to provide daily Portfolio NAV calculations, including:
A. Maintaining each Portfolio's securities portfolio
history by:
1. recording portfolio purchases and sales;
2. recording corporate actions and capital
changes relating to portfolio securities;
3. accruing interest, dividends and
expenses; and
4. maintaining the income history for
securities purchased by a Portfolio.
B. Determining distributions to Portfolio
shareholders;
C. Recording and reconciling shareholder activity
including:
1. recording subscription, liquidations and
dividend reinvestments;
-6-
<PAGE>
2. recording settlements of shareholder
activity; and
3. reconciling Portfolio shares outstanding
to the records maintained by DSC, as transfer agent of the Portfolio.
D. Valuing a Portfolio's securities portfolio which
includes determining the NAVs for all classes of the Portfolio;
E. Disseminating Portfolio NAVs and dividends to
interested parties (including the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the Investment Company Institute ("ICI"),
Morningstar, and Lipper Analytical Services, Inc. ("Lipper")); and
F. Resolving pricing and/or custody discrepancies.
Section 3.2 Financial Reporting. As Accounting Agent, DSC
shall perform financial reporting services for each Portfolio, which shall
include:
A. The preparation of semi-annual and annual reports
for shareholders which involves the performance of the following functions:
1. preparing all statements of net assets,
statements of operations and statements of changes in net assets for the
Portfolio;
-7-
<PAGE>
2. preparing footnotes to financial
statements for the Portfolio;
3. preparing workpapers for each Company's
annual audit by its independent public accountants; and
4. coordinating the annual audit by each
Company's independent public accountants.
B. Reporting to the ICI in response to requests for
monthly and other periodic information;
C. Performing statistical reporting, which includes
daily, monthly, quarterly and annual reports for Lipper, Weisenberger and other
third party reporting agencies; and
D. Furnishing financial information for any
additional required SEC reporting, such as the preparation of financial
information for each Company's reporting on Form N-SAR, the furnishing of
financial information for each Company's prospectus[es] and statement[s] of
additional information, and the financial information required for each
Company's annual Rule 24f-2 notice filing;
Section 3.3 Compliance Testing. DSC will monitor, test and
prepare and maintain supporting schedules which evidence compliance with the
definitional and distribution requirements under the Internal Revenue Code of
1986, as amended ("IRC"), including the following:
-8-
<PAGE>
A. The requirement to be registered at all times
during the taxable year under the 1940 Act (IRC ss.851(a));
B. The annual ninety percent gross income test (IRC
ss.851(b)(2));
C. The short/short (thirty percent) gross income test
(IRC ss.851(b)(3));
D. The quarterly IRC industry diversification tests
(IRC ss.ss.851(b)(4) and 817(h)); and
E. The 90% distribution requirements (IRC ss.852(a)).
Section 3.4 Other Services. In addition to the above, DSC, in
its capacity as Accounting Agent for the Company, will perform the following
services:
A. The calculation of required Portfolio monthly
yields and total return calculations in accordance with the prescribed rules of
the U.S. Securities and Exchange Commission;
B. Providing the financial information necessary for
the preparation of all federal and state tax returns and ancillary schedules,
including:
1. year-end excise tax distributions; and
2. compliance with Subchapter M and Section
4982 of the IRC;
-9-
<PAGE>
C. Performing special tax reporting to shareholders,
including the preparation of reports which reflect income earned by each
Portfolio by state, exempt income and distributions that qualify for the
corporate dividends received deduction;
D. The preparation of expense and budget figures for
each Portfolio, including the maintenance of detailed records pertaining to
expense accruals and payments and adjusting reports to reflect accrual
adjustments;
E. The preparation of reports for Board of Directors'
or Trustees' meetings;
F. Coordination of the custody relationships;
G. Facilitating security settlements;
H. Performance of required foreign security
accounting functions;
I. Performance of daily cash reconciliations for each
Portfolio;
J. Providing identified reports to portfolio managers
including:
1. providing portfolio holdings and security
valuation reports;
2. preparing cash forecasts and
reconciliations as mutually agreed upon; and
3. preparing income projections.
-10-
<PAGE>
IV. PERFORMANCE OF DUTIES
Section 4.1 DSC may request or receive instructions from a
Company and may, at a Portfolio's expense, consult with counsel for the Company
or its own counsel, with respect to any matter arising in connection with the
performance of its duties hereunder, and shall not be liable for any action
taken or omitted by it in good faith in accordance with such instructions or
opinions of counsel.
Section 4.2 DSC shall maintain reasonable insurance coverage
for errors and omissions and reasonable bond coverage for fraud.
Section 4.3 Upon notice thereof to a Company, DSC may employ
others to provide services to DSC in its performance of this Agreement.
Section 4.4 Personnel and facilities of DSC used to perform
services hereunder may be used to perform similar services to all Companies of
the Delaware Group and their Portfolios and to others, and may be used to
perform other services for all of the Companies of the Delaware Group and
others.
Section 4.5 The Companies and DSC may, from time to time, set
forth in writing at the Companies' expense certain guidelines to be applicable
to the services hereunder.
-11-
<PAGE>
V. ACCOUNTS AND RECORDS
Section 5.1 The parties hereto agree and acknowledge that the
accounts and records maintained by DSC with respect to a Portfolio shall be the
property of such Portfolio, and shall be made available to the relevant Company
promptly upon request and shall be maintained for the periods prescribed in Rule
31a-2 under the Investment Company Act of 1940 or such longer period as shall be
agreed to by the parties hereto, at such Portfolio's expense.
VI. COMPENSATION
Section 6.1 The Companies and DSC acknowledge that the
compensation to be paid hereunder to DSC is intended to induce DSC to provide
services under this Agreement of a nature and quality which the Boards of
Directors or Trustees of the Companies, including a majority who are not parties
to this Agreement or interested person of the parties hereto, have determined
after due consideration to be necessary for the conduct of the business of a
Portfolio in the best interests of a Portfolio and its shareholders.
Section 6.2 Compensation by a Portfolio hereunder shall be
determined in accordance with Schedule B hereto as it shall be amended from time
to time as provided for herein and which is incorporated herein as a part
hereof.
Section 6.3 Compensation as provided in Schedule B shall be
reviewed and approved for each Portfolio in the manner
-12-
<PAGE>
set forth in Section 8.1 hereof by the Boards of Directors or Trustees of the
Companies at least annually and may be reviewed and approved more frequently at
the request of either party. The Boards may request and DSC shall provide such
information as the Boards may reasonably require to evaluate the basis of and
approve the compensation.
VII. STANDARD OF CARE
Section 7.1 The Companies on behalf of each Portfolio
acknowledge that DSC shall not be liable for, and in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of the
performance of its duties under this contract, agree to indemnify DSC against,
any claim or deficiency arising from the performance of DSC's duties hereunder,
including DSC's costs, counsel fees and expenses incurred in investigating or
defending any such claim or any administrative or other proceeding, and
acknowledge that any risk of loss or damage arising from the conduct of a
Portfolio's affairs in accordance herewith or in accordance with guidelines or
instructions given hereunder, shall be borne by the Portfolio. The
indemnification provided for in this Section 7.1 shall be made Portfolio by
Portfolio so that DSC is only entitled to indemnification from a Company on
behalf of a Portfolio for actions arising from the performance of DSC's duties
as to that Portfolio.
-13-
<PAGE>
VIII. CONTRACTUAL STATUS
Section 8.1 This Agreement shall be executed and become
effective as to a Company with regard to a Portfolio listed on Schedule A as of
the date first written above if approved by a vote of such Company's Board of
Directors or Trustees, including an affirmative vote of a majority of the non-
interested members of the Board of such Company, cast in person at a meeting
called for the purpose of voting on such approval. It shall continue in effect
for an indeterminate period, and is subject to termination as to a Company on
behalf of a Portfolio or DSC, as the case may be, on sixty (60) days notice by
either that Company or DSC, unless earlier terminated or amended by agreement
among the parties. A Company shall be permitted to terminate this Agreement as
to a Portfolio on sixty (60) days notice to DSC. Compensation under this
Agreement by a Portfolio shall require approval by a majority vote of the Board
of Directors or Trustees of such Portfolio's Company, including an affirmative
vote of the majority of the non-interested members of such Board cast in person
at a meeting called for the purpose of voting such approval.
Section 8.2 This Agreement shall become effective as to any
Company or Portfolio not included on Schedule A as of the date first written
above, but desiring to participate in this Agreement, on such date as an amended
Schedule A adding such new Company or Portfolio to such Schedule is executed by
DSC and such new Company or a Company on behalf of a new Portfolio following
-14-
<PAGE>
approval by the Company or by the Company on behalf of a new Portfolio desiring
to be included in this Agreement in accordance with the method specified in
Section 8.1. Any such amended Schedule A shall not affect the validity of this
Agreement as between DSC and the other Companies which have executed this
Agreement or any subsequent amendment to Schedule A of this Agreement.
Section 8.3 This Agreement may not be assigned by DSC without
the approval of all of the Companies.
Section 8.4 This Agreement shall be governed by the laws of
the Commonwealth of Pennsylvania.
DELAWARE SERVICE COMPANY, INC.
/s/ David K. Downes
By:_____________________________________
David K. Downes
Senior Vice President/Chief
Administrative Officer/Chief
Financial Officer
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP DECATUR FUND, INC.
DELAWARE GROUP DELAWARE FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND, INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT
FUNDS, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP DELCHESTER HIGH-YIELD
BOND FUND, INC.
DMC TAX-FREE INCOME TRUST - PENNSYLVANIA
DELAWARE GROUP VALUE FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL
FUNDS, INC.
-15-
<PAGE>
DELAWARE GROUP DELCAP FUND, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
/s/Wayne A. Stork
By:_____________________________________
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
/s/ Wayne A. Stork
By:_____________________________________
Wayne A. Stork, Chairman
-16-
<PAGE>
SCHEDULE A
COMPANIES AND PORTFOLIOS COMPRISING THE DELAWARE GROUP*
Delaware Group Cash Reserve, Inc.
Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Total Return Fund
Delaware Group Delaware Fund, Inc.
Delaware Fund
Devon Fund
Delaware Group Tax-Free Fund, Inc.
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Group Trend Fund, Inc.
Delaware Group Delchester High-Yield Bond Fund, Inc.
- --------
* Except as otherwise noted, all Portfolios included on this Schedule A are
Existing Portfolios for purposes of the compensation described on Schedule B to
that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
Portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
-17-
<PAGE>
DMC Tax-Free Income Trust - Pennsylvania
Delaware Group Value Fund, Inc.
Delaware Group Global & International Funds, Inc.
International Equity Fund
Global Bond Fund
Global Assets Fund
Emerging Markets Fund (New)
Delaware Group DelCap Fund, Inc.
Delaware Pooled Trust, Inc.
The Defensive Equity Portfolio
The Aggressive Growth Portfolio
The International Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Defensive Equity Utility Portfolio (New)
The Labor Select International Equity Portfolio
The Real Estate Investment Trust Portfolio
The Fixed Income Portfolio
The Limited-Term Maturity Portfolio (New)
The Global Fixed Income Portfolio
The International Fixed Income Portfolio (New)
The High-Yield Bond Portfolio (New)
Delaware Group Premium Fund, Inc.
Equity/Income Series
High Yield Series
Capital Reserves Series
Money Market Series
Growth Series
Multiple Strategy Series
International Equity Series
Value Series
Emerging Growth Series
Global Bond Series (New)
Delaware Group Government Fund, Inc.
-18-
<PAGE>
Delaware Group Adviser Funds, Inc.
Enterprise Fund
U.S. Growth Fund
World Growth Fund
New Pacific Fund
Federal Bond Fund
Corporate Income Fund
Dated as of: August 19, 1996
-19-
<PAGE>
SCHEDULE B
COMPENSATION
Fee Schedule for The Delaware Group of Funds
Part 1 -- Fees for Existing Portfolios
Existing Portfolios are those so designated on Schedule A to the Fund Accounting
Agreement between Delaware Service Company, Inc. and the Delaware Group of Funds
dated as of August 19, 1996 ("Agreement").
Annual Asset Based Fees
First $10 Billion of Aggregate
Complex Net Assets 2.5 Basis Points
Aggregate Complex Net Assets
over $10 Billion 2.0 Basis Points
Annual asset based fees will be charged at a rate of 2.5 basis points for the
first $10 Billion of Aggregate Complex Net Assets. Aggregate Complex Net Assets
over $10 Billion will be charged at a rate of 2.0 basis points. These fees will
be charged to a Portfolio on an aggregated pro rated basis.
Annual Minimum Fees
Domestic Equity Portfolio $35,000
Domestic Fixed Income Portfolio $45,000
International Series Portfolio $70,000
Per Class of Share Fee $ 4,000
There is an annual minimum fee that will be charged only if the annual asset
based fee is less than the calculation for the minimum fee. This fee is based on
the type and the number of classes per Portfolio. For an equity Portfolio
$35,000 will be charged; for a fixed income Portfolio $45,000 will be charged,
and for an international Portfolio $70,000 will be charged. For each class of
shares, $4,000 will be charged, such amount to be prorated over a period of less
than a year for any classes added after April 30, 1996. A total of all minimum
fees will be compared to the total asset based fee to determine which fee is
higher and, subsequently, will be used to bill the Companies.
Part 2 -- Fees for New Portfolios
For each Portfolio designated as a New Portfolio on Schedule A to the Agreement,
there will be a fee of 2.0 basis points, providing that the Delaware complex net
assets are above $10 Billion (the
<PAGE>
rate would be 2.5 basis points if under $10 Billion and then 2.0 basis points
once the net assets cross $10 Billion), or an annual minimum fee calculated in
the manner described above, whichever is higher. This new fee would be added to
the total of Existing Portfolio fees and then pro rated. Fees shall not be
charged for New Portfolios included on Schedule A until such Portfolios shall
have commenced operations.
Dated as of: August 19, 1996
-21-
<PAGE>
AMENDMENT NO.1 TO
SCHEDULE A
TO DELAWARE GROUP OF FUNDS*
FUND ACCOUNTING AGREEMENT
Delaware Group Cash Reserve, Inc.
Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Total Return Fund
Delaware Group Delaware Fund, Inc.
Delaware Fund
Devon Fund
Delaware Group Tax-Free Money Fund, Inc.
Delaware Group Tax-Free Fund, Inc.
Tax-Free USA Fund
Tax-Free Insured Fund
Tax-Free USA Intermediate Fund
Delaware Group Limited-Term Government Funds, Inc.
Limited-Term Government Fund
U.S. Government Money Fund
Delaware Group Trend Fund, Inc.
Delaware Group Income Funds, Inc.
Delchester Fund
Strategic Income Fund (New)
*Except as otherwise noted, all Portfolios included on this Schedule A
are Existing Portfolios for purposes of the compensation described on Schedule B
to that Fund Accounting Agreement between Delaware Service Company, Inc. and the
Delaware Group of Funds dated as of August 19, 1996 ("Agreement"). All
portfolios added to this Schedule A by amendment executed by a Company on behalf
of such Portfolio hereof shall be a New Portfolio for purposes of Schedule B to
the Agreement.
2
<PAGE>
DMC Tax-Free Income Trust - Pennsylvania
Delaware Group Value Fund, Inc.
Delaware Group Global & International Funds, Inc.
International Equity Fund
Global Bond Fund
Global Assets Fund
Emerging Markets Fund (New)
Delaware Group Delcap Fund, Inc.
Delaware Pooled Trust, Inc.
The Defensive Equity Portfolio
The Aggressive Growth Portfolio
The International Equity Portfolio
The Defensive Equity Small/Mid-Cap Portfolio (New)
The Defensive Equity Utility Portfolio (New)
The Labor Select International Equity Portfolio
The Real Estate Investment Trust Portfolio
The Fixed Income Portfolio
The Limited-Term Maturity Portfolio (New)
The Global Fixed Income Portfolio
The International Fixed Income Portfolio (New)
The High-Yield Bond Portfolio (New)
Delaware Group Premium Fund, Inc.
Equity/Income Series
High Yield Series
Capital Reserves Series
Money Market Series
Growth Series
Multiple Strategy Series
International Equity Series
Value Series
Emerging Growth Series
Global Bond Series (New)
Delaware Group Government Fund, Inc.
3
<PAGE>
Delaware Group Adviser Funds, Inc.
Enterprise Fund
U.S. Growth Fund
World Growth Fund
New Pacific Fund
Federal Bond Fund
Corporate Income Fund
Dated as of: September 30, 1996
-----------------------
DELAWARE SERVICE COMPANY, INC.
By:
----------------------------------
David K. Downes
Senior Vice President/Chief
Administrative Officer/Chief
Financial Officer
DELAWARE GROUP CASH RESERVE, INC.
DELAWARE GROUP DECATUR FUND, INC.
DELAWARE GROUP DELAWARE FUND, INC.
DELAWARE GROUP TAX-FREE FUND, INC.
DELAWARE GROUP TAX-FREE MONEY FUND,INC.
DELAWARE GROUP LIMITED-TERM GOVERNMENT
FUNDS, INC.
DELAWARE GROUP TREND FUND, INC.
DELAWARE GROUP INCOME FUNDS, INC.
DMC TAX-FREE INCOME TRUST - PENNSYLVANIA
DELAWARE GROUP VALUE FUND, INC.
DELAWARE GROUP GLOBAL & INTERNATIONAL
FUNDS, INC.
DELAWARE GROUP DELCAP FUND, INC.
DELAWARE GROUP PREMIUM FUND, INC.
DELAWARE GROUP GOVERNMENT FUND, INC.
DELAWARE GROUP ADVISER FUNDS, INC.
By:
-----------------------------------
Wayne A. Stork
Chairman, President and
Chief Executive Officer
DELAWARE POOLED TRUST, INC.
By:
-----------------------------------
Wayne A. Stork
Chairman
4
<PAGE>
Consent of Independent Auditors
We consent to the references to our firm under the captions Financial
Highlights in the Prospectuses of Delaware Group Income Funds, Inc. for the
Delchester Fund A Class, B Class and C Class, and for the Institutional Class
and Financial Statements in the Statement of Additional Information of
Delaware Group Income Funds, Inc. and to the incorporation by reference in this
Post-Effective Amendment No. 54 to the Registration Statement (Form N-1A No.
2-37707) of Delaware Group Delchester High-Yield Bond Fund, Inc. of our report
dated September 6, 1996, included in the 1996 Annual Report to Shareholders of
the Delaware Group Delchester High-Yield Bond Fund, Inc.
/s/Ernst & Young LLP
-------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
September 24, 1996
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Directors
Delaware Group Delchester High-Yield Bond Fund, Inc.
We have audited the accompanying statement of net assets of Delaware Group
Delchester High-Yield Bond Fund, Inc. (the Fund) as of July 31, 1996, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Delchester High-Yield Bond Fund, Inc. at July 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
/s/Ernst & Young LLP
----------------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
September 6, 1996
<PAGE>
DELAWARE GROUP DELCHESTER FUND C
TOTAL RETURN PERFORMANCE
THREE MONTHS (EXCLUDING CDSC)
- ----------------------------------------------------------
Initial Investment $1,000.00
Beginning OFFER $6.17
Initial Shares 162.075
Fiscal Beginning Dividends Reinvested Cumulative
Year Shares for Period Shares Shares
- -----------------------------------------------------
1995 | 162.075 | $0.147 | 3.909 | 165.984
- -----------------------------------------------------
Ending Shares 165.984
Ending NAV x $6.14
-----------
Investment Return $1,019.14
Total Return Performance
- ------------------------
Investment Return $1,019.14
Less Initial Investment $1,000.00
-----------
$19.14 / $1,000.00 x 100
Total Return: 1.91%
<PAGE>
DELAWARE GROUP DELCHESTER FUND C
TOTAL RETURN PERFORMANCE
THREE MONTHS (INCLUDING CDSC)
- ----------------------------------------------------------
Initial Investment $1,000.00
Beginning OFFER $6.17
Initial Shares 162.075
Fiscal Beginning Dividends Reinvested Cumulative
Year Shares for Period Shares Shares
- -----------------------------------------------------
1995 | 162.075 | $0.147 | 3.909 | 165.984
- -----------------------------------------------------
Ending Shares 165.984
Ending NAV x $6.14
-----------
$1,019.14
Less CDSC $9.95
-----------
Investment Return $1,009.19
Total Return Performance
- ------------------------
Investment Return $1,009.19
Less Initial Investment $1,000.00
-----------
$9.19 / $1,000.00 x 100
Total Return: 0.92%
<PAGE>
DELAWARE GROUP DELCHESTER FUND C
TOTAL RETURN PERFORMANCE
SIX MONTHS (EXCLUDING CDSC)
- ----------------------------------------------------------
Initial Investment $1,000.00
Beginning OFFER $6.21
Initial Shares 161.031
Fiscal Beginning Dividends Reinvested Cumulative
Year Shares for Period Shares Shares
- -----------------------------------------------------
1995 | 161.031 | $0.287 | 6.004 | 167.035
- -----------------------------------------------------
Ending Shares 167.035
Ending NAV x $6.14
-----------
Investment Return $1,025.59
Total Return Performance
- ------------------------
Investment Return $1,025.59
Less Initial Investment $1,000.00
-----------
$25.59 / $1,000.00 x 100
Total Return: 2.56%
<PAGE>
DELAWARE GROUP DELCHESTER FUND C
TOTAL RETURN PERFORMANCE
SIX MONTHS (INCLUDING CDSC)
- -----------------------------------------------------------
Initial Investment $1,000.00
Beginning OFFER $6.27
Initial Shares 159.490
Fiscal Beginning Dividends Reinvested Cumulative
Year Shares for Period Shares Shares
- -----------------------------------------------------------
1995 | 159.490 | $0.287 | 7.545 | 167.035
- -----------------------------------------------------------
Ending Shares 167.035
Ending NAV x $6.14
-----------
$1,025.59
Less CDSC $9.79
-----------
Investment Return $1,015.80
Total Return Performance
- ------------------------
Investment Return $1,015.80
Less Initial Investment $1,000.00
-----------
$15.80 / $1,000.00 x 100
Total Return: 1.58%
<PAGE>
DELAWARE GROUP DELCHESTER FUND C
TOTAL RETURN PERFORMANCE
LIFE OF FUNDS (EXCLUDING CDSC)
- -----------------------------------------------------------
Initial Investment $1,000.00
Beginning OFFER $6.21
Initial Shares 161.031
Fiscal Beginning Dividends Reinvested Cumulative
Year Shares for Period Shares Shares
- -----------------------------------------------------------
1995 | 161.031 | $0.386 | 10.307 | 171.338
- -----------------------------------------------------------
Ending Shares 171.338
Ending NAV x $6.14
-----------
Investment Return $1,052.02
Total Return Performance
- ------------------------
Investment Return $1,052.02
Less Initial Investment $1,000.00
-----------
$52.02 / $1,000.00 x 100
Total Return: 5.20%
<PAGE>
DELAWARE GROUP DELCHESTER FUND C
TOTAL RETURN PERFORMANCE
LIFE OF FUNDS (INCLUDING CDSC)
- -----------------------------------------------------------
Initial Investment $1,000.00
Beginning OFFER $6.21
Initial Shares 161.031
Fiscal Beginning Dividends Reinvested Cumulative
Year Shares for Period Shares Shares
- -----------------------------------------------------------
1995 | 161.031 | $0.386 | 10.307 | 171.338
- -----------------------------------------------------------
Ending Shares 171.338
Ending NAV x $6.14
-----------
$1,052.02
Less CDSC $9.89
-----------
Investment Return $1,042.13
Total Return Performance
- ------------------------
Investment Return $1,042.13
Less Initial Investment $1,000.00
-----------
$42.13 / $1,000.00 x 100
Total Return: 4.21%
<PAGE>
The Delaware Group of Funds
Multiple Class Plan Pursuant to Rule 18f-3
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of Directors of each of the investment companies listed on
Appendix A as may be amended from time to time (each individually a "Fund," and
collectively, the "Funds"), including a majority of the Directors who are not
interested persons of each Fund, pursuant to Rule 18f-3 under the Investment
Company Act of 1940, as amended (the "Act"). The Board of each Fund has
determined that the Plan, including the allocation of expenses, is in the best
interests of the Fund as a whole, each series of shares offered by such Fund
(individually and collectively the "Series") where the Fund offers its shares in
multiple series, and each class of shares offered by the Fund or Series, as
relevant. The Plan sets forth the provisions relating to the establishment of
multiple classes of shares for each Fund and, if relevant, its Series. To the
extent that a subject matter set forth in this Plan is covered by a Fund's
Articles of Incorporation or By-Laws, such Articles of Incorporation or By-Laws
will control in the event of any inconsistencies with descriptions contained in
this Plan.
The term "Portfolio," when used in this Plan in the context of
a Fund that offers only a single series of shares, shall be a reference to the
Fund, and when used in the context of a Fund that offers multiple series of
shares, shall be a reference to each series of such Fund.
CLASSES
1. Appendix A to this Plan describes the classes to be issued
by each Portfolio and identifies the names of such classes.
FRONT-END SALES CHARGE
2. Class A shares carry a front-end sales charge as described
in the Funds' relevant prospectuses; and Class B, Class C and Institutional
Class shares are sold without a front-end sales charge.
CONTINGENT DEFERRED SALES CHARGE
3. Class A shares are not subject to a contingent deferred
sales charge ("CDSC"), except in the following limited circumstances. On
<PAGE>
investments of $1 million or more for which a dealer's commission is paid by the
Fund's principal underwriter, a CDSC of 1.00% of the lesser of (i) the net asset
value at the time of redemption, or (ii) the original net asset value at the
time of purchase applies to redemptions of those investments within the
contingency period of 12 months from the month of purchase.
4. Class B shares redeemed within six years of their purchase
shall be assessed a CDSC at the following rate: (i) 4.00% if shares are redeemed
within two years of purchase; (ii) 3.00% if shares are redeemed during the third
or fourth year following purchase; (iii) 2.00% if shares are redeemed during the
fifth year following purchase; (iv) 1.00% if shares are redeemed during the
sixth year following purchase; and (vi) 0% thereafter.
5. Class C shares redeemed within twelve months of their
purchase shall be assessed a CDSC at the rate of 1.00% of the lesser of (i) the
net asset value at the time of redemption, or (ii) the original net asset value
at the time of purchase.
6. The CDSC for each class is waived in certain circumstances,
as described in the Funds' relevant prospectuses. Shares that are subject to a
CDSC age one month at the end of the month in which the shares were purchased,
regardless of the specific date during the month that the shares were purchased.
7. Institutional Class shares are not subject to a CDSC.
RULE 12b-1 PLANS
8. In accordance with the Rule 12b-1 Plan for the Class A
shares of each Portfolio, the Fund shall pay to Delaware Distributors, L.P. (the
"Distributor") a monthly fee not to exceed 0.30% per annum of such Portfolio's
average daily net assets represented by Class A shares as may be determined by
the Fund's Board of Directors from time to time. The monthly fee shall be
reduced by the aggregate sums paid by or on behalf of such Portfolio to persons
other than broker-dealers (the "Service Providers") pursuant to servicing
agreements.
9. In accordance with the Rule 12b-1 Plan for the Class B
shares of each Portfolio, the Fund shall pay to the Distributor a monthly fee
not to exceed 0.75% per annum of such Portfolio's average daily net assets
represented by Class B shares as may be determined by the Fund's Board of
Directors from time to time. In addition to these amounts, the Fund shall pay
(i) to the Distributor for payment to dealers or others, or (ii) directly to
others, an amount not to exceed 0.25% per annum of such Portfolio's average
daily net assets represented by Class B shares, as a service fee pursuant to
dealer or servicing agreements.
-2-
<PAGE>
10. In accordance with the Rule 12b-1 Plan for the Class C
shares of each Portfolio, the Fund shall pay to the Distributor a monthly fee
not to exceed 0.75% per annum of such Portfolio's average daily net assets
represented by Class C shares as may be determined by the Fund's Board of
Directors from time to time. In addition to these amounts, the Fund shall pay
(i) to the Distributor for payment to dealers or others, or (ii) directly to
others, an amount not to exceed 0.25% per annum of such Portfolio's average
daily net assets represented by Class C shares, as a service fee pursuant to
dealer or servicing agreements.
11. A Rule 12b-1 Plan has not been adopted for the
Institutional Class shares of any Portfolio.
ALLOCATION OF EXPENSES
12. The Fund shall allocate to each class of shares of a
Portfolio any fees and expenses incurred by the Fund in connection with the
distribution or servicing of such class of shares under a Rule 12b-1 Plan, if
any, adopted for such class. In addition, the Fund reserves the right, subject
to approval by the Fund's Board of Directors, to allocate fees and expenses of
the following nature to a particular class of shares of a Portfolio (to the
extent that such fees and expenses actually vary among each class of shares or
vary by types of services provided to each class of shares of the Portfolio):
(i) transfer agency and other recordkeeping costs;
(ii) Securities and Exchange Commission and blue sky
registration or qualification fees;
(iii) printing and postage expenses related to printing and
distributing class specific materials, such as
shareholder reports, prospectuses and proxies to
current shareholders of a particular class or to
regulatory authorities with respect to such class of
shares;
(iv) audit or accounting fees or expenses relating
solely to such class;
(v) the expenses of administrative personnel and
services as required to support the shareholders
of such class;
(vi) litigation or other legal expenses relating solely
to such class of shares;
-3-
<PAGE>
(vii) Directors' fees and expenses incurred as a result
of issues relating solely to such class of shares;
and
(viii) other expenses subsequently identified and
determined to be properly allocated to such class
of shares.
13. Except for any expenses that are allocated to a particular
class as described in paragraph 11 above, all expenses incurred by a Portfolio
will be allocated to each class of shares of such Portfolio on the basis of the
net asset value of each such class in relation to the net asset value of the
Portfolio.
ALLOCATION OF INCOME AND GAINS
14. Income and realized and unrealized capital gains and
losses of a Portfolio will be allocated to each class of shares of such
Portfolio on the basis of the net asset value of each such class in relation to
the net asset value of the Portfolio.
CONVERSIONS
15. (a) Except for shares acquired through a reinvestment of
dividends or distributions, Class B shares held for eight years after purchase
are eligible for automatic conversion into Class A shares of the same Portfolio
in accordance with the terms described in the relevant prospectus. Class B
shares acquired through a reinvestment of dividends or distributions will
convert into Class A shares of the same Portfolio pro rata with the Class B
shares that were not acquired through the reinvestment of dividends and
distributions.
(b) The automatic conversion feature of Class B
shares shall be suspended at any time that the Board of Directors of the Fund
determines that there is not available a reasonably satisfactory opinion of
counsel to the effect that (i) the assessment of the higher fee under the Fund's
Rule 12b-1 Plan for Class B does not result in the Fund's dividends or
distributions constituting a preferential dividend under the Internal Revenue
Code of 1986, as amended, and (ii) the conversion of Class B shares into Class A
shares does not constitute a taxable event under federal income tax law. In
addition, the Board of Directors of a Fund may suspend the automatic conversion
feature by determining that any other condition to conversion set forth in the
relevant prospectus, as amended from time to time, is not satisfied.
(c) The Board of Directors of a Fund may also suspend the
automatic conversion of Class B shares if it determines that suspension is
-4-
<PAGE>
appropriate to comply with the requirements of the Act, or any rule or
regulation issued thereunder, relating to voting by Class B shareholders on the
Fund's Rule 12b-1 Plan for Class A or, in the alternative, the Board of
Directors may provide Class B shareholders with alternative conversion or
exchange rights.
16. Class A, Class C and Institutional Class shares do not
have a conversion feature.
EXCHANGES
17. Exchanges are permitted between Class A Shares and
Institutional Class Shares of a Portfolio or of any other Portfolio in the
Delaware Group funds; Class B shares of a Portfolio may only be exchanged for
Class B shares of any other Portfolio in the Delaware Group; Class C shares of a
Portfolio may only be exchanged for Class C shares of any other Portfolio in the
Delaware Group. All exchanges are subject to the eligibility and minimum
purchase requirements set forth in the Funds' prospectuses. Exchanges cannot be
made between open-end and closed-end funds within the Delaware Group.
18. Each class will vote separately with respect to the Rule
12b-1 Plan related to that class; provided, however, that Class B shares of a
Portfolio may vote on any proposal to materially increase the fees to be paid by
the Fund under the Rule 12b-1 Plan for the Class A shares of the same Portfolio.
19. On an ongoing basis, the Directors, pursuant to their
fiduciary responsibilities under the Act and otherwise, will monitor the
Portfolio for the existence of any material conflicts between the interests of
all the classes of shares offered by such Portfolio. The Directors, including a
majority of the Directors who are not interested persons of the Fund, shall take
such action as is reasonably necessary to eliminate any such conflict that may
develop. The Manager and the Distributor shall be responsible for alerting the
Board to any material conflicts that arise.
20. As described more fully in the Funds' relevant
prospectuses, broker-dealers that sell shares of a Portfolio will be compensated
differently depending on which class of shares the investor selects.
21. Each Fund reserves the right to increase, decrease or
waive the CDSC imposed on any existing or future class of shares of a Portfolio
within the ranges permissible under applicable rules and regulations of the
Securities and Exchange Commission (the "SEC") and the rules of the National
Association of Securities Dealers, Inc. (the "NASD"), as such rules may be
amended or adopted from time to time. Each Fund may in the future alter the
terms of the existing classes of such Portfolio or create new classes in
compliance with applicable rules and regulations of the SEC and the NASD.
-5-
<PAGE>
22. All material amendments to this Plan must be approved by a
majority of the Directors of each Fund affected by such amendments, including a
majority of the Directors who are not interested persons of the Fund.
Effective as of November 29, 1995
-6-
<PAGE>
APPENDIX A
List of Funds and Their Classes
1. Delaware Group Delaware Fund, Inc.
Delaware Fund
Delaware Fund A Class
Delaware Fund B Class
Delaware Fund C Class
Delaware Fund Institutional Class
Devon Fund
Devon Fund A Class
Devon Fund B Class
Devon Fund C Class
Devon Fund Institutional Class
2. Delaware Group Trend Fund, Inc.
Trend Fund A Class
Trend Fund B Class
Trend Fund C Class
Trend Fund Institutional Class
3. Delaware Group Value Fund, Inc.
Value Fund A Class
Value Fund B Class
Value Fund C Class
Value Fund Institutional Class
4. Delaware Group DelCap Fund, Inc.
DelCap Fund A Class
DelCap Fund B Class
DelCap Fund C Class
DelCap Fund Institutional Class
5. Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Income Fund A Class
Decatur Income Fund B Class
Decatur Income Fund C Class
Decatur Income Fund Institutional Class
<PAGE>
Decatur Total Return Fund
Decatur Total Return Fund A Class
Decatur Total Return Fund B Class
Decatur Total Return Fund C Class
Decatur Total Return Fund Institutional Class
6. Delaware Group Global & International Funds, Inc.
International Equity Series
International Equity Fund A Class
International Equity Fund B Class
International Equity Fund C Class
International Equity Fund Institutional Class
Global Bond Series
Global Bond Fund A Class
Global Bond Fund B Class
Global Bond Fund C Class
Global Bond Fund Institutional Class
Global Assets Series
Global Assets Fund A Class
Global Assets Fund B Class
Global Assets Fund C Class
Global Assets Fund Institutional Class
Emerging Market Series
Emerging Markets Fund A Class
Emerging Markets Fund B Class
Emerging Markets Fund C Class
Emerging Markets Fund Institutional Class
-8-
<PAGE>
APPENDIX A
List of Funds and Their Classes
1. Delaware Group Delaware Fund, Inc.
Delaware Fund
Delaware Fund A Class
Delaware Fund B Class
Delaware Fund C Class
Delaware Fund Institutional Class
Devon Fund
Devon Fund A Class
Devon Fund B Class
Devon Fund C Class
Devon Fund Institutional Class
2. Delaware Group Trend Fund, Inc.
Trend Fund A Class
Trend Fund B Class
Trend Fund C Class
Trend Fund Institutional Class
3. Delaware Group Value Fund, Inc.
Value Fund A Class
Value Fund B Class
Value Fund C Class
Value Fund Institutional Class
4. Delaware Group DelCap Fund, Inc.
DelCap Fund A Class
DelCap Fund B Class
DelCap Fund C Class
DelCap Fund Institutional Class
5. Delaware Group Decatur Fund, Inc.
Decatur Income Fund
Decatur Income Fund A Class
Decatur Income Fund B Class
Decatur Income Fund C Class
Decatur Income Fund Institutional Class
Decatur Total Return Fund
<PAGE>
Decatur Total Return Fund A Class
Decatur Total Return Fund B Class
Decatur Total Return Fund C Class
Decatur Total Return Fund Institutional Class
6. Delaware Group Global & International Funds, Inc.
International Equity Series
International Equity Fund A Class
International Equity Fund B Class
International Equity Fund C Class
International Equity Fund Institutional Class
Global Bond Series
Global Bond Fund A Class
Global Bond Fund B Class
Global Bond Fund C Class
Global Bond Fund Institutional Class
Global Assets Series
Global Assets Fund A Class
Global Assets Fund B Class
Global Assets Fund C Class
Global Assets Fund Institutional Class
<PAGE>
Emerging Markets Series (Added May 1, 1996)
Emerging Markets Fund A Class
Emerging Markets Fund B Class
Emerging Markets Fund C Class
Emerging Markets Fund Institutional Class
7. Delaware Group Income Funds, Inc.
Strategic Income Fund (Added September 30, 1996)
Strategic Income Fund A Class
Strategic Income Fund B Class
Strategic Income Fund C Class
Strategic Income Fund Institutional Class
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000027825
<NAME> DELAWARE GROUP DELCHESTER HIGH-YIELD BOND FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> DELCHESTER FUND A CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 1,210,946,325
<INVESTMENTS-AT-VALUE> 1,221,596,095
<RECEIVABLES> 46,871,348
<ASSETS-OTHER> 10,211
<OTHER-ITEMS-ASSETS> 50,317
<TOTAL-ASSETS> 1,268,527,971
<PAYABLE-FOR-SECURITIES> 43,849,399
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,007,363
<TOTAL-LIABILITIES> 53,856,762
<SENIOR-EQUITY> 197,697,993
<PAID-IN-CAPITAL-COMMON> 1,247,761,522
<SHARES-COMMON-STOCK> 158,516,786
<SHARES-COMMON-PRIOR> 162,495,049
<ACCUMULATED-NII-CURRENT> 307,327
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (241,745,403)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,649,770
<NET-ASSETS> 973,938,949
<DIVIDEND-INCOME> 1,550,788
<INTEREST-INCOME> 132,605,246
<OTHER-INCOME> 0
<EXPENSES-NET> 13,234,173
<NET-INVESTMENT-INCOME> 120,921,861
<REALIZED-GAINS-CURRENT> 1,187,422
<APPREC-INCREASE-CURRENT> (28,027,547)
<NET-CHANGE-FROM-OPS> 94,081,736
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 100,800,197
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29,345,150
<NUMBER-OF-SHARES-REDEEMED> 41,237,430
<SHARES-REINVESTED> 7,914,017
<NET-CHANGE-IN-ASSETS> 20,305,947
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (242,932,825)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,921,586
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13,234,173
<AVERAGE-NET-ASSETS> 999,309,831
<PER-SHARE-NAV-BEGIN> 6.280
<PER-SHARE-NII> 0.628
<PER-SHARE-GAIN-APPREC> (0.141)
<PER-SHARE-DIVIDEND> 0.627
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.140
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000027825
<NAME> DELAWARE GROUP DELCHESTER HIGH-YIELD BOND FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> DELCHESTER FUND B CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 1,210,946,325
<INVESTMENTS-AT-VALUE> 1,221,596,095
<RECEIVABLES> 46,871,348
<ASSETS-OTHER> 10,211
<OTHER-ITEMS-ASSETS> 50,317
<TOTAL-ASSETS> 1,268,527,971
<PAYABLE-FOR-SECURITIES> 43,849,399
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,007,363
<TOTAL-LIABILITIES> 53,856,762
<SENIOR-EQUITY> 197,697,993
<PAID-IN-CAPITAL-COMMON> 1,247,761,522
<SHARES-COMMON-STOCK> 28,688,738
<SHARES-COMMON-PRIOR> 17,807,043
<ACCUMULATED-NII-CURRENT> 307,327
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (241,745,403)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,649,770
<NET-ASSETS> 176,265,743
<DIVIDEND-INCOME> 1,550,788
<INTEREST-INCOME> 132,605,246
<OTHER-INCOME> 0
<EXPENSES-NET> 13,234,173
<NET-INVESTMENT-INCOME> 120,921,861
<REALIZED-GAINS-CURRENT> 1,187,422
<APPREC-INCREASE-CURRENT> (28,027,547)
<NET-CHANGE-FROM-OPS> 94,081,736
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13,336,513
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14,310,890
<NUMBER-OF-SHARES-REDEEMED> 4,275,449
<SHARES-REINVESTED> 846,254
<NET-CHANGE-IN-ASSETS> 20,305,947
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (242,932,825)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,921,586
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13,234,173
<AVERAGE-NET-ASSETS> 143,816,605
<PER-SHARE-NAV-BEGIN> 6.280
<PER-SHARE-NII> 0.581
<PER-SHARE-GAIN-APPREC> (0.141)
<PER-SHARE-DIVIDEND> 0.580
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.140
<EXPENSE-RATIO> 1.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000027825
<NAME> DELAWARE GROUP DELCHESTER HIGH-YIELD BOND FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> DELCHESTER FUND C CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 1,210,946,325
<INVESTMENTS-AT-VALUE> 1,221,596,095
<RECEIVABLES> 46,871,348
<ASSETS-OTHER> 10,211
<OTHER-ITEMS-ASSETS> 50,317
<TOTAL-ASSETS> 1,268,527,971
<PAYABLE-FOR-SECURITIES> 43,849,399
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,007,363
<TOTAL-LIABILITIES> 53,856,762
<SENIOR-EQUITY> 197,697,993
<PAID-IN-CAPITAL-COMMON> 1,247,761,522
<SHARES-COMMON-STOCK> 806,188
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 307,327
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (241,745,403)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,649,770
<NET-ASSETS> 4,953,281
<DIVIDEND-INCOME> 1,550,788
<INTEREST-INCOME> 132,605,246
<OTHER-INCOME> 0
<EXPENSES-NET> 13,234,173
<NET-INVESTMENT-INCOME> 120,921,861
<REALIZED-GAINS-CURRENT> 1,187,422
<APPREC-INCREASE-CURRENT> (28,027,547)
<NET-CHANGE-FROM-OPS> 94,081,736
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 145,007
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 872,689
<NUMBER-OF-SHARES-REDEEMED> 83,734
<SHARES-REINVESTED> 17,233
<NET-CHANGE-IN-ASSETS> 20,305,947
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (242,932,825)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,921,586
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13,234,173
<AVERAGE-NET-ASSETS> 2,366,447
<PER-SHARE-NAV-BEGIN> 6.210
<PER-SHARE-NII> 0.385
<PER-SHARE-GAIN-APPREC> (0.069)
<PER-SHARE-DIVIDEND> 0.386
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.140
<EXPENSE-RATIO> 1.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000027825
<NAME> DELAWARE GROUP DELCHESTER HIGH-YIELD BOND FUND, INC.
<SERIES>
<NUMBER> 004
<NAME> DELCHESTER FUND INSTITUTIONAL CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-END> JUL-31-1996
<INVESTMENTS-AT-COST> 1,210,946,325
<INVESTMENTS-AT-VALUE> 1,221,596,095
<RECEIVABLES> 46,871,348
<ASSETS-OTHER> 10,211
<OTHER-ITEMS-ASSETS> 50,317
<TOTAL-ASSETS> 1,268,527,971
<PAYABLE-FOR-SECURITIES> 43,849,399
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,007,363
<TOTAL-LIABILITIES> 53,856,762
<SENIOR-EQUITY> 197,697,993
<PAID-IN-CAPITAL-COMMON> 1,247,761,522
<SHARES-COMMON-STOCK> 9,686,281
<SHARES-COMMON-PRIOR> 9,828,671
<ACCUMULATED-NII-CURRENT> 307,327
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (241,745,403)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,649,770
<NET-ASSETS> 59,513,236
<DIVIDEND-INCOME> 1,550,788
<INTEREST-INCOME> 132,605,246
<OTHER-INCOME> 0
<EXPENSES-NET> 13,234,173
<NET-INVESTMENT-INCOME> 120,921,861
<REALIZED-GAINS-CURRENT> 1,187,422
<APPREC-INCREASE-CURRENT> (28,027,547)
<NET-CHANGE-FROM-OPS> 94,081,736
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,332,817
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,337,336
<NUMBER-OF-SHARES-REDEEMED> 6,338,631
<SHARES-REINVESTED> 858,905
<NET-CHANGE-IN-ASSETS> 20,305,947
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (242,932,825)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,921,586
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 13,234,173
<AVERAGE-NET-ASSETS> 61,251,167
<PER-SHARE-NAV-BEGIN> 6.280
<PER-SHARE-NII> 0.644
<PER-SHARE-GAIN-APPREC> (0.142)
<PER-SHARE-DIVIDEND> 0.642
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.140
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
