<PAGE> 1
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
___________________________________________________
HIGH-YIELD OPPORTUNITIES FUND
___________________________________________________
A CLASS
B CLASS
C CLASS
___________________________________________________
PROSPECTUS
___________________________________________________
DECEMBER 27, 1996
DELAWARE GROUP
<PAGE> 2
HIGH-YIELD OPPORTUNITIES FUND PROSPECTUS
A CLASS SHARES DECEMBER 27, 1996
B CLASS SHARES
C CLASS SHARES
-------------------------------------------------------------------
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 High-Yield Opportunities Fund A Class of
shares ("Class A Shares"), the High-Yield Opportunities Fund B Class of shares
("Class B Shares") and the High-Yield Opportunities Fund C Class of shares
("Class C Shares") (individually, a "Class" and collectively, the "Classes") of
the High-Yield Opportunities Fund series (the "Fund") of Delaware Group Income
Funds, Inc. ("Income Funds, Inc."), a professionally-managed mutual fund of the
series type. The investment objective of the Fund is to seek to provide
investors with total return and, as a secondary objective, high current income.
The 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 the Fund. See
Investment Objective and Policies, Risk Factors, and Appendix C--Ratings.
This Prospectus sets forth information that you should read and
consider before you invest. Please retain it for future reference. The Fund's
Statement of Additional Information ("Part B") dated December 27, 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 telephone numbers.
The Fund also offers the High-Yield Opportunities Fund Institutional
Class, which is available for purchase only by certain investors. A prospectus
for the High-Yield Opportunities Fund Institutional Class can be obtained by
writing to Delaware Distributors, L.P. at the above address or by calling the
above numbers.
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<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
COVER PAGE CLASSES OF SHARES
SYNOPSIS HOW TO BUY SHARES
SUMMARY OF EXPENSES REDEMPTION AND EXCHANGE
INVESTMENT OBJECTIVE AND POLICIES DIVIDENDS AND DISTRIBUTIONS
SUITABILITY TAXES
INVESTMENT STRATEGY CALCULATION OF OFFERING PRICE AND
RISK FACTORS NET ASSET VALUE PER SHARE
YOUTH AND VOLATILITY OF THE MANAGEMENT OF THE FUND
HIGH-YIELD MARKET OTHER INVESTMENT POLICIES AND
REDEMPTIONS RISK CONSIDERATIONS
LIQUIDITY AND VALUATION APPENDIX A--INVESTMENT ILLUSTRATIONS
THE DELAWARE DIFFERENCE APPENDIX B--CLASSES OFFERED
PLANS AND SERVICES APPENDIX C--RATINGS
RETIREMENT PLANNING
</TABLE>
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> 4
SYNOPSIS
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to provide investors
with total return and, as a secondary objective, high current income. The Fund
seeks to achieve its objective by investing principally in corporate bonds
rated BB or lower by Standard & Poor's Ratings Group ("S&P") or Ba or lower by
Moody's Investors Service, Inc. ("Moody's"), or similarly rated by another
nationally-recognized statistical rating organization, or, if unrated (which
may be more speculative in nature than rated bonds), judged to be of comparable
quality by the Manager (as defined below). The Fund may also invest in U.S.
and foreign government securities and commercial paper. For further details,
see Investment Objective and Policies.
RISK FACTORS
The 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") furnishes investment
management services to the Fund, subject to the supervision and direction of
Income Funds, Inc.'s Board of Directors. The Manager 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 Summary of
Expenses and Management of the Fund for further information regarding the
Manager and the fees payable under the Fund's Investment Management Agreement.
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
for the life of the investment.
The price of Class B Shares is equal to the net asset value per share.
Class B Shares are subject to a contingent deferred sales charge ("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.
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<PAGE> 5
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.
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.
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<PAGE> 6
SUMMARY OF EXPENSES
A general comparison of the sales arrangements and other expenses
applicable to Class A, Class B and Class C Shares follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHAREHOLDER TRANSACTION EXPENSES SHARES SHARES SHARES
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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**
</TABLE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF CLASS A CLASS B CLASS C
AVERAGE DAILY NET ASSETS) SHARES SHARES SHARES
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fees . . . . . . . . . . .
(after voluntary waivers) 0.00% 0.00% 0.00%
12b-1 Plan Expenses
(including service fees)
(after voluntary waivers). . . . . 0.00%+/++ 0.00%+/++ 0.00%+/++
Other Operating Expenses. . . . . . . 0.75%++ 0.75%++ 0.75%++
----- ----- -----
Total Operating Expenses . . . .
(after voluntary waivers) 0.75%++ 0.75%++ 0.75%++
----- ----- -----
</TABLE>
-5-
<PAGE> 7
*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 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 Distributor has
elected voluntarily to waive its right to receive 12b-1 Plan fees (including
service fees) from the commencement of the public offering of the Classes
through June 30, 1997. In the absence of those waivers, 12b-1 Plan expenses
would equal 0.30% for Class A Shares and 1% for each of the Class B and Class C
Shares. See Distribution (12b-1) and Service under Management of the Fund.
++"Total Operating Expenses" and "Other Operating Expenses" for the Class A
Shares, the Class B Shares and the Class C Shares are based on estimated
amounts for the first full fiscal year of the Classes, after giving effect to
the voluntary expense waiver. As noted above, the Distributor has elected to
voluntarily waive 12b-1 Plan expenses through June 30, 1997. Also, the Manager
has elected voluntarily to waive that portion, if any, of the annual management
fees payable by the 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%, from the
commencement of the public offering of the Classes through June 30, 1997. If
the voluntary expense waivers by the Distributor and the Manager were not in
effect, it is estimated that for the first full year, the Total Operating
Expenses, as a percentage of average daily net assets, would be 2.42%, 3.42%
and 3.42%, respectively, for the Class A Shares, the Class B Shares and the
Class C Shares, reflecting management fees of 0.65%.
For expense information about the High-Yield Opportunities Fund
Institutional Class of shares, see the separate prospectus relating to that
class.
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<PAGE> 8
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. The following example assumes the voluntary waiver
of the management fee by the Manager and of the 12b-1 Plan fees by the
Distributor as discussed in this Prospectus.
<TABLE>
<CAPTION>
ASSUMING REDEMPTION ASSUMING NO REDEMPTION
1 YEAR 3 YEARS 1 YEAR 3 YEARS
-------------------- ----------------------
<S> <C> <C> <C> <C>
CLASS A SHARES $55(1) $70 $55 $70
CLASS B SHARES(2) $46 $54 $8 $24
CLASS C SHARES $18 $24 $8 $24
</TABLE>
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.
(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.
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<PAGE> 9
INVESTMENT OBJECTIVE AND POLICIES
The objective of the Fund is to seek total return and, as a secondary
objective, high current income. The Fund seeks to achieve its objective by
investing primarily in corporate bonds rated BB or lower by S&P or Ba or lower
by Moody's, or similarly rated by another nationally-recognized statistical
rating organization or, if unrated (which may be more speculative in nature
than rated bonds), judged to be of comparable quality by the Manager. See
Appendix C for more rating information and Risk Factors and Other Investment
Policies and Risk Considerations for a description of the risks associated with
investing in lower-rated fixed-income securities.
SUITABILITY
The Fund may be suitable for the investor interested in total return.
High current income is secondary objective. The Manager's primary focus in
selecting securities for the Fund will be total return. Lower-yielding
securities may be selected over higher-yield securities based on the Manager's
view of the potential for returns offered by the securities being considered
for the Fund.
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 yield, or that
principal will be protected. However, through the cautious selection and
supervision of its portfolio, the Manager 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 greater
price appreciation and 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. 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 Risk Factors and
Other Investment Policies and Risk Considerations for a complete discussion of
the risk factors affecting the Fund's portfolio securities.
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 together to create a more complete investment program.
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.
-8-
<PAGE> 10
INVESTMENT STRATEGY
The Fund will invest at least 65% of its assets at the time of
purchase in corporate bonds that may be rated BB or lower by S&P or Ba or lower
by Moody's, or similarly rated by another nationally-recognized statistical
rating organization, or if unrated (which may be more speculative in nature
than rated bonds), judged to be of comparable quality by the Manger. The Fund
generally will not purchase corporate bonds which, at the time of purchase, are
rated lower than CCC by S&P or Caa by Moody's. If a corporate bond held by the
Fund drops below these levels, including a security that goes into default, the
Fund will commence with an orderly sale of the security in a manner devised to
minimize any adverse affect on the Fund. If a sale of the security is not
practicable for any reason, the Fund will pursue other available measures
reasonably anticipated by the Manager to facilitate repayment of the bond.
The Fund may also invest in securities of, or guaranteed by, the U.S.
and foreign governments, their agencies or instrumentalities and 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 S&P or rated P-1 or P-2 by Moody's or, if unrated, judged to be of
comparable quality by the Manager.
The Fund may acquire zero coupon bonds and, to a lesser extent,
pay-in-kind (PIK) bonds. See Zero Coupon Bonds and Pay-In-Kind Bonds under
Other Investment Policies and Risk Considerations. The Fund may also invest in
other types of income-producing securities, including common stocks and
preferred stocks, some of which may have convertible features or attached
warrants and which may be speculative. See Convertible, Debt and
Non-Traditional Equity Securities under Other Investment Policies and Risk
Considerations.
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 15% of
its net assets would consist of such illiquid securities. See
Restricted/Illiquid Securities under Other Investment Policies and Risk
Considerations.
The Fund may invest up to 15% of its total assets in securities of
issuers domiciled in foreign countries. See Foreign Investment Information
under Other Investment Policies and Risk Considerations.
The Fund may hold cash or invest in short-term debt securities and
other money market instruments when, in the Manager's opinion, such holdings
are prudent given then prevailing market conditions or pending investment in
other types of securities. All these short-term investments will be of the
highest quality as determined by a nationally-recognized statistical rating
organization (e.g., AAA by S&P or Aaa by Moody's) or, if unrated, judged to be
of comparable quality as determined by the Manager. See Short-Term Investments
under Other Investment Policies and Risk Considerations.
The Manager does not normally intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short- term trading;
however, the Manager may take advantage of short-term opportunities that are
consistent with its investment objective.
* * *
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.
-9-
<PAGE> 11
Although the Fund will constantly strive to attain its objective,
there can be no assurance that is will be attained.
The Fund's 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 investment policies of the Fund that are 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.
-10-
<PAGE> 12
RISK FACTORS
GENERALLY
The Fund invests principally 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 a greater potential for
price appreciation and can offer 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 portfolio
diversification, credit analysis, and attention to trends in the economy,
industries and financial markets.
HIGH-YIELD SECURITIES
The Fund may invest primarily in bonds rated BB or lower by S&P or Ba
or lower by Moody's, and in bonds of comparable quality. See Appendix C to
this Prospectus for more rating information. Investing in these so-called
"junk" bonds or "high-yield" bonds entails certain risks, including the risk of
loss of principal and default on interest payments, 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, the risks of lower-rated
bonds 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 the
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 the 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.
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, 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 ratios may increase.
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<PAGE> 13
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 which 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.
See High-Yield, High Risk Securities under Other Investment Policies
and Risk Considerations for further information about high-yield securities.
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<PAGE> 14
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.
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.
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<PAGE> 15
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.
DIVIDEND PAYMENTS
Dividends, capital gains and other distributions are automatically
reinvested in your account,. You may, however, 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.
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 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.
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<PAGE> 16
DELAWARE GROUP ASSET PLANNER
Delaware Group Asset Planner is an asset allocation service that gives
you, 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, you may also tailor an allocation
strategy that meets your 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.
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<PAGE> 17
RETIREMENT PLANNING
Under certain circumstances, 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 High-Yield Opportunities 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")
New SAR/SEP plans may not be established after December 31, 1996.
Employers must have no more than 25 employees to maintain an existing 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.
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<PAGE> 18
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 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.
-17-
<PAGE> 19
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. Absent any applicable fee waiver, Class A Shares are subject to
annual 12b-1 Plan expenses of up to a maximum of 0.30% 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, below. 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. Absent any
applicable fee waiver, Class B Shares are subject to annual 12b-1 Plan expenses
of up to a maximum of 1% (0.25% of which are service fees to be paid to the
Distributor, dealers or others for providing personal service and/or
maintaining shareholder accounts) of average daily net assets of 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. If no waiver
of 12b-1 fees is in effect, 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 and, thereafter, for the remainder of the life of the investment, the
annual 0.30% 12b-1 Plan fee for the Class A Shares will apply. 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. Absent any
applicable fee waiver, Class C Shares are subject to annual 12b-1 Plan expenses
of up to a maximum of 1% (0.25% of which are service fees to be paid to the
Distributor, dealers or others for providing personal service and/or
maintaining shareholder accounts) of average daily net assets of such shares
for the life of the investment. If no waiver of 12b-1 fees is in effect, 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.
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<PAGE> 20
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. If no waiver of 12b-1
fees is in effect, the higher 12b-1 Plan expenses on Class B Shares and Class C
Shares will be offset to the extent a return is realized on the additional
money initially invested upon the purchase of such shares. However, there can
be no assurance as to the return, if any, that will be realized on such
additional money. In 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.
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.
For the distribution and related services provided to, and the
expenses borne on behalf of, the Fund, absent any applicable fee waiver, 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, when
assessed, 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.
Purchases of $100,000 or more carry a reduced front-end sales charge
as shown in the following table.
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<PAGE> 21
HIGH-YIELD OPPORTUNITIES FUND A CLASS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Front-End Sales Charge Dealer's
as % of Commission***
Offering Amount as % of
Amount of Purchase Price Invested** Offering Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
* 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
0.15% 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.
- --------------------------------------------------------------------------------
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<PAGE> 22
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:
<TABLE>
<CAPTION>
DEALER'S COMMISSION
-------------------
(as a percentage of
AMOUNT OF PURCHASE amount purchased)
------------------
<S> <C>
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
</TABLE>
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 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.
-21-
<PAGE> 23
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 between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware
Group funds. In addition, purchases of Class A Shares may be made by financial
institutions investing for the account of their trust customers when they are
not eligible to purchase shares of the Fund's institutional class. 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.
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
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<PAGE> 24
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, absent any applicable fee waiver, 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, if any, 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.
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
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<PAGE> 25
that date. If the eighth anniversary occurs between Conversion
Dates, an investor's Class B Shares will be converted on the next Conversion
Date after such anniversary. Consequently, if a shareholder's eighth
anniversary falls on the day after a Conversion Date, that shareholder will
have to hold Class B Shares for as long as three additional months after the
eighth anniversary of purchase before the shares will automatically convert
into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute
tax-free exchanges for federal income tax purposes. See Taxes.
LEVEL SALES CHARGE ALTERNATIVE - CLASS C SHARES
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently 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, absent any applicable
fee waiver, 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, if any, 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.
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<PAGE> 26
The following table sets forth the rates of the CDSC for the Class B
Shares of the Fund:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR AFTER PURCHASE MADE SUBJECT TO CHARGE)
------------------------ ------------------
<S> <C>
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
</TABLE>
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, absent any applicable fee waiver. 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 0.30% 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 and Class C
Shares under Redemption and Exchange.
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 0.25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or 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
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<PAGE> 27
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.
HIGH-YIELD OPPORTUNITIES FUND INSTITUTIONAL CLASS
In addition to offering the Class A, Class B and Class C Shares, the
Fund also offers the High-Yield Opportunities Fund Institutional Class, which
is described in a separate prospectus and is available for purchase only by
certain investors. High-Yield Opportunities 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
High-Yield Opportunities Fund Institutional Class, contact the Distributor by
writing to the address or by calling the telephone number listed on the back of
this Prospectus.
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<PAGE> 28
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 High-Yield Opportunities
Fund A Class, High-Yield Opportunities Fund B Class or High- Yield
Opportunities Fund C Class, to Delaware Group at 1818 Market Street,
Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to the specific Fund and Class selected. Your check
should be identified with your name(s) and account number. 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
retirement plan application, to the specific Fund and Class selected, to
Delaware Group at 1818 Market Street, Philadelphia, PA 19103.
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<PAGE> 29
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. See Redemption and Exchange for more complete
information concerning your exchange privilege.
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. See Appendix B--Classes Offered for a list of funds that offer
Class A, Class B, Class C and Consultant Class Shares. 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
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.
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<PAGE> 30
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) invested in your Fund account or invested 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. 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.
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<PAGE> 31
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 Appendix B--Classes Offered for a list of the funds
offering those classes of shares. For more information about reinvestments,
call the Shareholder Service Center.
Distributions for capital gains and/or dividends for participants in
the following retirement plans are automatically reinvested into the same
Delaware Group fund: SAR/SEP, SEP/IRA,Profit Sharing, Money Purchase Pension,
401(k), 403(b)(7), or 457 Plans.
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.
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 Appendix B--Classes Offered for the funds in the
Delaware Group that offer consultant class shares.
An annual maintenance fee, currently $35 per Strategy, is typically
due at the time of initial investment and by September 30th of each subsequent
year. The fee, payable to Delaware Service Company, Inc. to defray extra costs
associated with administering the Asset Planner service, will be deducted
automatically from one of the funds within your Asset Planner account if not
paid by September 30th. However, the annual fee is waived until further
notice. Investors who utilize the Asset Planner for an IRA will continue to
pay an annual IRA fee of $15 per Social Security number. 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.
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<PAGE> 32
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, as a result of a
redemption, have remained below the minimum stated account balance for a period
of three or more consecutive months. Holders of such accounts may be notified
of their insufficient account balance and advised that they have until the end
of the current calendar quarter to raise their balance to the stated minimum.
If the account has not reached the minimum balance requirement by that time,
the Fund will charge a $9 fee for that quarter and each subsequent calendar
quarter until the account is brought up to the minimum balance. The service
fee will be deducted from the account during the first week of each calendar
quarter for the previous quarter, and will be used to help defray the cost of
maintaining low-balance accounts. No fees will be charged without proper
notice, and no CDSC will apply to such assessments.
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.
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<PAGE> 33
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 equity funds, bond 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.
Redemption proceeds will be distributed promptly, as described below, but not
later than seven days after receipt of a redemption request.
Except as noted below, for a redemption request to be in "good order,"
you must provide your account number, account registration, and the total
number of shares or dollar amount of the transaction. For exchange requests,
you must also provide the name of the fund 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.
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<PAGE> 34
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 shares of other funds in the Delaware Group (in each
case, "New Shares") in a permitted exchange, will not be subject to a CDSC that
might otherwise be due upon redemption of the Original Shares. However, such
shareholders will continue to be subject to the CDSC and, in the case of Class
B Shares, the automatic conversion schedule of the Original Shares as described
in this 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, absent any applicable fee waiver,
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 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.
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<PAGE> 35
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 after receipt of the redemption request. This service is only
available to individual, joint and individual fiduciary-type accounts.
TELEPHONE REDEMPTION--PROCEEDS TO YOUR BANK
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must complete an Authorization Form and have your signature
guaranteed. For your protection, your authorization must be on file. If you
request a wire, your funds will normally be sent the next business day.
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 after receipt of your redemption request to your predesignated
bank account. There are no separate fees for this redemption method, but the
mail time may delay getting funds into your bank account. Simply call the
Shareholder Service Center prior to the time the offering price and net asset
value are determined, as noted above.
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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.
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;
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(v) returns of excess contributions to an IRA; (vi) distributions by other
employee benefit plans to pay benefits; and (vii) 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.
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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 expected to be declared daily and paid
monthly. However, the Fund does not anticipate declaring or paying dividends
during the first few months following the commencement of its operations. Both
dividends and distributions, if any, are automatically reinvested in your
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 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, absent any applicable fee waiver,
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.
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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 by-product of Fund management activities. Consequently,
capital gains distributions may be expected to vary considerably from year to
year. Also, for those investors subject to tax, if purchases of shares in the
Fund are made shortly before the record date for a dividend or capital gains
distribution, a portion of the investment will be returned as a taxable
distribution.
Although dividends generally will be treated as distributed when paid,
dividends which are declared in October, November or December to shareholders
of record on a specified date in one of those months, but which, for
operational reasons, may not be paid to the shareholder until the following
January, will be treated for tax purposes as if paid by the Fund and received
by the shareholder on December 31 of the 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.
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<PAGE> 40
The Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities.
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.
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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 Fund, Inc.'s
Board of Directors. Equity securities for which marked 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 High-Yield Opportunities 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, if any,
payable under their respective Plans.
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<PAGE> 42
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
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 October 31, 1996, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $30 billion in assets in the various
institutional or separately managed (approximately $19,214,690,000) and
investment company (approximately $11,539,873,000) 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 which are implemented by the Fund'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 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.
Paul A. Matlack and Gerald T. Nichols have primary responsibility for
making day-to-day investment decisions for the Fund. 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. Mr. Matlack is a CFA
charterholder and 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, a Vice President/Senior
Portfolio Manager of Income Funds, Inc., has been a member of the Fund's
management team since its inception. 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 Manager, 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 CFA charterholder.
Mr. Matlack and Mr. Nichols will from time to time consult with Paul
E. Suckow, Executive Vice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc. He is a CFA charterholder and 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.
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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 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 to their advisory clients. These services may be used by the Manager in
servicing any of its accounts. Subject to best price and execution, the Fund
may consider a broker/dealer's sales of Fund shares in placing portfolio orders
and may place orders with broker/dealers that have agreed to defray certain
Fund expenses such as custodian fees.
PERFORMANCE INFORMATION
From time to time, the Fund may quote yield or total return
performance of the 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 or life-of-fund 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 as of December 27, 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 of the
Fund (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
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<PAGE> 44
time, and paying distribution and maintenance fees to brokers, dealers and
others. In connection with the promotion of shares of the Classes, 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 12b-1 plan fees 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 Distributor has elected voluntarily to waive its
right to receive 12b-1 fees (including service fees) from the commencement of
the public offering of the Classes through June 30, 1997.
The 12b-1 Plan expenses relating to each of the Class B Shares and
Class C Shares of the Fund are also used to pay the Distributor for advancing
the commission costs to dealers with respect to the initial sale of such
shares.
Absent any applicable fee waiver, 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) 0.30% of the Class A Shares' average daily net
assets in any year, and (ii) 1% (0.25% of which are service fees to be paid to
the Distributor, dealers and others for providing personal service and/or
maintaining shareholder accounts) of each of the Class B Shares' and Class C
Shares' average daily net assets 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.
While payments, if any, pursuant to the Plans may not exceed 0.30%
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 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.
The Fund's Plans do not apply to the High-Yield Opportunities 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 High-Yield Opportunities Fund Institutional Class shares.
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for the Fund
pursuant to an amended and restated agreement dated as of December 27, 1996.
The Transfer Agent also provides accounting services to the Fund pursuant to
the terms of a separate Fund Accounting Agreement. The directors of Income
Funds, Inc. annually review service fees paid to the Transfer Agent.
The Distributor and the Transfer Agent are also indirect, wholly owned
subsidiaries of DMH.
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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 two other series of shares, the Delchester Fund series and
Strategic Income 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 Class A Shares, Class B Shares and Class C Shares, the
Fund also offers the High-Yield Opportunities 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 High-Yield Opportunities 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.
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<PAGE> 46
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
HIGH-YIELD, HIGH RISK SECURITIES
The Fund invests primarily in securities rated BB or lower by S&P or
Ba or lower by Moody's, or similarly rated by another nationally- recognized
statistical rating organization or, if unrated (which may be more speculative
in nature than rated bonds), judged to be of comparable quality by the Manager.
See Appendix C--Ratings to this Prospectus for more rating information. The
discussion in this section supplements the description of the risks of
high-yield securities found earlier in this Prospectus in Investment Objective
and Policies and Risk Factors and investors should refer to those sections for
a further discussion of the risks of high-yield bonds.
Fixed-income securities of this type are considered to be of poor
standing and predominantly speculative. Such securities are subject to a
substantial degree of credit risk. In the past, the high-yields from these
bonds have more than compensated for their higher default rates. There can be
no assurance, however, that yields will continue to offset default rates on
these bonds in the future. The Manager intends to maintain an adequately
diversified portfolio of these bonds. While diversification can help to reduce
the effect of an individual default on the Fund, there can be no assurance that
diversification will protect the Fund from widespread bond defaults brought
about by a sustained economic downturn.
Medium and low-grade bonds held by the Fund may be issued as a
consequence of corporate restructurings, such as leveraged buy-outs, mergers,
acquisitions, debt recapitalizations or similar events. Also, these bonds are
often issued by smaller, less creditworthy companies or by highly leveraged
(indebted) firms, which are generally less able than more financially stable
firms to make scheduled payments of interest and principal. The risks posed by
bonds issued under such circumstances are substantial.
The economy and interest rates may affect these high-yield, high risk
securities differently from other securities. Prices have been found to be
less sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic changes or individual corporate developments.
Also, during an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. Changes by recognized rating agencies in their rating of any
security and in the ability of an issuer to make payments of interest and
principal will also ordinarily have a more dramatic effect on the values of
these investments than on the values of higher rated securities. Such changes
in value will not affect cash income derived from these securities, unless the
issuers fail to pay interest or dividends when due. Such changes will,
however, affect the Fund's net asset value per share.
ZERO COUPON BONDS AND PAY-IN-KIND BONDS
The Fund may purchase zero-coupon bonds and pay-in-kind ("PIK") bonds.
A zero-coupon bond has no cash coupon payments. Instead, the issuer sells the
security at a substantial discount from its maturity value. The interest
received by the investor from holding this security to maturity is the
difference between the maturity value and the purchase price. The advantage to
the investor is that the reinvestment risk of the income received during the
life of the bond is eliminated. However, zero-coupon bonds, like other bonds,
retain interest rate and credit risk and usually display more price volatility
than securities that pay a cash coupon. Since there are no periodic interest
payments made to the holder of a zero-coupon bond, when interest rates rise,
the value of such a security will fall more dramatically than a bond paying out
interest on a current basis. When interest rates fall, however, zero-coupon
bonds rise more rapidly in value because the bonds have locked in a specific
rate of return which becomes more attractive the further interest rates fall.
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<PAGE> 47
PIK bonds are securities that pay interest in either cash or
additional securities, at the issuer's option, for a specified period. PIKs,
like zero-coupon bonds, are designed to give an issuer flexibility in managing
cash flow. PIK bonds can be either senior or subordinated debt and trade flat
(i.e., without accrued interest). The price of PIK bonds is expected to
reflect to the market value of the underlying debt plus an amount representing
accrued interest since the last payment. PIKs are usually less volatile than
zero-coupon bonds, but more volatile than cash-pay securities. PIK bonds may
provide an attractive yield on the Fund's investment even when the interest
paid is in the form of additional securities of the issuer instead of cash.
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.
FOREIGN INVESTMENT INFORMATION
The Fund may invest up to 15% of its total assets in securities of
foreign issuers, including Yankee Bonds. Investments in obligations of foreign
issuers involve somewhat different investment risks than those affecting
obligations of United States issuers. There is limited publicly available
information with respect to foreign issuers, and foreign issuers are not
subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to domestic companies. There is
also less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States and it is
more difficult to enforce legal rights outside of the U.S. Many foreign
securities markets have substantially less volume than U.S. national securities
exchanges, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable domestic issuers. Settlement practices
of certain foreign countries may include delays and may otherwise differ from
those customary in U.S. markets. Brokerage commissions and other transaction
costs on foreign securities exchanges are generally higher than in the United
States. It is also expected that the expenses for custodial arrangements of
the Fund's foreign securities will be somewhat greater than the expenses for
the custodial arrangements for U.S. securities of equal value. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from the companies comprising the Fund's
investments. See Taxes. Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the possible adoption of foreign government
restrictions such as exchange controls. Also, because stocks of foreign
companies are normally denominated in foreign currencies, the Fund may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations, and may incur costs in connection with conversions between
various currencies.
The risks noted above often are heightened for investments in emerging
or developing countries. Compared to the United States and other developed
countries, emerging or developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities. Prices on these exchanges 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. Further, investments by foreign investors are subject to
a variety of restrictions in
-46-
<PAGE> 48
many emerging or developing countries. These restrictions may take the form of
prior governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the type of companies in which foreigners may invest.
Additional restrictions may be imposed at any time by these or other countries
in which the Fund invests. In addition, 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
government consents. Although these restrictions may in the future make it
undesirable to invest in emerging or developing countries, the Manager does not
believe that any current repatriation restrictions would affect the Fund's
decision to invest in such countries.
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, 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,
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 Immediate
Credit Banks and the Federal National Mortgage Association.
SHORT-TERM INVESTMENTS
The short-term investments in which the Fund may invest are:
(1) Time deposits, certificates of deposit (including marketable
variable rate certificates of deposit) and bankers' acceptances issued by a
U.S. commercial bank. Time deposits are non-negotiable deposits maintained in
a banking institution for a specified period of time at a stated interest rate.
Time deposits maturing in more than seven days will not be purchased by the
Fund, and time deposits maturing from two business days through seven calendar
days will not exceed 15% of the total assets of the Fund. Certificates of
deposit are negotiable short-term obligations issued by commercial banks
against funds deposited in the issuing institution. Variable rate certificates
of deposit are certificates of deposit on which the interest rate is
periodically adjusted prior to their stated maturity based upon a specified
market rate. A bankers' acceptance is a time draft drawn on a commercial bank
by a borrower usually in connection with an international commercial
transaction (to finance the import, export, transfer or storage of goods).
-47-
<PAGE> 49
The Fund will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion or, in the case of
a bank which does not have total assets of at least $1 billion, the aggregate
investment made in any one such bank is limited to $100,000 and the principal
amount of such investment is insured in full by the Federal Deposit Insurance
Corporation, (ii) it is a member of the Federal Deposit Insurance Corporation,
and (iii) the bank or its securities have received the highest quality rating
by a nationally- recognized statistical rating organization;
(2) Commercial paper with the highest quality rating by a
nationally-recognized statistical rating organization (e.g., A-1 by S&P or
Prime-1 by Moody's) or, if not so rated, of comparable quality as determined by
the Manager;
(3) Short-term corporate obligations with the highest quality
rating by a nationally-recognized statistical rating organization (e.g., AAA by
S&P or Aaa by Moody's) or, if not so rated, of comparable quality as determined
by the Manager;
(4) U.S. government securities (see U.S. Government Securities);
and
(5) Repurchase agreements collateralized by securities listed
above.
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 of 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.
RESTRICTED/ILLIQUID SECURITIES
The Fund may invest in restricted securities, including securities
eligible for resale without registration pursuant to Rule 144A ("Rule 144A
Securities") under the 1933 Act. Rule 144A exempts many privately placed and
legally restricted securities from the registration requirements of the 1933
Act and permits such securities to be freely traded among certain institutional
buyers such as the Fund.
The Fund may invest no more than 15% of the value of its net assets in
illiquid securities. Illiquid securities, for purposes of this policy, include
repurchase agreements maturing in more than seven days.
-48-
<PAGE> 50
While maintaining oversight, the Board of Directors has delegated to
the Manager the day-to-day functions 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; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security 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 15% limit on investment
in such securities, the Manager will determine what action shall be taken to
ensure that the Fund continues to adhere to such limitation.
UNSEASONED COMPANIES
The Fund may invest in relatively new or unseasoned companies which
are in their early stages of development, or small companies positioned in new
and emerging industries where the opportunity for rapid growth is expected to
be above average. Securities of unseasoned companies present greater risks
than securities of larger, more established companies. The companies in which
the Fund may invest may have relatively small revenues, limited product lines,
and may have a small share of the market for their products or services. Small
companies may lack depth of management, they may be unable to internally
generate funds necessary for growth or potential development or to generate
such funds through external financing or favorable terms, or they may be
developing or marketing new products or services for which markets are not yet
established and may never become established. Due these and other factors,
small companies may suffer significant losses as well as realize substantial
growth, and investments in such companies tend to be volatile and are therefore
speculative.
BORROWING FROM BANKS
The Fund may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Fund will not borrow money in
excess of one-third of the value of its net assets. The Fund has no intention
of increasing its net income through borrowing. Any borrowing will be done
from a bank and, to the extent that such borrowing exceeds 5% of the value of
the Fund's net assets, asset coverage of at least 300% is required. In the
event that such asset coverage shall at any time fall below 300%, the Fund
shall, within three days thereafter (not including Sundays or holidays, or such
longer period as the Securities and Exchange Commission may prescribe by rules
and regulations), reduce the amount of its borrowings to such an extent that
the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the 1940 Act, except for notes to banks. Investment securities will
not be purchased while the Fund has an outstanding borrowing.
-49-
<PAGE> 51
APPENDIX A - INVESTMENT ILLUSTRATIONS
ILLUSTRATIONS OF HYPOTHETICAL RETURNS ON INVESTMENTS BASED ON PURCHASE OPTION
$10,000 PURCHASE
<TABLE>
<CAPTION>
Scenario 1 Scenario 2 Scenario 3 Scenario 4
No Redemption Redeem 1st Year Redeem 3rd Year Redeem 5th Year
--------------------------- --------------------------- -------------------------- --------------------------
Year Class A Class B Class C Class A Class B Class C Class A Class B Class C Class A Class B Class C
---- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 9,525 10,000 10,000 9,525 10,000 10,000 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+ 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 10,905 11,300 11,300
3 11,669 12,012 12,012 11,669 11,712 12,012+ 11,669 12,012 12,012
4 12,485 12,768 12,768 12,485 12,768 12,768
5 13,359 13,573 13,573 13,359 13,373 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
</TABLE>
*This assumes that Class B Shares were converted to Class A Shares at the end
of the eighth year.
$250,000 PURCHASE
<TABLE>
<CAPTION>
Scenario 1 Scenario 2 Scenario 3 Scenario 4
No Redemption Redeem 1st Year Redeem 3rd Year Redeem 5th Year
---------------------------- --------------------------- ---------------------------- --------------------------
Year Class A Class B Class C Class A Class B Class C Class A Class B Class C Class A Class B Class C
---- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 243,750 250,000 250,000 243,750 250,000 250,000 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,750 265,750 260,813 255,750 263,250+ 260,813 265,750 265,750 260,813 265,750 265,750
2 279,069 282,492 282,492 279,069 282,492 282,492 279,069 282,492 282,492
3 298,604 300,289 300,289 298,604 292,789 300,289+ 298,604 300,289 300,289
4 319,507+ 319,207 319,207 319,507+ 319,207 319,207
5 341,872 339,318 339,318 341,872 334,318 339,318
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
</TABLE>
*This assumes that Class B Shares were converted to Class A Shares at the end
of the eighth year.
Illustrations do not reflect any applicable waiver of 12b-1 fees. If any such
fee waivers were reflected, the illustrations represented above would be
different.
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> 52
APPENDIX B--CLASSES OFFERED
<TABLE>
<CAPTION>
GROWTH OF CAPITAL A CLASS B CLASS C CLASS CONSULTANT CLASS
<S> <C> <C> <C> <C>
Trend Fund x x x -
Enterprise Fund x x x -
DelCap Fund x x x -
Value Fund x x x -
U.S. Growth Fund x x x -
TOTAL RETURN
Devon Fund x x x -
Decatur Total Return Fund x x x -
Decatur Income Fund x x x -
Delaware Fund x x x -
GLOBAL DIVERSIFICATION
Emerging Markets Fund x x x -
New Pacific Fund x x x -
International Equity Fund x x x -
World Growth Fund x x x -
Global Assets Fund x x x -
Global Bond Fund x x x -
CURRENT INCOME
Delchester Fund x x x -
Strategic Income Fund x x x -
Corporate Income Fund x x x -
Federal Bond Fund x x x -
U.S. Government Fund x x x -
Limited-Term Government Fund x x x -
TAX-FREE CURRENT INCOME
Tax-Free Pennsylvania Fund x x x -
Tax-Free USA Fund x x x -
Tax-Free Insured Fund x x x -
Tax-Free USA Intermediate Fund x x x -
MONEY MARKET FUNDS
Delaware Cash Reserve x x x x
U.S. Government Money Fund x - - x
Tax-Free Money Fund x - - x
</TABLE>
-51-
<PAGE> 53
APPENDIX C--RATINGS
The Fund's assets may be invested in corporate bonds that may be rated
BB or lower by S&P or Ba or lower by Moody's, or similarly rated by another
nationally-recognized statistical rating organization or that may be unrated.
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.
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.
-50-
<PAGE> 54
For more information contact the Delaware Group at 800-828-5052.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
___________________________________________
HIGH-YIELD OPPORTUNITIES FUND
___________________________________________
INSTITUTIONAL
___________________________________________
P R O S P E C T U S
___________________________________________
DECEMBER 27 , 1996
DELAWARE GROUP
HIGH-YIELD OPPORTUNITIES FUND
PROSPECTUS
<PAGE> 55
INSTITUTIONAL CLASS SHARES DECEMBER 27, 1996
_________________________________________________________________
1818 MARKET STREET, PHILADELPHIA, PA 19103
FOR MORE INFORMATION ABOUT
THE HIGH-YIELD OPPORTUNITIES FUND INSTITUTIONAL CLASS
CALL THE DELAWARE GROUP AT 800-828-5052.
This Prospectus describes the High-Yield Opportunities Fund
Institutional Class of shares (the "Class") of the High-Yield Opportunities
Fund series (the "Fund") of Delaware Group Income Funds, Inc. ("Income Funds,
Inc."), a professionally-managed mutual fund of the series type. The
investment objective of the Fund is to seek to provide investors with total
return and, as a secondary objective, high current income.
The 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 the Fund. See
Investment Objective and Policies, Risk Factors, and Appendix A--Ratings.
This Prospectus sets forth information that you should read and
consider before you invest. Please retain it for future reference. The Fund's
Statement of Additional Information ("Part B") dated December 27, 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 telephone numbers.
The Fund also offers the High-Yield Opportunities Fund A Class of
shares, the High-Yield Opportunities Fund B Class of shares and the High-Yield
Opportunities 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.
-2-
<PAGE> 56
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
COVER PAGE CLASSES OF SHARES
SYNOPSIS HOW TO BUY SHARES
SUMMARY OF EXPENSES REDEMPTION AND EXCHANGE
INVESTMENT OBJECTIVE AND POLICIES DIVIDENDS AND DISTRIBUTIONS
SUITABILITY TAXES
INVESTMENT STRATEGY CALCULATION OF NET ASSET
RISK FACTORS VALUE PER SHARE
YOUTH AND VOLATILITY OF THE MANAGEMENT OF THE FUND
HIGH-YIELD MARKET OTHER INVESTMENT POLICIES AND
REDEMPTIONS RISK CONSIDERATIONS
LIQUIDITY AND VALUATION APPENDIX A--RATINGS
THE DELAWARE DIFFERENCE
PLANS AND SERVICES
</TABLE>
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> 57
SYNOPSIS
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to provide investors
with total return and, as a secondary objective, high current income. The Fund
seeks to achieve its objective by investing principally in corporate bonds
rated BB or lower by Standard & Poor's Ratings Group ("S&P") or Ba or lower by
Moody's Investors Service, Inc. ("Moody's"), or similarly rated by another
nationally-recognized statistical rating organization, or, if unrated (which
may be more speculative in nature than rated bonds), judged to be of comparable
quality by the Manager (as defined below). The Fund may also invest in U.S.
and foreign government securities and commercial paper. For further details,
see Investment Objective and Policies.
RISK FACTORS
The 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") furnishes investment
management services to the Fund, subject to the supervision and direction of
Income Funds, Inc.'s Board of Directors. The Manager provides investment
management services to certain other funds in the Delaware Group. Delaware
Distributors, L.P. (the "Distributor") is the national distributor for the Fund
and for all of the other mutual funds in the Delaware Group. Delaware Service
Company, Inc. (the "Transfer Agent") is the shareholder servicing, dividend
disbursing, accounting services and transfer agent for the Fund and for all of
the other mutual funds in the Delaware Group. See Summary of Expenses and
Management of the Fund for further information regarding the Manager and the
fees payable under the Fund's Investment Management Agreement.
Purchase Price
Shares of the Class offered by this Prospectus are available at net
asset value, without a front-end or contingent deferred sales charge, and are
not subject to distribution fees under a Rule 12b-1 distribution plan. See
Classes of Shares.
REDEMPTION AND EXCHANGE
Shares of the Class are redeemed or exchanged at the net asset value
calculated after receipt of the redemption or exchange request. See Redemption
and Exchange.
OPEN-END INVESTMENT COMPANY
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> 58
SUMMARY OF EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- ---------------------------------------------------------------
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price). . . . . None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of offering price). . . . . . . . None
Exchange Fees . . . . . . . . . . . . . . . . . . . . None*
</TABLE>
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
- -----------------------------------------------------------------
<S> <C>
Management Fees (after voluntary waivers) . . . . 0.00%
12b-1 Fees. . . . . . . . . . . . . . . . . . . . None
Other Operating Expenses+ . . . . . . . . . . . . 0.75%
====
Total Operating Expenses+
(after voluntary waivers) . . . . 0.75%
====
</TABLE>
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.
*Exchanges are subject to the requirements of each fund and a front-end sales
charge may apply.
+"Total Operating Expenses" and "Other Operating Expenses" for the Class are
based on estimated amounts for 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 Fund and to pay certain expenses of the Fund to the extent
necessary to ensure that the "Total Operating Expenses" of the Class do not
exceed 0.75% 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 2.12% for the Class' first full fiscal year,
reflecting management fees of 0.65%.
For expense information about High-Yield Opportunities Fund A Class,
High-Yield Opportunities Fund B Class and High-Yield Opportunities Fund C
Class, see the separate prospectus relating to those classes.
-5-
<PAGE> 59
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. The following example
assumes the voluntary waiver of the management fee by the Manager.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$8 $24
</TABLE>
The purpose of the above tables is to assist the investor in
understanding the various costs and expenses that an investor in the Class will
bear directly or indirectly.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
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INVESTMENT OBJECTIVE AND POLICIES
The objective of the Fund is to seek total return and, as a secondary
objective, high current income. The Fund seeks to achieve its objective by
investing primarily in corporate bonds rated BB or lower by S&P or Ba or lower
by Moody's, or similarly rated by another nationally-recognized statistical
rating organization or, if unrated (which may be more speculative in nature
than rated bonds), judged to be of comparable quality by the Manager. See
Appendix A for more rating information and Risk Factors and Other Investment
Policies and Risk Considerations for a description of the risks associated with
investing in lower-rated fixed-income securities.
SUITABILITY
The Fund may be suitable for the investor interested in total return.
High current income is secondary objective. The Manager's primary focus in
selecting securities for the Fund will be total return. Lower-yielding
securities may be selected over higher-yield securities based on the Manager's
view of the potential for returns offered by the securities being considered
for the Fund.
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 yield, or that
principal will be protected. However, through the cautious selection and
supervision of its portfolio, the Manager 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 greater
price appreciation and 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. 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 Risk Factors and
Other Investment Policies and Risk Considerations for a complete discussion of
the risk factors affecting the Fund's portfolio securities.
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 together to create a more complete investment program.
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.
INVESTMENT STRATEGY
The Fund will invest at least 65% of its assets at the time of
purchase in corporate bonds that may be rated BB or lower by S&P or Ba or lower
by Moody's, or similarly rated by another nationally-recognized statistical
rating organization, or if unrated (which may be more speculative in nature
than rated bonds), judged to be of comparable quality by the Manger. The Fund
generally will not purchase corporate bonds which, at the time of purchase, are
rated lower than CCC by S&P or Caa by Moody's. If a corporate bond held by the
Fund drops below these levels, including a security that goes into default, the
Fund will commence with an orderly sale of the security in a manner devised to
minimize any adverse affect on the Fund. If a sale of the security is not
practicable for any reason,
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the Fund will pursue other available measures reasonably anticipated by the
Manager to facilitate repayment of the bond.
The Fund may also invest in securities of, or guaranteed by, the U.S.
and foreign governments, their agencies or instrumentalities and 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 S&P or rated P-1 or P-2 by Moody's or, if unrated, judged to be of
comparable quality by the Manager.
The Fund may acquire zero coupon bonds and, to a lesser extent,
pay-in-kind (PIK) bonds. See Zero Coupon Bonds and Pay-In-Kind Bonds under
Other Investment Policies and Risk Considerations. The Fund may also invest in
other types of income-producing securities, including common stocks and
preferred stocks, some of which may have convertible features or attached
warrants and which may be speculative. See Convertible, Debt and
Non-Traditional Equity Securities under Other Investment Policies and Risk
Considerations.
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 15% of
its net assets would consist of such illiquid securities. See
Restricted/Illiquid Securities under Other Investment Policies and Risk
Considerations.
The Fund may invest up to 15% of its total assets in securities of
issuers domiciled in foreign countries. See Foreign Investment Information
under Other Investment Policies and Risk Considerations.
The Fund may hold cash or invest in short-term debt securities and
other money market instruments when, in the Manager's opinion, such holdings
are prudent given then prevailing market conditions or pending investment in
other types of securities. All these short-term investments will be of the
highest quality as determined by a nationally-recognized statistical rating
organization (e.g., AAA by S&P or Aaa by Moody's) or, if unrated, judged to be
of comparable quality as determined by the Manager. See Short-Term Investments
under Other Investment Policies and Risk Considerations.
The Manager does not normally intend to respond to short-term market
fluctuations or to acquire securities for the purpose of short- term trading;
however, the Manager may take advantage of short-term opportunities that are
consistent with its investment objective.
* * *
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.
Although the Fund will constantly strive to attain its objective,
there can be no assurance that is will be attained.
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The Fund's 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 investment policies of the Fund that are 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.
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RISK FACTORS
GENERALLY
The Fund invests principally 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 a greater potential for
price appreciation and can offer 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 portfolio
diversification, credit analysis, and attention to trends in the economy,
industries and financial markets.
HIGH-YIELD SECURITIES
The Fund may invest primarily in bonds rated BB or lower by S&P or Ba
or lower by Moody's, and in bonds of comparable quality. See Appendix A to
this Prospectus for more rating information. Investing in these so-called
"junk" bonds or "high-yield" bonds entails certain risks, including the risk of
loss of principal and default on interest payments 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, the risks of lower-rated
bonds 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 the
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 the 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.
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, 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 ratios may increase.
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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 which 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.
See High-Yield, High Risk Securities under Other Investment Policies
and Risk Considerations for further information about high-yield securities.
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CLASSES OF SHARES
The Distributor serves as the national distributor for the Fund.
Shares of the Class may be purchased directly by contacting the Fund or its
agent or through authorized investment dealers. All purchases of shares of the
Class are at net asset value. There is no front-end or contingent deferred
sales charge.
INVESTMENT INSTRUCTIONS GIVEN ON BEHALF OF PARTICIPANTS IN AN
EMPLOYER-SPONSORED RETIREMENT PLAN ARE MADE IN ACCORDANCE WITH DIRECTIONS
PROVIDED BY THE EMPLOYER. EMPLOYEES CONSIDERING PURCHASING SHARES OF THE CLASS
AS PART OF THEIR RETIREMENT PROGRAM SHOULD CONTACT THEIR EMPLOYER FOR DETAILS.
Shares of the Class are available for purchase only by: (a)
retirement plans introduced by persons not associated with brokers or dealers
that are primarily engaged in the retail securities business and rollover
individual retirement 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) a bank, trust company and similar financial
institution investing for its own account or for the account of its trust
customers for whom such financial institution is exercising investment
discretion in purchasing shares of the Class, except where the investment is
part of a program that requires payment to the financial institution of a Rule
12b-1 Plan fee; and (e) registered investment advisers investing on behalf of
clients that consist solely of institutions and high net-worth individuals
having at least $1,000,000 entrusted to the adviser for investment purposes,
but only if the adviser is not affiliated or associated with a broker or dealer
and derives compensation for its services exclusively from its clients for such
advisory services.
HIGH-YIELD OPPORTUNITIES FUND A CLASS, HIGH-YIELD OPPORTUNITIES FUND B CLASS
AND HIGH-YIELD OPPORTUNITIES FUND C CLASS
In addition to offering the High-Yield Opportunities Fund
Institutional Class, the Fund also offers the High-Yield Opportunities Fund A
Class, the High-Yield Opportunities Fund B Class and the High-Yield
Opportunities Fund C Class, which are described in a separate prospectus.
Shares of the High-Yield Opportunities Fund A Class, the High-Yield
Opportunities Fund B Class and the High-Yield Opportunities Fund C Class may be
purchased through authorized investment dealers or directly by contacting the
Fund or the Distributor. The High-Yield Opportunities Fund A Class carries a
front-end sales charge and, absent any applicable fee waiver, has annual 12b-1
expenses equal to a maximum of 0.30%. The maximum front-end sales charge as a
percentage of the offering price is 4.75% and is reduced on certain
transactions of $100,000 or more. The High-Yield Opportunities Fund B Class
and the High-Yield Opportunities Fund C Class have no front-end sales charge
but, absent any applicable fee waiver, are subject to annual 12b-1 expenses
equal to a maximum of 1%. Shares of the High-Yield Opportunities Fund B Class
and the High-Yield Opportunities Fund C Class and certain shares of the
High-Yield Opportunities Fund A Class may be subject to a contingent deferred
sales charge upon redemption. To obtain a prospectus relating to such classes,
contact the Distributor by writing to the address or by calling the phone
numbers listed on the cover of this Prospectus.
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<PAGE> 66
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 High-Yield Opportunities
Fund Institutional Class, to Delaware Group at 1818 Market Street,
Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to High-Yield Opportunities 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 High-Yield
Opportunities Fund Institutional Class, to Delaware Group at 1818 Market
Street, Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments anytime by
wiring funds to CoreStates Bank, N.A., as described above. You must advise
your Client Services Representative by telephone at 800-828-5052 prior to
sending your wire.
INVESTING BY EXCHANGE
If you have an investment in another mutual fund in the Delaware Group
and you qualify to purchase shares of the Class, you may write and authorize an
exchange of part or all of your investment into the Fund. However, shares of
the High-Yield Opportunities Fund B Class and High-Yield Opportunities 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. See Redemption and
Exchange for more complete information concerning your exchange privileges.
INVESTING THROUGH YOUR INVESTMENT DEALER
You can make a purchase of Fund shares through most investment dealers
who, as part of the service they provide, must transmit orders promptly to the
Fund. They may charge for this service.
PURCHASE PRICE AND EFFECTIVE DATE
The purchase price (net asset value) 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.
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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.
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<PAGE> 68
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 the Fund receives 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. Redemption proceeds will be
distributed promptly, as described below, but not later than seven days after
receipt of a redemption request.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and
carefully read that fund's prospectus before buying shares in an exchange. The
prospectus contains more complete information about the fund, including charges
and expenses.
The Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor 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.
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<PAGE> 69
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 after receipt of
your redemption request. Certificates are issued for shares only if you submit
a specific request. If your shares are in certificate form, the certificate
must accompany your request and also be in good order.
You also may submit your written request for redemption or exchange by
facsimile transmission at the following number: 215-255-8864.
TELEPHONE REDEMPTION AND EXCHANGE
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your shares in certificate form, you may redeem or
exchange only by written request and you must return your certificates.
The Telephone Redemption--Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in writing that you do not
wish to have such services available with respect to your account. The Fund
reserves the right to modify, terminate or suspend these procedures upon 60
days' written notice to shareholders. It may be difficult to reach the Fund by
telephone during periods when market or economic conditions lead to an
unusually large volume of telephone requests.
Neither the Fund nor its Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, the Fund will follow
reasonable procedures to confirm that instructions communicated by telephone
are genuine (including verification of a form of personal identification) as,
if it does not, 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 after receipt of the redemption request.
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TELEPHONE REDEMPTION-PROCEEDS TO YOUR BANK
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must submit a written authorization and you may need to have your
signature guaranteed. For your protection, your authorization must be on file.
If you request a wire, your funds will normally be sent the next business day.
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 after receipt of your redemption request to your predesignated
bank account. There are no fees for this redemption method, but the mail time
may delay getting funds into your bank account. Simply call your Client
Services Representative prior to the time the net asset value is determined, as
noted above.
TELEPHONE EXCHANGE
You or your investment dealer of record can exchange shares into any
fund in the Delaware Group under the same registration. As with the written
exchange service, telephone exchanges are subject to the same conditions and
limitations as other exchanges noted above. Telephone exchanges may be subject
to limitations as to amounts or frequency.
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DIVIDENDS AND DISTRIBUTIONS
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 expected to be declared daily and paid
monthly. However, the Fund does not anticipate declaring or paying dividends
during the first few months following the commencement of its operations.
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. Both
dividends and distributions are automatically reinvested in your account at net
asset value.
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 Class will not incur
distribution fees under the Rule 12b-1 Plans which, absent any applicable fee
waiver, apply to the High-Yield Opportunities Fund A Class, the High-Yield
Opportunities Fund B Class and the High-Yield Opportunities Fund C Class.
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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 tax as ordinary income, even though received in additional shares. It
is expected that 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 by-product
of Fund management activities. Consequently, capital gains distributions may
be expected to vary considerably from year to year. Also, for those investors
subject to tax, if purchases of shares in the Fund are made shortly before the
record date for a dividend or capital gains distribution, a portion of the
investment will be returned as a taxable distribution.
Although dividends generally will be treated as distributed when paid,
dividends which are declared in October, November or December to shareholders
of record on a specified date in one of those months, but which, for
operational reasons, may not be paid to the shareholder until the following
January, will be treated for tax purposes as if paid by the Fund and received
by the shareholder on December 31 of the 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.
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.
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<PAGE> 73
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 Accounting and Tax Issues and Taxes in Part B for additional
information on tax matters relating to the Fund and its shareholders.
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CALCULATION OF NET ASSET VALUE PER SHARE
The purchase and redemption price of 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 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 Fund, 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 High-Yield Opportunities Fund A, B and C Classes
alone will bear the 12b-1 Plan fees payable under their respective Plans.
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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
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 October 31, 1996, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $30 billion in assets in the various
institutional or separately managed (approximately $19,214,690,000) and
investment company (approximately $11,539,873,000) 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 which are implemented by the Fund'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 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.
Paul A. Matlack and Gerald T. Nichols have primary responsibility for
making day-to-day investment decisions for the Fund. 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. Mr. Matlack is a CFA
charterholder and 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, a Vice President/Senior
Portfolio Manager of Income Funds, Inc., has been a member of the Fund's
management team since its inception. 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 Manager, 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 CFA charterholder.
Mr. Matlack and Mr. Nichols will from time to time consult with Paul
E. Suckow, Executive Vice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc. He is a CFA charterholder and 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.
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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 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 to their advisory clients. These services may be used by the Manager in
servicing any of its accounts. Subject to best price and execution, the Fund
may consider a broker/dealer's sales of Fund shares in placing portfolio orders
and may place orders with broker/dealers that have agreed to defray certain
Fund expenses such as custodian fees.
PERFORMANCE INFORMATION
From time to time, the Fund may quote yield or total return
performance of the Class in advertising and other types of literature.
The current yield for the Class will be calculated by dividing the
annualized net investment income earned by the Class during a recent 30-day
period by the net asset value per share on the last day of the period. The
yield formula provides for semi-annual compounding, which assumes that net
investment income is earned and reinvested at a constant rate and annualized at
the end of a six-month period.
Total return will be based on a hypothetical $1,000 investment,
reflecting the reinvestment of all distributions. Each presentation will
include the average annual total return for one-, five- and ten-year or
life-of-fund periods, as relevant. The Fund may also advertise aggregate and
average total return information concerning the Class over additional periods
of time.
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. The Fund's fiscal year ends on July
31.
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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 as of December 27, 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 amended and restated agreement dated as of December 27, 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.
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 two other series of shares, the Delchester Fund series and
Strategic Income 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 High-Yield
Opportunities Fund A Class, the High-Yield Opportunities Fund B Class and the
High-Yield Opportunities 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 High-Yield
Opportunities Fund A Class, the High-Yield Opportunities Fund B Class and the
High-Yield Opportunities Fund C Class.
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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.
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OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
HIGH-YIELD, HIGH RISK SECURITIES
The Fund invests primarily in securities rated BB or lower by S&P or
Ba or lower by Moody's, or similarly rated by another nationally- recognized
statistical rating organization or, if unrated (which may be more speculative
in nature than rated bonds), judged to be of comparable quality by the Manager.
See Appendix A--Ratings to this Prospectus for more rating information. The
discussion in this section supplements the description of the risks of
high-yield securities found earlier in this Prospectus in Investment Objective
and Policies and Risk Factors and investors should refer to those sections for
a further discussion of the risks of high-yield bonds.
Fixed-income securities of this type are considered to be of poor
standing and predominantly speculative. Such securities are subject to a
substantial degree of credit risk. In the past, the high-yields from these
bonds have more than compensated for their higher default rates. There can be
no assurance, however, that yields will continue to offset default rates on
these bonds in the future. The Manager intends to maintain an adequately
diversified portfolio of these bonds. While diversification can help to reduce
the effect of an individual default on the Fund, there can be no assurance that
diversification will protect the Fund from widespread bond defaults brought
about by a sustained economic downturn.
Medium and low-grade bonds held by the Fund may be issued as a
consequence of corporate restructurings, such as leveraged buy-outs, mergers,
acquisitions, debt recapitalizations or similar events. Also, these bonds are
often issued by smaller, less creditworthy companies or by highly leveraged
(indebted) firms, which are generally less able than more financially stable
firms to make scheduled payments of interest and principal. The risks posed by
bonds issued under such circumstances are substantial.
The economy and interest rates may affect these high-yield, high risk
securities differently from other securities. Prices have been found to be
less sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic changes or individual corporate developments.
Also, during an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing. Changes by recognized rating agencies in their rating of any
security and in the ability of an issuer to make payments of interest and
principal will also ordinarily have a more dramatic effect on the values of
these investments than on the values of higher rated securities. Such changes
in value will not affect cash income derived from these securities, unless the
issuers fail to pay interest or dividends when due. Such changes will,
however, affect the Fund's net asset value per share.
ZERO COUPON BONDS AND PAY-IN-KIND BONDS
The Fund may purchase zero-coupon bonds and pay-in-kind ("PIK") bonds.
A zero-coupon bond has no cash coupon payments. Instead, the issuer sells the
security at a substantial discount from its maturity value. The interest
received by the investor from holding this security to maturity is the
difference between the maturity value and the purchase price. The advantage to
the investor is that the reinvestment risk of the income received during the
life of the bond is eliminated. However, zero-coupon bonds, like other bonds,
retain interest rate and credit risk and usually display more price volatility
than securities that pay a cash coupon. Since there are no periodic interest
payments made to the holder of a zero-coupon bond, when interest rates rise,
the value of such a security will fall more dramatically than a bond paying out
interest on a current basis. When interest rates fall, however, zero-coupon
bonds rise more rapidly in value because the bonds have locked in a specific
rate of return which becomes more attractive the further interest rates fall.
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PIK bonds are securities that pay interest in either cash or
additional securities, at the issuer's option, for a specified period. Pies,
like zero-coupon bonds, are designed to give an issuer flexibility in managing
cash flow. PIK bonds can be either senior or subordinated debt and trade flat
(i.e., without accrued interest). The price of PIK bonds is expected to
reflect to the market value of the underlying debt plus an amount representing
accrued interest since the last payment. Pies are usually less volatile than
zero-coupon bonds, but more volatile than cash-pay securities. PIK bonds may
provide an attractive yield on the Fund's investment even when the interest
paid is in the form of additional securities of the issuer instead of cash.
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.
FOREIGN INVESTMENT INFORMATION
The Fund may invest up to 15% of its total assets in securities of
foreign issuers, including Yankee Bonds. Investments in obligations of foreign
issuers involve somewhat different investment risks than those affecting
obligations of United States issuers. There is limited publicly available
information with respect to foreign issuers, and foreign issuers are not
subject to uniform accounting, auditing and financial standards and
requirements comparable to those applicable to domestic companies. There is
also less government supervision and regulation of foreign securities
exchanges, brokers and listed companies than in the United States and it is
more difficult to enforce legal rights outside of the U.S. Many foreign
securities markets have substantially less volume than U.S. national securities
exchanges, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable domestic issuers. Settlement practices
of certain foreign countries may include delays and may otherwise differ from
those customary in U.S. markets. Brokerage commissions and other transaction
costs on foreign securities exchanges are generally higher than in the United
States. It is also expected that the expenses for custodial arrangements of
the Fund's foreign securities will be somewhat greater than the expenses for
the custodial arrangements for U.S. securities of equal value. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from the companies comprising the Fund's
investments. See Taxes. Additional risks include future political and
economic developments, the possibility that a foreign jurisdiction might impose
or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits and the possible adoption of foreign government
restrictions such as exchange controls. Also, because stocks of foreign
companies are normally denominated in foreign currencies, the Fund may be
affected favorably or unfavorably by changes in currency rates and exchange
control regulations, and may incur costs in connection with conversions between
various currencies.
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The risks noted above often are heightened for investments in emerging
or developing countries. Compared to the United States and other developed
countries, emerging or developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities. Prices on these exchanges 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. Further, investments by foreign investors are subject to
a variety of restrictions in many emerging or developing countries. These
restrictions may take the form of prior governmental approval, limits on the
amount or type of securities held by foreigners, and limits on the type of
companies in which foreigners may invest. Additional restrictions may be
imposed at any time by these or other countries in which the Fund invests. In
addition, 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 government consents. Although
these restrictions may in the future make it undesirable to invest in emerging
or developing countries, the Manager does not believe that any current
repatriation restrictions would affect the Fund's decision to invest in such
countries.
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, 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,
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 Immediate
Credit Banks and the Federal National Mortgage Association.
SHORT-TERM INVESTMENTS
The short-term investments in which the Fund may invest are:
(1) Time deposits, certificates of deposit (including marketable
variable rate certificates of deposit) and bankers' acceptances issued by a
U.S. commercial bank. Time deposits are non-negotiable deposits maintained in
a banking institution for a specified period of time at a stated interest rate.
Time
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deposits maturing in more than seven days will not be purchased by the Fund,
and time deposits maturing from two business days through seven calendar days
will not exceed 15% of the total assets of the Fund. Certificates of deposit
are negotiable short-term obligations issued by commercial banks against funds
deposited in the issuing institution. Variable rate certificates of deposit
are certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
The Fund will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion or, in the case of
a bank which does not have total assets of at least $1 billion, the aggregate
investment made in any one such bank is limited to $100,000 and the principal
amount of such investment is insured in full by the Federal Deposit Insurance
Corporation, (ii) it is a member of the Federal Deposit Insurance Corporation,
and (iii) the bank or its securities have received the highest quality rating
by a nationally- recognized statistical rating organization;
(2) Commercial paper with the highest quality rating by a
nationally-recognized statistical rating organization (e.g., A-1 by S&P or
Prime-1 by Moody's) or, if not so rated, of comparable quality as determined by
the Manager;
(3) Short-term corporate obligations with the highest quality
rating by a nationally-recognized statistical rating organization (e.g., AAA by
S&P or Aaa by Moody's) or, if not so rated, of comparable quality as determined
by the Manager;
(4) U.S. government securities (see U.S. Government Securities);
and
(5) Repurchase agreements collateralized by securities listed
above.
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 of 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.
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RESTRICTED/ILLIQUID SECURITIES
The Fund may invest in restricted securities, including securities
eligible for resale without registration pursuant to Rule 144A ("Rule 144A
Securities") under the 1933 Act. Rule 144A exempts many privately placed and
legally restricted securities from the registration requirements of the 1933
Act and permits such securities to be freely traded among certain institutional
buyers such as the Fund.
The Fund may invest no more than 15% of the value of its net assets in
illiquid securities. Illiquid securities, for purposes of this policy, include
repurchase agreements maturing in more than seven days.
While maintaining oversight, the Board of Directors has delegated to
the Manager the day-to-day functions 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; and (iv) the nature of the security and the
nature of the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security 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 15% limit on investment
in such securities, the Manager will determine what action shall be taken to
ensure that the Fund continues to adhere to such limitation.
UNSEASONED COMPANIES
The Fund may invest in relatively new or unseasoned companies which
are in their early stages of development, or small companies positioned in new
and emerging industries where the opportunity for rapid growth is expected to
be above average. Securities of unseasoned companies present greater risks
than securities of larger, more established companies. The companies in which
the Fund may invest may have relatively small revenues, limited product lines,
and may have a small share of the market for their products or services. Small
companies may lack depth of management, they may be unable to internally
generate funds necessary for growth or potential development or to generate
such funds through external financing or favorable terms, or they may be
developing or marketing new products or services for which markets are not yet
established and may never become established. Due these and other factors,
small companies may suffer significant losses as well as realize substantial
growth, and investments in such companies tend to be volatile and are therefore
speculative.
BORROWING FROM BANKS
The Fund may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Fund will not borrow money in
excess of one-third of the value of its net assets. The Fund has no intention
of increasing its net income through borrowing. Any borrowing will be done
from a bank and, to the extent that such borrowing exceeds 5% of the value of
the Fund's net assets, asset coverage of at least 300% is required. In the
event that such asset coverage shall at any time fall below 300%, the Fund
shall, within three days thereafter (not including Sundays or holidays, or such
longer period as the Securities and Exchange Commission may prescribe by rules
and regulations), reduce the amount of its borrowings to such an extent that
the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the 1940 Act, except for notes to banks. Investment securities will
not be purchased while the Fund has an outstanding borrowing.
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APPENDIX A--RATINGS
The Fund's assets may be invested in corporate bonds that may be rated
BB or lower by S&P or Ba or lower by Moody's, or similarly rated by another
nationally-recognized statistical rating organization or that may be unrated.
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.
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.
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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
High-Yield Opportunities 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
___________________________________________________________________________
DELAWARE GROUP INCOME FUNDS, INC.
___________________________________________________________________________
DELCHESTER FUND
___________________________________________________________________________
STRATEGIC INCOME FUND
___________________________________________________________________________
HIGH-YIELD OPPORTUNITIES FUND
___________________________________________________________________________
PART B
STATEMENT OF
ADDITIONAL INFORMATION
____________________________________________________________________________
DECEMBER 27, 1996
DELAWARE GROUP
<PAGE> 86
PART B--STATEMENT OF ADDITIONAL INFORMATION DECEMBER 27, 1996
DELAWARE GROUP
DELAWARE GROUP INCOME FUNDS, INC.
1818 MARKET STREET
PHILADELPHIA, PA 19103
FOR MORE INFORMATION ABOUT THE INSTITUTIONAL CLASS OF DELCHESTER FUND,
STRATEGIC INCOME FUND AND HIGH-YIELD OPPORTUNITIES FUND: 800-828-5052
FOR PROSPECTUS AND PERFORMANCE OF THE CLASS A SHARES, CLASS B SHARES AND
CLASS C SHARES OF DELCHESTER FUND, STRATEGIC INCOME FUND AND HIGH-YIELD
OPPORTUNITIES FUND: NATIONWIDE 800-523-4640
INFORMATION ON EXISTING ACCOUNTS OF THE CLASS A SHARES, CLASS B SHARES AND
CLASS C SHARES OF DELCHESTER FUND, STRATEGIC INCOME FUND AND HIGH-YIELD
OPPORTUNITIES FUND: (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
OFFICERS AND DIRECTORS
EXCHANGE PRIVILEGE
GENERAL INFORMATION
APPENDIX A--IRA INFORMATION
FINANCIAL STATEMENTS
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Delaware Group Income Funds, Inc. ("Income Funds, Inc.") is a
professionally-managed mutual fund of the series type presently offering three
series of shares: the Delchester Fund series (the "Delchester Fund"), the
Strategic Income Fund series (the "Strategic Income Fund") and the High-Yield
Opportunities Fund series (the "High-Yield Opportunities Fund") (individually,
a "Fund" and collectively, the "Funds").
Each Fund of Income Funds, Inc. offers three retail classes: the
Delchester Fund A Class, the Strategic Income Fund A Class and the High-Yield
Opportunities Fund A Class (the "Class A Shares"); the Delchester Fund B Class,
the Strategic Income Fund B Class and the High-Yield Opportunities Fund B Class
(the "Class B Shares"); and the Delchester Fund C Class, the Strategic Income
Fund C Class and the High-Yield Opportunities 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, the Strategic Income Fund
Institutional Class and the High-Yield Opportunities 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%, absent any applicable fee waiver, 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 0.30%, for Strategic
Income Fund A Class may not exceed 0.30% and have currently been fixed by the
Board at 0.25%, and for High-Yield Opportunities Fund may not exceed 0.30%.
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, absent any applicable fee waiver, annual 12b-1 Plan
expenses of up to 1%, which are assessed against the Class C Shares for the
life of the investment. The High-Yield Opportunities Fund will not pay a 12b-1
Fee with respect to any Class until July 1, 1997. See Distribution and Service
under Investment Management Agreements.
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectus of
the Fund Classes for the Delchester Fund dated September 30, 1996 and the
Strategic Income Fund, dated September 30, 1996, as revised October 4, 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. This Part B also supplements the information
contained in the current Prospectus of the Fund Classes for the High-Yield
Opportunities Fund dated December 27, 1996, and the current Prospectus of the
Institutional Class for the High-Yield Opportunities Fund dated December 27,
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.
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<PAGE> 88
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 may 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
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reserves in bank deposits in foreign currencies, the Fund will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in connection with conversions between various
currencies. The investment policies of 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
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<PAGE> 90
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
foreign currency approximating the value of some or all of the Fund's assets
denominated in such foreign
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<PAGE> 91
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.
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<PAGE> 92
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 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 debt securities in the
portfolio would decline,
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<PAGE> 93
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 fundamental policy, the Fund currently intends to limit
its investments in futures contracts and options thereon to the extent that not
more than 5% of the Funds 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.
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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.
High-Yield Opportunities Fund
The High-Yield Opportunities Fund seeks total return and, as a
secondary objective, high current income. The types of securities in which
High-Yield Opportunities Fund invests are subject to price fluctuations
particularly due to changes in interest rates and economic conditions.
Management will seek to achieve High-Yield Opportunities Fund's objective by
investing at least 65% of the Fund's assets at time of purchase in corporate
bonds rated BB or lower by S&P or Ba or lower by Moody's or similarly rated by
other rating agencies, and in unrated bonds judged to be of comparable quality
by the Manager. Unrated bonds may be more speculative in nature than rated
bonds.
The Fund may also invest in securities of, or guaranteed by, the U.S.
and foreign governments, their agencies or instrumentalities and 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 S&P or rated P-1 or P-2 by Moody's or similarly rated by other rating
agencies, and in unrated paper judged to be of comparable quality by the
Manager.
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Appendix C to High-Yield Opportunities 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.
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 High-Yield Opportunities 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, the Fund will be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and may incur costs in connection with conversions between various currencies.
As disclosed in High-Yield Opportunities 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.
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 High-Yield
Opportunities 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 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. 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 High-Yield Opportunities
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
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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 High-Yield Opportunities Fund invests.
ZERO COUPON AND PAY-IN-KIND BONDS
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon, deferred interest and pay-in-kind bonds.
These bonds carry an additional risk in that, unlike bonds that pay interest
throughout the period to maturity, the High-Yield Opportunities Fund will
realize no cash until the cash payment date and, if the issuer defaults, the
Fund may obtain no return at all on its investment. Zero coupon, deferred
interest and pay-in-kind bonds involve additional special considerations.
Zero coupon or deferred interest securities are debt obligations that
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
(the "cash payment date") and therefore are generally issued and traded at a
discount from their face amounts or par value. The discount varies depending
on the time remaining until maturity or cash payment date, prevailing interest
rates, liquidity of the security and the perceived credit quality of the
issuer. The discount, in the absence of financial difficulties of the issuer,
typically decreases as the final maturity or cash payment date of the security
approaches. The market prices of zero coupon securities are generally more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater degree than
do non-zero coupon or deferred interest securities having similar maturities
and credit quality. Current federal income tax law requires that a holder of a
zero coupon security report as income each year the portion of the original
issue discount on the security that accrues that year, even though the holder
receives no cash payments of interest during the year.
Pay-in-kind bonds are securities that pay interest through the
issuance of additional bonds. The Fund will be deemed to receive interest over
the life of these bonds and be treated as if interest were paid on a current
basis for federal income tax purposes, although no cash interest payments are
received by the Fund until the cash payment date or until the bonds mature.
Accordingly, during periods when the Fund receive no cash interest payments on
its zero coupon securities or deferred interest or pay-in-kind bonds, it may be
required to dispose of portfolio securities to meet the distribution
requirements and these sales may be subject to the risk factors discussed
above. The Fund is not limited in the amount of its assets that may be
invested in these types of securities.
CONVERTIBLE, DEBT AND NON-TRADITIONAL EQUITY SECURITIES
From time to time, a portion of the Fund's assets may be invested in
convertible and debt securities of issuers in any industry. A convertible
security is a security which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the
same or a different issuer. Convertible and debt securities are senior to
common stocks in a corporation's capital structure, although convertible
securities are usually subordinated to similar nonconvertible securities.
Convertible and debt securities provide a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in the convertible
security's underlying common stock. Just as with debt securities, convertible
securities tend to increase in market value when interest rates decline and
tend to decrease in value when interest rates rise. However, the price of a
convertible security is also influenced by the market value of the security's
underlying common stock and tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. Convertible and debt securities acquired by the
Fund may be rated below investment grade, or unrated. These lower rated
convertible and debt securities are subject to credit risk considerations
substantially similar to such
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considerations affecting high risk, high-yield bonds, commonly referred to as
"junk bonds." See Investment Objective and Policies, Risk Factors and
High-Yield, High Risk Securities for a further discussion of these types of
investments.
The 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.
The 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.
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.
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BORROWING FROM BANKS
The Fund may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Fund will not borrow money in
excess of one-third of the value of its net assets. The Fund has no intention
of increasing its net income through borrowing. Any borrowing will be done
from a bank and, to the extent that such borrowing exceeds 5% of the value of
the Fund's net assets, asset coverage of at least 300% is required. In the
event that such asset coverage shall at any time fall below 300%, the Fund
shall, within three days thereafter (not including Sundays or holidays, or such
longer period as the Securities and Exchange Commission may prescribe by rules
and regulations), reduce the amount of its borrowings to such an extent that
the asset coverage of such borrowings shall be at least 300%. The Fund will
not pledge more than 10% of its net assets, or issue senior securities as
defined in the 1940 Act, except for notes to banks. Investment securities will
not be purchased while the Fund has an outstanding borrowing.
Investment Policies Applicable to Each Fund
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 secondary
market for high-yield issues, could reduce the number of new high-yield
securities being issued and could make it more difficult for a 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 and
High-Yield Opportunities Fund will not purchase illiquid assets if more than
15% of its respective 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
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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, 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.
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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.
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.
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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.
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.
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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.
High-Yield Opportunities Fund
High-Yield Opportunities 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 High-Yield Opportunities Fund, or 67% of the
voting securities of High-Yield Opportunities 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 the Fund purchases securities.
1. With respect to 75% of its total assets, High-Yield
Opportunities Fund will not invest more than 5% of its total assets in the
securities of any one issuer (other than 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. High-Yield Opportunities Fund will not make any investment in
real estate. This restriction does 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. High-Yield Opportunities Fund will not sell short any security
or property.
4. High-Yield Opportunities Fund will not buy or sell commodities
or commodity contracts except that the Fund may enter into futures contracts
and options thereon.
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5. High-Yield Opportunities 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. The Fund shall not issue
senior securities as defined in the Investment Company Act of 1940, except for
notes to banks.
6. High-Yield Opportunities 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. High-Yield Opportunities 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 may be deemed to be an underwriter for purposes of the
Securities Act of 1933.
8. High-Yield Opportunities Fund will not invest more than 25% 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,
High-Yield Opportunities Fund has the following investment restrictions which
may be amended or changed without approval of shareholders.
1. High-Yield Opportunities Fund will not invest for the purpose
of acquiring control of any company.
2. High-Yield Opportunities Fund will not invest in securities of
other investment companies, except 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 at the time of the
investment.
3. High-Yield Opportunities Fund will not write, purchase or sell
options, puts, calls or combinations thereof with respect to securities.
4. High-Yield Opportunities Fund will not enter into futures
contracts or options thereon.
5. High-Yield Opportunities Fund will not purchase or retain the
securities of any issuer which has an officer, director or security holder who
is a director or officer of Income Funds, Inc. or of the Manager if or so long
as the directors and officers of Income Funds, Inc. and of the Manager together
own beneficially more than 5% of any class of securities of such issuer.
6. High-Yield Opportunities Fund will not invest in interests in
oil, gas and other mineral leases or other mineral exploration or development
programs.
7. High-Yield Opportunities Fund will not purchase securities on
margin except short-term credits that may be necessary for the clearance of
purchases and sales of securities.
-18-
<PAGE> 104
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.
-19-
<PAGE> 105
Performance information is not provided for Strategic Income Fund because such
shares were not offered to the public prior to October 1, 1996 and performance
information is not provided for High-Yield Opportunities Fund because such
shares were not offered to the public prior to the date of this Part B.
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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
DELCHESTER DELCHESTER DELCHESTER
FUND FUND FUND
A CLASS A CLASS INSTITUTIONAL
(AT OFFER) (AT NAV) CLASS (1)
<S> <C> <C> <C>
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%
</TABLE>
_________________________
(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.
-20-
<PAGE> 106
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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
DELCHESTER FUND DELCHESTER FUND
B CLASS B CLASS
(INCLUDING DEFERRED (EXCLUDING DEFERRED
SALES CHARGE) SALES CHARGE)
<S> <C> <C>
1 year
ended
7/31/96 3.39% 7.30%
Period
5/2/94(1)
through
7/31/96 4.70% 5.85%
</TABLE>
_________________________
(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.
<TABLE>
<CAPTION>
AGGREGATE TOTAL RETURN
DELCHESTER FUND DELCHESTER FUND
C CLASS C CLASS
(INCLUDING DEFERRED (EXCLUDING DEFERRED
SALES CHARGE) SALES CHARGE)
<S> <C> <C>
Period
11/29/95(1)
through
7/31/96 4.21% 5.20%
</TABLE>
_________________________
(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.
-21-
<PAGE> 107
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 is
not provided for Strategic Income Fund because such shares were not offered to
the public prior to October 1, 1996 and yield information is not provided for
High-Yield Opportunities Fund 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.
-22-
<PAGE> 108
Statistical and performance information and various indices compiled
and maintained by organizations such as the following may also be used in
preparing exhibits comparing certain industry trends and competitive mutual
fund performance to comparable activities and performances of the 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.
-23-
<PAGE> 109
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.
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 is not
provided for Strategic Income Fund because such shares were not offered to the
public prior to October 1, 1996 and performance information is not provided for
High-Yield Opportunities Fund because such shares were not offered to the
public prior to the date of this Part B.
-24-
<PAGE> 110
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
DELCHESTER DELCHESTER
FUND FUND CONSUMER
A CLASS INSTITUTIONAL PRICE
(AT OFFER) CLASS(2) INDEX(3)
<S> <C> <C> <C>
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%
</TABLE>
_________________________
(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.
-25-
<PAGE> 111
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
DELCHESTER DELCHESTER
FUND FUND
B CLASS B CLASS CONSUMER
(INCLUDING (EXCLUDING PRICE
DEFERRED DEFERRED INDEX(2)
SALES CHARGE) SALES CHARGE)
<S> <C> <C> <C>
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%
</TABLE>
_________________________
(1) Date of initial public offering of the Delchester Fund B Class.
(2) Source--U.S. Department of Labor.
-26-
<PAGE> 112
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
DELCHESTER DELCHESTER
FUND FUND
C CLASS C CLASS CONSUMER
(INCLUDING (EXCLUDING PRICE
DEFERRED DEFERRED INDEX(2)
SALES CHARGE) SALES CHARGE)
<S> <C> <C> <C>
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%
</TABLE>
_________________________
(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.
-27-
<PAGE> 113
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.
<TABLE>
<CAPTION>
NUMBER
INVESTMENT PRICE PER OF SHARES
AMOUNT SHARE PURCHASED
<S> <C> <C> <C>
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
</TABLE>
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.
-28-
<PAGE> 114
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:
<TABLE>
<CAPTION>
7% Rate 9% Rate 11% Rate
of Return of Return of Return
--------- --------- ---------
<S> <C> <C> <C>
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
</TABLE>
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.
-29-
<PAGE> 115
TRADING PRACTICES AND BROKERAGE
Delchester Fund, High-Yield Opportunities 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 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
-30-
<PAGE> 116
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 and High-Yield Opportunities Fund anticipate that their respective
annual rates 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.
-31-
<PAGE> 117
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, absent any applicable fee waiver, 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, absent any
applicable fee waiver, 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, absent any
applicable fee waiver, are higher than those to which Class A Shares are
subject and are assessed against Class B Shares for approximately eight years
after purchase. See Automatic Conversion of Class B Shares under Classes of
Shares in the Fund Classes' Prospectuses.
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares, absent any applicable fee waiver, are also subject to
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<PAGE> 118
annual 12b-1 Plan expenses for the life of the investment which are equal to
those to which Class B Shares are subject.
The Distributor has voluntarily elected to waive the payment of 12b-1
Plan expenses by the High-Yield Opportunities Fund from the commencement of
public offering through June 30 , 1997.
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, if any, under a Fund's
12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
unless, in the case of Class A Shares or Institutional Class shares, a
shareholder submits a specific request. Certificates are not issued in the
case of Class B Shares or Class C Shares. 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, absent any applicable fee waiver, annual
12b-1 Plan expenses of up to a maximum of 0.30% of the average daily net assets
of Class A Shares (currently, no more than 0.25% of the average daily net
assets of 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% (0.25% of which are service fees
to be paid to the Distributor, dealers or others for providing personal service
and/or maintaining shareholder accounts) of average daily net assets of the
respective Class. Class B Shares will automatically convert to Class A Shares
at the end of approximately eight years after purchase and, thereafter, be
subject to annual 12b-1 Plan expenses of up to a maximum of 0.30% of average
daily net assets of such shares. Unlike Class B Shares, Class C Shares do not
convert to another class.
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<PAGE> 119
CLASS A SHARES - DELCHESTER FUND, STRATEGIC INCOME FUND AND HIGH-YIELD
OPPORTUNITIES 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.
<TABLE>
<CAPTION>
DELCHESTER FUND
STRATEGIC INCOME FUND
HIGH-YIELD OPPORTUNITIES FUND
CLASS A SHARES
- ---------------------------------------------------------------------------------------------------------------------
DEALER'S
COMMISSION***
FRONT-END SALES CHARGE AS % OF AS % OF
OFFERING AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTED** PRICE
- ---------------------------------------------------------------------------------------------------------------------
Strategic High-Yield
Delchester Income Opportunities
Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Less than $100,000 4.75% 5.05% 4.91% 4.91% 4.00%
$100,000 but under $250,000 3.75 3.91 3.82 3.82 3.00
$250,000 but under $500,000 2.50 2.60 2.55 2.55 2.00
$500,000 but under $1,000,000* 2.00 2.12 2.00 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 and
High-Yield Opportunities 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.
- --------------------------------------------------------------------------------
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<PAGE> 120
Certain dealers who enter into an agreement to provide extra training
and information on Delaware Group products and services and who increase sales
of Delaware Group funds may receive an additional commission of up to 0.15% of
the offering price in connection with sales of Class A Shares. Such dealers
must meet certain requirements in terms of organization and distribution
capabilities and their ability to increase sales. The Distributor should be
contacted for further information on these requirements as well as the basis
and circumstances upon which the additional commission will be paid.
Participating dealers may be deemed to have additional responsibilities under
the securities laws.
DEALER'S COMMISSION
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers
through whom such purchases are effected in accordance with the following
schedule:
<TABLE>
<CAPTION>
DEALER'S COMMISSION
-------------------
AMOUNT (as a percentage of
OF PURCHASE amount purchased)
-----------
<S> <C>
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
</TABLE>
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.
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<PAGE> 121
The following table sets forth the rates of the CDSC for Class B
Shares of each Fund:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE (AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR AFTER PURCHASE MADE SUBJECT TO CHARGE)
------------------------ ------------------
<S> <C>
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
</TABLE>
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares, absent any applicable fee
waiver, will still be subject to the annual 12b-1 Plan expenses of up to 1% of
average daily net assets of those shares. At the end of approximately eight
years after purchase, the investor's Class B Shares will be automatically
converted into Class A Shares of the same 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, absent any applicable fee waiver, 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 0.30% of the Class
A Shares' average daily net assets for the year, and up to 1% (0.25% of which
are service fees to be paid to the Distributor, dealers and others for
providing personal service and/or maintaining shareholder accounts) of each of
the Class B Shares' and the Class C
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<PAGE> 122
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 and High-Yield
Opportunities Fund the extent such fee for any day exceeds the net investment
income realized by such Funds' respective Class A, Class B and Class C Shares
for such day. In addition, the Distributor has elected voluntarily to waive
all payments under the 12b-1 Plan for the Class A Shares, Class B Shares and
Class C Shares of the High-Yield Opportunities Fund during the commencement of
the public offering of the Fund through June 30, 1997.
Although the maximum fee payable under the 12b-1 Plan relating to the
Delchester Fund A Class is 0.30% 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 0.10% 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 0.30% 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 0.25%. 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 0.30% on all Class A Shares' assets to be paid at any
time following appropriate Board approval.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of Class
A, Class B and Class C Shares would be borne by such persons without any
reimbursement from such Fund Classes. Subject to seeking best price and
execution, a 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
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<PAGE> 123
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 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.
OTHER PAYMENTS TO DEALERS -- CLASS A, CLASS B AND CLASS C SHARES
From time to time, at the discretion of the Distributor, all
registered broker/dealers whose aggregate sales of Fund Classes exceed certain
limits as set by the Distributor, may receive from the Distributor an
additional payment of up to 0.25% of the dollar amount of such sales. The
Distributor may also provide additional promotional incentives or payments to
dealers that sell shares of the Delaware Group of funds. In some instances,
these incentives or payments may be offered only to certain dealers who
maintain, have sold or 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.
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.
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<PAGE> 124
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. In addition, purchases of Class A Shares may be made
by financial institutions investing for the account of their trust customers
when they are not eligible to purchase shares of a Fund's Institutional Class.
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.
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.
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
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<PAGE> 125
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 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
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<PAGE> 126
$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.
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.
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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) a bank, trust company and similar
financial institution investing for its own account or for the account of its
trust customers for whom such financial institution is exercising investment
discretion in purchasing shares of the Class, except where the investment is
part of a program that requires payment to the financial institution of a Rule
12b-1 Plan fee; and (e) registered investment advisers investing on behalf of
clients that consist solely of institutions and high net-worth individuals
having at least $1,000,000 entrusted to the adviser for investment purposes,
but only if the adviser is not affiliated or associated with a broker or
dealer and derives compensation for its services exclusively from its clients
for such advisory services.
Shares of the Institutional Classes are available for purchase at net
asset value, without the imposition of a front-end or contingent deferred sales
charge and are not subject to Rule 12b-1 expenses.
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INVESTMENT PLANS
REINVESTMENT PLAN/OPEN ACCOUNT
Unless otherwise designated by shareholders in writing, dividends from
net investment income and distributions from realized securities profits, if
any, will be automatically reinvested in additional shares of the respective
Fund Classes of Delchester Fund and Strategic Income Fund in which an investor
has an account (based on the net asset value in effect on the reinvestment
date) and will be credited to the shareholder's account on that date. All
dividends and distributions of the Institutional Classes of each Fund and the
Fund Classes of High- Yield Opportunities Fund 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 of Delchester Fund and Strategic Income Fund and
Appendix B--Classes Offered in the Fund Classes' Prospectus for High-Yield
Opportunities Fund 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.
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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.
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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.
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
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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. These plans can be maintained as Section
401(k), profit sharing or money purchase pension plans. Contributions 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 and make 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, for years prior to
1997, elects to be treated as having no compensation for the year. Investments
in each of the Fund Classes are permissible.
An individual can contribute up to $2,000 to his or her IRA each year.
Contributions may or may not be deductible depending upon the taxpayers
adjusted gross income and whether the taxpayer or his or her spouse is an
active participant in an employer-sponsored retirement plan. Even if a
taxpayer (or his or her spouse) is an active participant in an
employer-sponsored retirement plan, the full $2,000 deduction is still
available if the taxpayer's adjusted gross income is below $25,000 ($40,000 for
taxpayers filing joint returns). A partial deduction is allowed for married
couples with incomes between $40,000 and $50,000, and for single individuals
with incomes between $25,000 and $35,000. No deductions are available for
contributions to IRAs by taxpayers whose adjusted gross income before IRA
deductions exceeds $50,000 ($35,000 for singles) and who are active
participants in an employer-sponsored retirement plan. Taxpayers who 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 for years prior to 1997), and defer taxes on interest or
other earnings from the IRAs. Special rules apply for determining the
deductibility of contributions made by married individuals filing separate
returns.
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Effective for tax years beginning after 1996, one-income couples can
contribute up to $2,000 to each spouse's IRA provided the combined compensation
of both spouses is at least equal to the total contributions for both spouses.
If the working spouse is an active participant in an employer-sponsored
retirement plan and earns over $40,000, the maximum deduction limit is reduced
in the same way that the limit is reduced for contributions to a non-spousal
IRA.
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.
Effective January 1, 1997, the 10% premature distribution penalty will
not apply to distributions from an IRA that are used to pay medical expenses in
excess of 7.5% of adjusted gross income or to pay health insurance premiums by
an individual who has received unemployment compensation for 12 consecutive
weeks.
See Appendix B 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")
New SAR/SEP plans may not be established after December 31, 1996. In
addition, employers must have 25 or fewer eligible employees to maintain an
existing SEP/IRA that permits salary deferral contributions. SAR/SEP plans may
only invest in Class A Shares and Class C Shares.
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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 00.
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 00.
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 00.
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the 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 a Fund is expected to be
equivalent.
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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, in the case of the Fund Classes, 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.
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Payment for shares redeemed will ordinarily be mailed the next
business day, but in no case later than seven days, after receipt of a
redemption request in good order; provided, however, that each commitment to
mail or wire redemption proceeds by a certain time, as described below, is
modified by the qualifications described in the next paragraph.
Each 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.
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<PAGE> 137
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 from the Fund Classes. 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.
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.
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<PAGE> 138
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 of Delchester Fund
and Strategic Income Fund 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 of Delchester Fund and Strategic Income Fund 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
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<PAGE> 139
Limited Contingent Deferred Sales Charge - Class A Shares under Redemption and
Exchange in the Prospectuses for the Fund Classes. Shareholders should consult
their financial advisers to determine whether a Systematic Withdrawal Plan
would be suitable for them.
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 or currently any of the Fund Classes of High-Yield Opportunities Fund.
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<PAGE> 140
DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Each Fund declare a dividend to shareholders of each Class of the
respective Fund's shares from net investment income on a daily basis.
Dividends are declared each day the respective Fund is open and paid monthly.
Net investment income earned on days when the respective Fund is not open will
be declared as a dividend on the next business day. Purchases of shares of the
respective 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 the respective 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 the respective 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 and High-Yield Opportunities Fund do not anticipate
declaring or paying dividends during the first few months following the
commencement of operations.
Each Class of shares of a Fund will share proportionately in the
investment income and expenses of that Fund, except that, absent any applicable
fee waiver, 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. Payment by check of cash dividends will ordinarily be mailed within
three business days after the payable date. Dividend payments of $1.00 or less
will be automatically reinvested, notwithstanding a shareholder's election to
receive dividends in cash. If such a shareholder's dividends increase to
greater than $1.00, the shareholder would have to file a new election in order
to begin receiving dividends in cash again. If a shareholder redeems an entire
account, all dividends accrued to the time of the withdrawal will be paid by
separate check at the end of that particular monthly dividend period,
consistent with the payment and mailing schedule described above. Any check in
payment of dividends or other distributions which cannot be delivered by the
United States Post Office or which remains uncashed for a period of more than
one year may be reinvested in the shareholder's account at the then-current net
asset value and the dividend option may be changed from cash to reinvest. A
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.
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<PAGE> 141
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. High-Yield Opportunities Fund intends to meet these requirements when it
commences operations. 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 and High-Yield Opportunities 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.
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<PAGE> 142
INVESTMENT MANAGEMENT AGREEMENTS
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 October 31, 1996, the Manager and its affiliates
in the Delaware Group, including the Sub-Adviser, were managing in the
aggregate more than $30 billion in assets in various institutional or
separately managed (approximately $19,214,690,000) and investment company
(approximately $11,539,873,000) 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. The Investment
Management Agreement for High-Yield Opportunities Fund is dated December 27,
1996 and was approved by the initial shareholder on December 27, 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 0.60% on the first $500 million of the Fund's
average daily net assets, 0.575% of the next $250 million and 0.55% 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 0.65% on the first $500 million of the Fund's
average daily net assets, 0.625% of the next $500 million and 0.60% 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.
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<PAGE> 143
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.
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 0.75% (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.
The annual compensation paid by High-Yield Opportunities Fund for
investment management services is equal to 0.65% on the first $500 million of
the Fund's average daily net assets, 0.625% of the next $500 million and 0.60%
of the average daily net assets in excess of $1 billion. The Manager makes all
investment decisions which are implemented by High-Yield Opportunities Fund.
The Manager pays the salaries of all directors, officers and employees who are
affiliated with both the Manager and Income Funds, Inc.
The Manager has elected voluntarily to waive that portion, if any, of
the annual management fees payable by High-Yield Opportunities 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 0.75% (exclusive of taxes,
interest, brokerage commissions, extraordinary expenses and 12b-1 expenses)
during the commencement of the public offering of the Fund through June 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 0.77%, 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.
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<PAGE> 144
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, under a separate Distribution Agreement
dated as of September 30, 1996 for Strategic Income Fund and under a separate
Distribution Agreement dated as of December 27, 1996 for High-Yield
Opportunities 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. The Distributor has elected voluntarily to
waive payments under the 12b-1 Plans for the Class A Shares, Class B Shares and
Class C Shares of the High-Yield Opportunities Fund during the commencement of
the public offering of the Fund through June 30, 1997.
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
Manager has elected voluntarily to waive payments under the 12b-1 Plan for the
Class A Shares, the Class B Shares and the Class C Shares of the High-Yield
Opportunities Fund during the commencement of public offering of the Fund
through June 30, 1997.
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
December 27, 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.
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<PAGE> 145
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 November 30,
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 4.98% of the outstanding shares of the
Institutional Class shares of Delchester Fund. As of the same date, Income
Funds, Inc.'s officers and directors owned less than 1% of the Class A Shares,
the Class B Shares, the Class C Shares and the Institutional Class of Strategic
Income Fund. Shares of High-Yield Opportunities Fund were not offered for
investment prior to the date of this Part B.
As of November 30, 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 Fund Administration
4800 Deer Lake Dr East 3rd Fl.
Jacksonville, FL 32246 2,642,127 7.94%
Delchester Fund
C Class Merrill Lynch, Pierce, Fenner
& Smith Mutual Fund Operations
Attention Fund Administration
4800 Deer Lake Dr. East 3rd Fl.
Jacksonville, FL 32246 157,411 10.66%
Donaldson Lufkin Jenrette
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303 84,579 5.73%
Delchester Fund
Institutional Class Nationwide Life Insurance Co.
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218 2,152,646 22.84%
Bear Stearns
FBO Raymond G. Perelman
Charitable Remainder Unitrust
One Metrotech Center North
Brooklyn, NY 11201 1,988,218 21.10%
</TABLE>
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<PAGE> 146
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Delaware Fund
Institutional Class Charles Schwab & Co. Inc.
Attention Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104 1,303,046 13.83%
Delaware Management Company
Employee Profit Sharing Trust
1818 Market Street
Philadelphia, PA 19103 1,087,972 11.54%
Ogden Financial Services Inc.
Attention George Warren
3411 Silverside Road
103 Springer Building
Wilmington, DE 19810 632,864 6.72%
</TABLE>
As of November 30, 1996, management believes the following
accounts held 5% or more of the outstanding shares of a Class of shares of
Strategic Income Fund:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Strategic Income
Fund A Class NFSC/FMTC IRA
FBO Warren D. Wright
774 South Avenue
New Canaan, CT 06840 43,838 7.33%
Mary M. Holahan
131 Ocean Dr. East
Stamford, CT 06902 37,116 6.27%
Delaware Management Company
Custodian for Gerard J. McManus
54 Sherwood Road
Levittown, NY 11756 30,737 5.19%
</TABLE>
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<PAGE> 147
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Strategic Income
Fund B Class Merrill Lynch, Inc.
Mutual Fund Operations
P.O. Box 41621
Jacksonville, FL 32203 26,074 7.46%
Carew F. Rowell
1621 North Valencia
Albany, GA 31707 25,812 7.38%
NFSC FEBO #BNX-179221
Loy B. Luekenga
P.O. Box 67
Colony, OK 73021 23,311 6.67%
Raymond E. Ramsdell and
Arline B. Ramsdell, JT WOS
71 Crestwood Road
Tolland, CT 06084 22,514 6.44%
Eleanora Siebers
71 Morning Glory Lane
Whiting, NJ 08759 18,084 5.17%
Strategic Income
Fund C Class First Trust Corporation
Trst Joseph Yanes
P.O. Box 173301
Denver, CO 80217 33,160 87.60%
Strategic Income Fund
Institutional Class Chicago Trust Company
FBO Lincoln National Corporation
Employees Retirement Trust
1000 N. Water St. TR 14
Milwaukee, WI 53202 549,146 99.99%
</TABLE>
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<PAGE> 148
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 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 Income Funds, Inc.'s investment manager and
considered an "interested person" as defined in the 1940 Act.
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<PAGE> 149
RICHARD G. UNRUH, JR. (57)
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. and
Delaware Capital Management, 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)
Executive Vice 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/Chief Investment Officer/Fixed Income and
Director of Founders Holdings, Inc.
Senior Vice President/Chief Investment Officer, Fixed Income of
Delaware Management Holdings, Inc.
Director of Founders CBO Corporation.
Senior Vice President of Delaware Capital Management, Inc.
Director, HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
WALTER P. BABICH (69)
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 (58)
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.
ANN R. LEVEN (56)
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.
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<PAGE> 150
W. THACHER LONGSTRETH (76)
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 (71)
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 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.
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<PAGE> 151
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., Founders Holdings, Inc.,
Delaware Investment & Retirement Services, 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 (37)
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.
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<PAGE> 152
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 (47)
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.
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<PAGE> 153
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.
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<PAGE> 154
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.
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<PAGE> 155
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.
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<PAGE> 156
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 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.
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<PAGE> 157
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.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
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<PAGE> 158
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.
The Manager, or the Sub-Adviser, also manages the investment options
for Delaware Medallion[sm] III Variable Annuity. Medallion is issued by
Allmerica Financial Life Insurance and Annuity Company (First Allmerica
Financial Life Insurance Company in New York and Hawaii). Delaware Medallion
offers 10 different investment series ranging from domestic equity funds,
international equity and bond funds and domestic fixed income funds. Each
investment series available through Medallion utilizes an investment strategy
and discipline the same as or similar to one of the Delaware Group mutual funds
available outside the annuity. See Delaware Group Premium Fund, above.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, 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 each Fund 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>
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<PAGE> 159
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED LIMITED CDSC PAYMENTS
----------------- ---------------------
<S> <C>
July 31, 1996 $2,090
July 31, 1995 966
July 31, 1994 6,497
</TABLE>
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED CDSC PAYMENTS
----------------- -------------
<S> <C>
July 31, 1996 $407,317
July 31, 1995 184,351
July 31, 1994* 1,555
</TABLE>
*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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED CDSC PAYMENTS
----------------- -------------
<S> <C>
July 31, 1996* $502
</TABLE>
*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, in each case, of $11.00 plus, in each case, transaction charges
for particular services according to a schedule. Compensation is fixed each
year and approved by the Board of 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
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<PAGE> 160
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 and High-Yield
Opportunities 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.
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, two
hundred million shares have been allocated to the Strategic Income Fund series
of shares, and two hundred million shares have been allocated to the High-Yield
Opportunities Fund series. 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; 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; and one hundred million shares to
the High-Yield Opportunities Fund A Class, twenty-five million shares each to
the High-Yield Opportunities Fund B Class and the High-Yield Opportunities Fund
C Class and fifty million shares to the High- Yield Opportunities Fund
Institutional Class.
Shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable.
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<PAGE> 161
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. operated as Delaware
Group Delchester High-Yield Bond Fund, Inc., and offered one series of shares,
the Delchester Fund series.
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.
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<PAGE> 162
APPENDIX A--IRA INFORMATION
An individual can contribute up to $2,000 to his or her IRA each year.
Contributions may or may not be deductible depending upon the taxpayers
adjusted gross income and whether the taxpayer or his or her spouse is an
active participant in an employer-sponsored retirement plan. Even if a
taxpayer (or his or her spouse) is an active participant in an
employer-sponsored retirement plan, the full $2,000 deduction is still
available if the taxpayer's adjusted gross income is below $25,000 ($40,000 for
taxpayers filing joint returns). A partial deduction is allowed for married
couples with incomes between $40,000 and $50,000, and for single individuals
with incomes between $25,000 and $35,000. No deductions are available for
contributions to IRAs by taxpayers whose adjusted gross income before IRA
deductions exceeds $50,000 ($35,000 for singles) and who are active
participants in an employer-sponsored retirement plan. Taxpayers who were not
allowed deductions on IRA contributions still can make nondeductible IRA
contributions of as much as $2,000 for each working spouse ($2,250 for
one-income couples for years prior to 1997), and defer taxes on interest or
other earnings from the IRAs. Special rules apply for determining the
deductibility of contributions made by married individuals filing separate
returns.
Effective for tax years beginning after 1996, one-income couples can
contribute up to $2,000 to each spouse's IRA provided the combined compensation
of both spouses is at least equal to the total contributions for both spouses.
If the working spouse is an active participant in an employer-sponsored
retirement plan and earns over $40,000, the maximum deduction limit is reduced
in the same way that the limit is reduced for contributions to a non-spousal
IRA.
As illustrated in the following tables, maintaining an IRA remains a
valuable opportunity.
For many, an IRA will continue to offer both an up-front tax break
with its tax deduction each year and the real benefit that comes with
tax-deferred compounding. For others, losing the tax deduction will impact
their taxable income status each year. Over the long term, however, being able
to defer taxes on earnings still provides an impressive investment
opportunity--a way to have money grow faster due to tax-deferred compounding.
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<PAGE> 163
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%]
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<PAGE> 164
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%]
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<PAGE> 165
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.
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<PAGE> 166
$2,000 SINGLE INVESTMENT AT A RETURN OF 10%
COMPOUNDED MONTHLY
<TABLE>
<CAPTION>
TAXABLE-- TAXABLE-- TAXABLE--
YEARS 39.6%* 36%* 31%
- -----------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
TAXABLE-- TAXABLE-- TAX
YEARS 28% 15% DEFERRED
- -----------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
$2,000 INVESTED ANNUALLY AT A RETURN OF 10%
COMPOUNDED MONTHLY
<TABLE>
<CAPTION>
TAXABLE-- TAXABLE-- TAXABLE--
YEARS 39.6%* 36%* 31%
- -----------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
TAXABLE-- TAXABLE-- TAX
YEARS 28% 15% DEFERRED
- ------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
- -----------------------
* 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.
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<PAGE> 167
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.
<TABLE>
<S> <C>
After 5 years $3,528 more
10 years $6,113
20 years $17,228
30 years $47,295
</TABLE>
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!
<TABLE>
<CAPTION>
8% 10%
-- ---
<S> <C> <C>
10 years $ 31,828 $ 36,018
30 years 259,288 397,466
</TABLE>
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.
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<PAGE> 168
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 October 1, 1996 and
High-Yield Opportunities Fund was not offered to the public prior to the date
of this Part B.
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