<PAGE>
(HYOF-ABC)
HIGH-YIELD OPPORTUNITIES FUND PROSPECTUS
A CLASS SHARES SEPTEMBER 29, 1997
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 800-659-2265
This Prospectus describes shares of 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 Fund's objective 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.
The Fund offers High-Yield Opportunities Fund A Class ("Class A
Shares"), High-Yield Opportunities Fund B Class ("Class B Shares") and
High-Yield Opportunities Fund C Class ("Class C Shares") (individually, a
"Class" and collectively, the "Classes").
This Prospectus relates only to the classes listed above and sets forth
information that you should read and consider before you invest. Please retain
it for future reference. The Fund's Statement of Additional Information ("Part
B" of Income Funds, Inc.'s registration statement) dated September 29, 1997, as
it may be amended from time to time, contains additional information about the
Fund and has been filed with the Securities and Exchange Commission. Part B is
incorporated by reference into this Prospectus and is available, without charge,
by writing to Delaware Distributors, L.P. at the above address or by calling the
above numbers. The Fund's financial statements appear in its Annual Report,
which will accompany any requests for Part B.
The Fund also offers High-Yield Opportunities Fund Institutional Class,
which is available for purchase only by certain investors. A prospectus for
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 number.
<PAGE>
(HYOF-ABC)
TABLE OF CONTENTS
Cover Page
Synopsis
Summary of Expenses
Financial Highlights
Investment Objective and Policies
Suitability
Investment Strategy
Risk Factors
Youth and Volatility of the
High-Yield Market
Redemptions
Liquidity and Valuation
The Delaware Difference
Plans and Services
Retirement Planning
Classes of Shares
How to Buy Shares
Redemption and Exchange
Dividends and Distributions
Taxes
Calculation of Offering Price and
Net Asset Value Per Share
Management of the Fund
Other Investment Policies and
Risk Considerations
Appendix A--Investment Illustrations
Appendix B--Classes Offered
Appendix C--Ratings
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BE SURE TO CONSULT YOUR FINANCIAL ADVISER WHEN MAKING INVESTMENTS. MUTUAL FUNDS
CAN BE A VALUABLE PART OF YOUR FINANCIAL PLAN; HOWEVER, SHARES OF THE FUND ARE
NOT FDIC OR NCUSIF INSURED, ARE NOT GUARANTEED BY ANY BANK OR ANY CREDIT UNION,
ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND INVOLVE INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. SHARES OF
THE FUND ARE NOT BANK OR CREDIT UNION DEPOSITS.
-2-
<PAGE>
(HYOF-ABC)
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 and Other Investment Policies
and Risk Considerations.
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 also provides investment
management services to certain of the other funds in the Delaware Group.
Delaware Distributors, L.P. (the "Distributor") is the national distributor for
the Fund and for all of the other mutual funds in the Delaware Group. Delaware
Service Company, Inc. (the "Transfer Agent") is the shareholder servicing,
dividend disbursing, accounting services and transfer agent for the Fund and for
all of the other mutual funds in the Delaware Group. See 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, based on the net asset value per share of
Class A Shares as of the end of Income Funds, Inc.'s most recent fiscal year is
equivalent to 5.07% of the amount invested. The front-end sales charge is
reduced on certain transactions of at least $100,000 but under $1,000,000. For
purchases of $1,000,000 or more. the front-end sales charge is eliminated
(subject to a CDSC of 1% if shares are redeemed within 12 months of purchase if
in connection with such purchase a dealer commission was paid). 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.
-3-
<PAGE>
(HYOF-ABC)
Purchase Amounts
Generally, the minimum initial investment in any Class is $1,000.
Subsequent investments generally must 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. 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 first organized as a
Delaware corporation in 1970 and was subsequently organized as a Maryland
corporation on March 4, 1983. See Shares under Management of the Fund.
-4-
<PAGE>
(HYOF-ABC)
SUMMARY OF EXPENSES
A general comparison of the sales arrangements and other expenses
applicable to Class A, Class B and Class C Shares follows:
Class A Class B Class C
Shareholder Transaction Expenses Shares Shares Shares
- ------------------------------------------------------------------------
Maximum Sales Charge Imposed
on Purchases (as a percentage
of offering price)................ 4.75% None None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a
percentage of offering price)..... None None None
Maximum Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds,
as applicable) .......... None* 4.00%* 1.00%*
Redemption Fees...................... None** None** None**
Annual Operating Expenses
(as a percentage of Class A Class B Class C
average daily net assets) Shares Shares Shares
- ------------------------------------------------------------------------
Management Fees
(after voluntary waivers)....... 0.13% 0.13% 0.13%
12b-1 Plan Expenses
(including service fees)
(after voluntary waivers)......... 0.00%+/++ 0.00%+/++ 0.00%+/++
Other Operating Expenses............. 0.62%++ 0.62%++ 0.62%++
----- ----- -----
Total Operating Expenses
(after voluntary waivers)....... 0.75%++ 0.75%++ 0.75%++
----- ----- -----
-5-
<PAGE>
(HYOF-ABC)
*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
December 31, 1997. In the absence of those waivers, 12b-1 Plan expenses would
equal 0.30% for Class A Shares and 1.00% 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 Class A Shares,
Class B Shares and 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 December 31, 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 December 31, 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 1.57%, 2.27% and 2.27%,
respectively, for Class A Shares, Class B Shares and Class C Shares, reflecting
management fees of 0.65%.
Investors utilizing the Delaware Group Asset Planner asset allocation
service also typically incur an annual maintenance fee of $35 per Strategy.
However, the annual maintenance fee is waived until further notice. Investors
who utilize the Asset Planner for an Individual Retirement Account ("IRA") will
pay an annual IRA fee of $15 per Social Security number. See Delaware Group
Asset Planner in Part B.
For expense information about High-Yield Opportunities Fund Institutional
Class of shares, see the separate prospectus relating to that class.
-6-
<PAGE>
(HYOF-ABC)
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.
Assuming Redemption Assuming No Redemption
1 year 3 years 1 year 3 years
------ ------- ------ -------
Class A Shares $55(1) $70 $55 $70
Class B Shares(2) $48 $54 $8 $24
Class C Shares $18 $24 $8 $24
(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.
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.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
High-Yield Opportunities Fund of Delaware Group Income Funds, Inc. and have been
audited by Ernst & Young LLP, independent auditors. The data should be read in
conjunction with the financial statements, related notes, and the report of
Ernst & Young LLP, all of which are incorporated by reference into Part B.
Further information about the Fund's performance is contained in its Annual
Report to shareholders. A copy of the Fund's Annual Report (including the report
of Ernst & Young LLP) may be obtained from Income Funds, Inc. upon request at no
charge.
- --------------------------------------------------------------------------------
-7-
<PAGE>
(HYOF-ABC)
High-Yield
Opportunities
Fund A Class
------------
For the period
12/30/96(1)
through
7/31/97
------------
Net Asset Value, Beginning of Period......................... $5.5000
Income From Investment Operations
- ---------------------------------
Net Investment Income(2)..................................... 0.2902
Net Gains (Losses) on Securities
(both realized and unrealized)........................... 0.2990
------
Total From Investment Operations...................... 0.5892
------
Less Distributions
- ------------------
Dividends from Net Investment Income......................... (0.1692)
Distributions from Capital Gains ............................ none
Total Distributions................................... (0.1692)
Net Asset Value, End of Period............................... $5.9200
=======
- ------------------
Total Return(3)(4)........................................... 10.81%
- ------------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000's omitted) ................. $5,990
Ratio of Expenses to Average Daily Net Assets .............. 0.75%
Ratio of Expenses to Average Daily Net Assets
Prior to Expense Limitation.............................. 1.57%
Ratio of Net Investment Income to Average
Daily Net Assets......................................... 8.53%
Ratio of Net Investment Income to Average Daily Net Assets
Prior to Expense Limitation.............................. 7.70%
Portfolio Turnover Rate...................................... 270%
- -------------
(1) Date of initial public offering of Class A Shares was December 30,
1996; ratios have been annualized but total return has not been
annualized. Total return for this short of a time period may not be
representative of longer term results.
(2) The average shares outstanding method has been applied for per share
information.
(3) Does not reflect maximum sales charge of 4.75% for Class A Shares.
(4) Total return reflects the expense limitations and waivers of 12b-1 Plan
fees referenced under Summary of Expenses in the Prospectus.
-8-
<PAGE>
(HYOF-ABC)
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
- - Ratings 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, the Fund will pursue other available measures
reasonably anticipated by the Manager to facilitate repayment of the bond.
-9-
<PAGE>
(HYOF-ABC)
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.
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>
(HYOF-ABC)
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 - Ratings
in 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.
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
-11-
<PAGE>
(HYOF-ABC)
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.
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
-12-
<PAGE>
(HYOF-ABC)
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.
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 you to exchange all or part of your 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.
-13-
<PAGE>
(HYOF-ABC)
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.
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.
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,
SIMPLE IRAs, Simplified Employee Pension Plans, Salary Reduction Simplified
Employee Pension Plans, and 403(b)(7) and 457 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 shares of 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. 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")
Although new SAR/SEP plans may not be established after December 31,
1996, existing plans may be maintained by employers having 25 or fewer
employees. An employer may elect to make additional contributions to such
existing plans.
403(b)(7) Deferred Compensation Plan
-14-
<PAGE>
(HYOF-ABC)
Permits employees of public school systems or of certain types of
non-profit organizations to enter into a deferred compensation arrangement for
the purchase of shares of each of the Classes.
457 Deferred Compensation Plan
Permits employees of state and local governments and certain other
entities to enter into a deferred compensation arrangement for the purchase of
shares of each of the Classes.
Prototype Profit Sharing or Money Purchase Pension Plan
Offers self-employed individuals, partnerships and corporations a
tax-qualified plan which provides for the investment of contributions in Class A
Shares or Class C Shares. Class B Shares are not available for purchase by such
plans.
Prototype 401(k) Defined Contribution Plan
Permits employers to establish a tax-qualified plan based on salary
deferral contributions for investment in Class A or Class C Shares. Class B
Shares are not available for purchase by such plans.
SIMPLE IRA
A SIMPLE IRA combines many of the features of an IRA and a 401(k) Plan
but is easier to administer than a typical 401(k) Plan. It requires employers to
make contributions on behalf of their employees and also has a salary deferral
feature that permits employees to defer a portion of their salary into the plan
on a pre-tax basis.
SIMPLE 401(k)
A SIMPLE 401(k) is like a regular 401(k) except that plan sponsors are
limited to 100 employees and, in exchange for mandatory plan sponsor
contributions, discrimination testing is no longer required. Class B Shares are
not available for purchase by such plans.
The Limited CDSC is applicable to any redemptions of net asset value
purchases made on behalf of any group retirement plan on which a dealer's
commission has been paid only if such redemption is made pursuant to a
withdrawal of the entire plan from Delaware Group funds. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange.
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
-15-
<PAGE>
(HYOF-ABC)
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.
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, Class B Shares
will automatically be converted into Class A Shares and, thereafter, for the
remainder of the life of the investment, the annual 12b-1 Plan fee of up to
0.30% for Class A Shares will apply. See Automatic Conversion of Class B Shares,
below.
-16-
<PAGE>
(HYOF-ABC)
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.
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, and the
effect of earning a return on such additional money will diminish over time. In
comparing Class B Shares to Class C Shares, investors should consider the
durability of the annual 12b-1 Plan expenses to which each of the Classes is
subject and the desirability of an automatic conversion feature, which is
available only for Class B Shares.
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 Class A Shares, from the proceeds of the
front-end sales charge and 12b-1 Plan fees and, in the case of Class B Shares
and Class C Shares, from the proceeds of the 12b-1 Plan fees and, if applicable,
the CDSC incurred upon redemption. Financial advisers may receive different
compensation for selling Class A, 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 Distribution (12b-1) and Service under Management of
the Fund.
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
-17-
<PAGE>
(HYOF-ABC)
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.
-18-
<PAGE>
(HYOF-ABC)
Purchases of $100,000 or more carry a reduced front-end sales charge as
shown in the following table.
High-Yield Opportunities Fund A Class
- --------------------------------------------------------------------------------
Dealer's
Front-End Sales Charge as % of Commission***
Offering Amount as % of
Amount of Purchase Price Invested** Offering Price
- --------------------------------------------------------------------------------
Less than $100,000 4.75% 5.07% 4.00%
$100,000 but
under $250,000 3.75 3.89 3.00
$250,000 but
under $500,000 2.50 2.53 2.00
$500,000 but
under $1,000,000* 2.00 2.03 1.60
* There is no front-end sales charge on purchases of Class A Shares of
$1,000,000 or more but, under certain limited circumstances, a 1% Limited
CDSC may apply upon redemption of such shares.
** Based upon the net asset value per share of Class A Shares as of Income
Funds, Inc.'s most recent fiscal year.
*** Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify for
the reduced front-end sales charge on the basis of previous or current
purchases. The reduced front-end sales charge will be granted upon
confirmation of the shareholder's holdings by the Fund. Such reduced
front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of the
front-end sales charge shown above. In addition, certain dealers who
enter into an agreement to provide extra training and information on
Delaware Group products and services and who increase sales of Delaware
Group funds may receive an additional commission of up to 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.
- --------------------------------------------------------------------------------
-19-
<PAGE>
(HYOF-ABC)
For initial purchases of Class A Shares of $1,000,000 or more, a dealer's
commission may be paid by the Distributor to financial advisers through whom
such purchases are made in accordance with the following schedule:
Dealer's Commission
(as a percentage of
Amount of Purchase amount purchased)
------------------ -----------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies may be aggregated with those of 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.
Assets held by investment advisory clients of the Manager or its affiliates in a
stable value account may be combined with other Delaware Group fund holdings.
Shares of other funds that do not carry a front-end sales charge or CDSC may not
be included unless they were acquired through an exchange from a Delaware Group
fund that does carry a front-end sales charge or CDSC.
This privilege permits you to combine your purchases and holdings with
those of your spouse, your children under 21 and any trust, fiduciary or
retirement account for the benefit of such family members.
It also permits you to use these combinations under a Letter of
Intention. A Letter of Intention allows you to make purchases over a 13-month
period and qualify the entire purchase for a reduction in front-end sales
charges on Class A Shares.
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
-20-
<PAGE>
(HYOF-ABC)
the applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge Alternative - Class A Shares, above.
Buying Class A Shares at Net Asset Value
Class A Shares of the Fund may be purchased at net asset value under
the Delaware Group Dividend Reinvestment Plan and, under certain circumstances,
the Exchange Privilege and the 12-Month Reinvestment Privilege. See The Delaware
Difference and Redemption and Exchange for additional information.
Purchases of Class A Shares may be made at net asset value by current
and former officers, directors and employees (and members of their families) of
the Manager, any affiliate, any of the funds in the Delaware Group, certain of
their agents and registered representatives and employees of authorized
investment dealers and by employee benefit plans for such entities. Individual
purchases, including those in retirement accounts, must be for accounts in the
name of the individual or a qualifying family member.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware Group
funds. Officers, directors and key employees of institutional clients of the
Manager or any of its affiliates may purchase Class A Shares at net asset value.
Moreover, purchases may be effected at net asset value for the benefit of the
clients of brokers, dealers and registered investment advisers affiliated with a
broker or dealer, if such broker, dealer or investment adviser has entered into
an agreement with the Distributor providing specifically for the purchase of
Class A Shares in connection with special investment products, such as wrap
accounts or similar fee based programs.
Purchases of Class A Shares at net asset value may also be made by the
following: financial institutions investing for the account of their trust
customers if they are not eligible to purchase shares of the Institutional Class
of the Fund; any group retirement plan (excluding defined benefit pension
plans), or such plans of the same employer, for which plan participant records
are maintained on the Delaware Investment & Retirement Services, Inc. ("DIRSI")
proprietary record keeping system that (i) has in excess of $500,000 of plan
assets invested in Class A Shares of Delaware Group funds and any stable value
account available to investment advisory clients of the Manager or its
affiliate, or (ii) is sponsored by an employer that has at any point after May
1, 1997 had more than 100 employees while such plan has held Class A Shares of a
Delaware Group fund and such employer has properly represented to DIRSI in
writing that it has the requisite number of employees and has received written
confirmation back from DIRSI.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group 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 Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
-21-
<PAGE>
(HYOF-ABC)
Group Investment Plans
Group Investment Plans (e.g., SEP/IRA, SAR/SEP, SIMPLE IRA, SIMPLE
401(k), Prototype Profit Sharing and Money Purchase Pension and 401(k) Defined
Contribution Plans) may benefit from the reduced front-end sales charges
available on Class A Shares, 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 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 Class B Shares
described in this Prospectus, even after the exchange. Such CDSC schedule may be
higher than the CDSC schedule for Class B Shares acquired as a result of the
exchange. See Redemption and Exchange.
Automatic Conversion of Class B Shares
Class B Shares, other than shares acquired through reinvestment of
dividends, held for eight years after purchase are eligible for automatic
conversion into Class A Shares. Conversions of Class B Shares into Class A
Shares will occur only four times in any calendar year, on the last business day
of the second full week of March, June, September and December (each, a
"Conversion Date"). If the eighth anniversary after a purchase of Class B Shares
falls on a Conversion Date, an investor's Class B Shares will be converted on
that date. If the eighth anniversary occurs between Conversion Dates, an
investor's Class B Shares will be converted on the next Conversion Date after
such anniversary. Consequently, if a shareholder's eighth anniversary falls on
the day after a
-22-
<PAGE>
(HYOF-ABC)
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 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 Class B Shares or 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.
-23-
<PAGE>
(HYOF-ABC)
The following table sets forth the rates of the CDSC for Class B Shares
of the Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ ------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares, absent any applicable fee waiver. See Automatic Conversion of Class B
Shares, above. Investors are reminded that the Class A Shares into which Class B
Shares will convert are subject to ongoing annual 12b-1 Plan expenses of up to a
maximum of 0.30% 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 Conduct Rules, in
connection with the promotion of Delaware Group fund shares, the Distributor
may, from time to time, pay to participate in dealer-sponsored seminars and
conferences, reimburse dealers for expenses incurred in connection with
preapproved seminars, conferences and advertising and may, from time to time,
pay or allow additional promotional incentives to dealers, which shall include
non-cash concessions, such as certain luxury merchandise or a trip to or
attendance at a business or investment seminar at a luxury resort, as part of
preapproved sales contests. Payment of non-cash compensation to dealers is
currently under review by the NASD and the Securities and Exchange Commission.
It is likely that the NASD's Conduct Rules will be amended such that the ability
of the Distributor to pay non-cash compensation as
-24-
<PAGE>
(HYOF-ABC)
described above will be restricted in some fashion. The Distributor intends to
comply with the NASD's Conduct Rules as they may be amended.
High-Yield Opportunities Fund Institutional Class
In addition to offering Class A, Class B and Class C Shares, the Fund
also offers 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.
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 the 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, the
Delaware Group 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.
-25-
<PAGE>
(HYOF-ABC)
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, for the specific Fund and Class selected, 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 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 privileges.
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 Delaware Group funds and
the classes they offer. 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.
-26-
<PAGE>
(HYOF-ABC)
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.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) 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 account in a Delaware Group mutual fund 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 in Wealth Builder at any time
by giving 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, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) 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.
-27-
<PAGE>
(HYOF-ABC)
Reinvestments of distributions into Class A Shares of the Fund or of
other Delaware Group funds are made without a front-end sales charge.
Reinvestments of distributions into Class B Shares of the Fund or of other
Delaware Group funds or into Class C Shares of the Fund or of other Delaware
Group funds are also made without any sales charge and will not be subject to a
CDSC if later redeemed. See Automatic Conversion of Class B Shares under Classes
of Shares for information concerning the automatic conversion of Class B Shares
acquired by reinvesting dividends.
Holders of Class A Shares of the Fund may not reinvest their
distributions into Class B Shares or Class C Shares of any fund in the Delaware
Group, 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. 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. See Appendix B--Classes
Offered for the funds in the Delaware Group offering those classes of shares.
For more information about reinvestments, call the Shareholder Service Center.
Capital gains and/or dividend distributions to participants in the
following retirement plans are automatically reinvested into the same Delaware
Group fund in which their investments are held: SAR/SEP, SEP/IRA, SIMPLE IRA,
SIMPLE 401(k), Profit Sharing and Money Purchase Pension Plans, 401(k) Defined
Contribution Plans or 403(b)(7) or 457 Deferred Compensation Plans.
Purchase Price and Effective Date
The offering price and net asset value of 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, its agent or designee. The effective
date of a direct purchase is the day your wire, electronic transfer or check is
received, unless it is received after the 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
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.
-28-
<PAGE>
(HYOF-ABC)
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.
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.
For example, redemption or exchange requests received in good order after the
time the offering price and net asset value of shares are determined will be
processed on the next business day. 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 in which you want to invest the proceeds.
Exchange instructions and redemption requests must be signed by the record
owner(s) exactly as the shares are registered. You may request a redemption or
an exchange by calling the Shareholder Service Center at 800-523-1918. 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
-29-
<PAGE>
(HYOF-ABC)
redemption request or delay payment of redemption proceeds if there has been a
recent change to the shareholder's address of record.
There is no front-end sales charge or fee for exchanges made between
shares of funds which both carry a front-end sales charge. Any applicable
front-end sales charge will apply to exchanges from shares of funds not subject
to a front-end sales charge, except for exchanges involving assets that were
previously invested in a fund with a front-end sales charge and/or exchanges
involving the reinvestment of dividends.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for 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(s) must accompany your request and also be in good order.
Certificates are issued for Class A Shares only if a shareholder submits a
specific request. Certificates are not issued for Class B Shares or Class C
Shares.
-30-
<PAGE>
(HYOF-ABC)
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 proceeds. If you ask for a check, it will normally be mailed the next
business day after receipt of your redemption request to your predesignated bank
account. There are no separate fees for this redemption method, but the mail
time may delay getting funds into your bank account. Simply call the Shareholder
Service Center prior to the time the offering price and net asset value are
determined, as noted above.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to
adjust your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can
-31-
<PAGE>
(HYOF-ABC)
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 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) periodic distributions from an IRA, SIMPLE
IRA, or 403(b)(7) or 457 Deferred Compensation Plan due to death, disability, or
attainment of age 59 1/2 and IRA distributions qualifying under Section 72(t) of
the Internal Revenue Code; (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
-32-
<PAGE>
(HYOF-ABC)
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, SIMPLE IRA, 403(b)(7) or 457 Deferred Compensation Plan, Profit Sharing
Plan, Money Purchase Pension Plan or 401(k) Defined Contribution Plan; (iii)
periodic distributions from a 403(b)(7) or 457 Deferred Compensation Plan upon
attainment of age 59 1/2, Profit Sharing Plan, Money Purchase Pension Plan, or
401(k) Defined Contribution Plan upon attainment of age 70 1/2 and IRA
distributions qualifying under Section 72(t) of the Internal Revenue Code; 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, SIMPLE IRA, 403(b)(7) or 457 Deferred
Compensation Plan, Profit Sharing Plan, Money Purchase Pension Plan or 401(k)
Defined Contribution Plan; (iii) periodic distributions from a 403(b)(7) or 457
Deferred Compensation Plan upon attainment of age 59 1/2, Profit Sharing Plan,
Money Purchase Pension Plan, or 401(k) Defined Contribution Plan upon attainment
of age 70 1/2 and IRA distributions qualifying under Section 72(t) of the
Internal Revenue Code; (iv) distributions from a 403(b)(7) or 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) or 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) periodic distributions from
an IRA or SIMPLE IRA on or after attainment of age 59; 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.
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. 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 Class A
-33-
<PAGE>
(HYOF-ABC)
Shares, Class B Shares and 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.
TAXES
The tax discussion set forth below is included for general information
only. Investors should contact 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 gains 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.
-34-
<PAGE>
(HYOF-ABC)
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.
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.
Income Funds, Inc. is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Investment Application your proper
Taxpayer Identification Number and by certifying that you are not subject to
backup withholding.
See Taxes in Part B for additional information on tax matters relating
to the Fund and its shareholders.
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 High-Yield Opportunities Fund Institutional Class will not incur any
of the expenses under Income Funds, Inc.'s 12b-1 Plans and Class A, Class B and
Class C Shares alone will bear the 12b-1 Plan expenses payable under their
respective 12b-1 Plans.
-35-
<PAGE>
(HYOF-ABC)
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 July 31, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $39 billion in assets in the various
institutional or separately managed (approximately $23,844,101,000) and
investment company (approximately $15,869,009,000) accounts. The directors of
Income Funds, Inc. annually review fees paid to the Manager.
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.
Investment management fees incurred by the Fund for the period December 30, 1996
(date of initial public offering) through July 31, 1997 were 0.65% (annualized)
and 0.13% (annualized) was paid as a result of the voluntary waiver of fees by
the Manager.
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
-36-
<PAGE>
(HYOF-ABC)
manager at the Delaware Group from 1981 to 1985. He returned to the Delaware
Group in 1993 after eight years with Oppenheimer Management Corporation where he
served as Executive Vice President and Director of Fixed Income.
Portfolio Trading Practices
The Fund normally will not invest for short-term trading purposes.
However, the Fund may sell securities without regard to the length of time they
have been held. The degree of portfolio activity will affect brokerage costs of
the Fund and may affect taxes payable by the Fund's shareholders. Given the
Fund's investment objective and current market conditions, its annual portfolio
turnover rate is expected to exceed 100%. A turnover rate of 100% occurs, for
example, when all the investments in the Fund's portfolio at the beginning of
the year were replaced by the end of the year. For the period December 30, 1996
(date of initial public offering) through July 31, 1997, the Fund's portfolio
turnover rate was 270% (annualized).
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 shares of funds in the Delaware Group of
funds in placing portfolio orders and may place orders with broker/dealers that
have agreed to defray certain expenses of such funds, such as custodian fees.
Performance Information
From time to time, the Fund may quote yield or total return performance
of the 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, if applicable) periods. 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 considered a guarantee of future results.
Distribution (12b-1) and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor for the Fund's shares under a separate 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
-37-
<PAGE>
(HYOF-ABC)
Distributor from the assets of the respective Classes a monthly fee for the
Distributor's services and expenses in distributing and promoting sales of
shares.
These expenses include, among other things, preparing and distributing
advertisements, sales literature, and prospectuses and reports used for sales
purposes, compensating sales and marketing personnel, holding special promotions
for specified periods of time, and paying distribution and maintenance fees to
brokers, dealers and others. In connection with the promotion of 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 its respective Classes
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 Class A Shares, and 1% annually with respect to each of
the Class B Shares and 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 Plans do not apply to High-Yield Opportunities Fund Institutional
Class. Those shares are not included in calculating the Plans' fees, and the
Plans are not used to assist in the distribution and marketing of High-Yield
Opportunities Fund Institutional Class.
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 Distributor and the Transfer Agent. The Distributor and the Transfer
Agent are also indirect, wholly owned subsidiaries of DMH.
-38-
<PAGE>
(HYOF-ABC)
Expenses
The Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement. The ratio of expenses to
average daily net assets is expected to equal 0.75% for each Class, reflecting
the voluntary waivers and payments by the Manager and the Distributor. These
ratios would be higher if such waivers and payments were not in effect. See
Summary of Expenses.
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 and 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 the Strategic
Income Fund series.
Fund shares have a par value of $1.00, equal voting rights, except as
noted below, and are equal in all other respects. 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 High-Yield Opportunities Fund Institutional 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 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 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, 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 Class A Shares.
Lincoln National Corporation Employees' Retirement Trust (the "Trust")
made an initial investment in the Fund, and as of July 31, 1997, the Trust held
no shares of the Fund's Class A Shares, Class B Shares and Class C Shares,
respectively, but the Trust held 99% of the outstanding shares of the Fund's
Institutional Class. 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.
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 in 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.
-39-
<PAGE>
(HYOF-ABC)
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.
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,
-40-
<PAGE>
(HYOF-ABC)
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 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
-41-
<PAGE>
(HYOF-ABC)
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).
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;
-42-
<PAGE>
(HYOF-ABC)
(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 to the Fund, if any, would be the difference
between the repurchase price and the market value of the security. The Fund will
limit its investments in repurchase agreements to those which the Manager under
guidelines of the Board of Directors determines to present minimal credit risks
and which are of high quality. In addition, the Fund must have collateral of at
least 100% of the repurchase price, including the portion representing the
Fund's yield under such agreements, which is monitored on a daily basis.
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
-43-
<PAGE>
(HYOF-ABC)
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.
-44-
<PAGE>
(HYOF-ABC)
APPENDIX A - INVESTMENT ILLUSTRATIONS
Illustrations of Hypothetical Returns on Investments Based on Purchase Option
$10,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
----------------------------------- ----------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 9,525 10,000 10,000 9,525 10,000 10,000
1 10,192 10,630 10,630 10,192 10,230 10,530+
2 10,905 11,300 11,300
3 11,669 12,012 12,012
4 12,485 12,768 12,768
5 13,359 13,573 13,573
6 14,294 14,428 14,428
7 15,295 15,337 15,337
8 16,366+ 16,303 16,303
9 17,511 17,444* 17,330
10 18,737 18,665* 18,422
</TABLE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
----------------------------------- ----------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 9,525 10,000 10,000 9,525 10,000 10,000
1 10,192 10,630 10,630 10,192 10,630 10,630
2 10,905 11,300 11,300 10,905 11,300 11,300
3 11,669 11,712 12,012+ 11,669 12,012 12,012
4 12,485 12,768 12,768
5 13,359 13,373 13,573+
6
7
8
9
10
</TABLE>
*This assumes that Class B Shares were converted to Class
A Shares at the end of the eighth year.
<PAGE>
$250,000 Purchase
<TABLE>
<CAPTION>
Scenario 1 Scenario 2
No Redemption Redeem 1st Year
-------------------------------------------- -----------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,750 265,750 260,813 255,750 263,250+
2 279,069 282,492 282,492
3 298,604 300,289 300,289
4 319,507+ 319,207 319,207
5 341,872 339,318 339,318
6 365,803 360,695 360,695
7 391,409 383,418 383,418
8 418,808 407,574 407,574
9 448,124 436,104* 433,251
10 479,493 466,631* 460,546
</TABLE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Scenario 3 Scenario 4
Redeem 3rd Year Redeem 5th Year
-------------------------------------- --------------------------------
Year Class A Class B Class C Class A Class B Class C
- ---- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
0 243,750 250,000 250,000 243,750 250,000 250,000
1 260,813 265,750 265,750 260,813 265,750 265,750
2 279,069 282,492 282,492 279,069 282,492 282,492
3 298,604 292,789 300,289+ 298,604 300,289 300,289
4 319,507+ 319,207 319,207
5 341,872 334,318 339,318
6
7
8
9
10
</TABLE>
*This assumes that Class B Shares were converted to Class
A Shares at the end of the eighth year.
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.
-45-
<PAGE>
(HYOF-ABC)
APPENDIX B -- CLASSES OFFERED
Growth of Capital A Class B Class C Class Consultant Class
Aggressive Growth Fund x x x -
Trend Fund x x x -
Enterprise Fund x x x -
DelCap Fund x x x -
Small Cap Value Fund x x x -
U.S. Growth Fund x x x -
Growth Stock Fund x x x -
Tax-Efficient Equity Fund x x x -
Total Return
Blue Chip Fund x x x -
Quantum Fund x x x -
Devon Fund x x x -
Decatur Total Return Fund x x x -
Decatur Income Fund x x x -
Delaware Fund x x x -
International Diversification
Emerging Markets Fund x x x -
New Pacific Fund x x x -
World Growth Fund x x x -
International Equity 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 -
Delaware-Voyageur US Government
Securities Fund x x x -
Limited-Term Government Fund x x x -
-46-
<PAGE>
(HYOF-ABC)
APPENDIX B--CLASSES OFFERED (CON'T)
<TABLE>
<CAPTION>
Tax Preferred Income A Class B Class C Class Consultant Class
<S> <C> <C> <C> <C>
National High Yield Municipal Bond 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 -
Delaware-Voyageur Tax-Free Arizona Insured Fund x x x -
Delaware-Voyageur Tax-Free Arizona Fund x x x -
Delaware-Voyageur Tax-Free California Insured Fund x x x -
Delaware-Voyageur Tax-Free California Fund x x x -
Delaware-Voyageur Tax-Free Colorado Fund x x x -
Delaware-Voyageur Tax-Free Florida Insured Fund x x x -
Delaware-Voyageur Tax-Free Florida Intermediate Fund x x x -
Delaware-Voyageur Tax-Free Florida Fund x x x -
Delaware-Voyageur Tax-Free Idaho Fund x x x -
Delaware-Voyageur Tax-Free Iowa Fund x x x -
Delaware-Voyageur Tax-Free Kansas Fund x x x -
Delaware-Voyageur Minnesota High Yield Municipal Bond Fund x x x -
Delaware-Voyageur Minnesota Insured Fund x x x -
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund x x x -
Delaware-Voyageur Tax-Free Minnesota Fund x x x -
Delaware-Voyageur Tax-Free Missouri Insured Fund x x x -
Delaware-Voyageur Tax-Free New Mexico Fund x x x -
Delaware-Voyageur Tax-Free New York Fund x x x -
Delaware-Voyageur Tax-Free North Dakota Fund x x x -
Delaware-Voyageur Tax-Free Oregon Insured Fund x x x -
Tax-Free Pennsylvania Fund x x x -
Delaware-Voyageur Tax-Free Utah Fund x x x -
Delaware-Voyageur Tax-Free Washington Insured Fund x x x -
Delaware-Voyageur Tax-Free Wisconsin 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>
-47-
<PAGE>
(HYOF-ABC)
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.
The table set forth below shows the percentage of the Fund's securities
included in each of the specified rating categories and shows the percentage of
the Fund's assets held in U.S. government securities. Certain securities may not
be rated because the rating agencies were either not asked to provide ratings
(e.g., many issuers of privately placed bonds do not seek ratings) or because
the rating agencies declined to provide a rating for some reason, such as
insufficient data. The table below shows the percentage of the Fund's securities
which are not rated. The information contained in the table was prepared based
on a dollar weighted average of the Fund's portfolio composition based on month
end data for the period December 30, 1996 (date of initial public offering)
through July 31, 1997. The paragraphs following the table contain excerpts from
Moody's and S&P's rating descriptions.
Average Weighted
Rating Moody's and/or S&P Percentage of Portfolio
- ------------------------- -----------------------
United States Treasury Obligations 3.13%
Aaa/AAA N/A
Aa/AA N/A
A/A N/A
Baa/BBB N/A
Ba/BB N/A
B/B 15.18%
Caa/CCC 79.61%
Not Rated/Other 2.08%
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
-48-
<PAGE>
(HYOF-ABC)
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.
-49-
<PAGE>
(HYOF-ABC)
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific tax-exempt
funds, money market funds, global and international funds and closed-end 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
- -----------------------------------------------------------------------------
SEPTEMBER 29, 1997
DELAWARE
GROUP
<PAGE>
(HYOF-IC)
HIGH-YIELD OPPORTUNITIES FUND PROSPECTUS
INSTITUTIONAL CLASS SHARES SEPTEMBER 29, 1997
1818 Market Street, Philadelphia, PA 19103
For more information about
High-Yield Opportunities Fund Institutional Class
call the Delaware Group at 800-828-5052.
This Prospectus describes shares of 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.
The Fund offers High-Yield Opportunities Fund Institutional Class (the
"Class") of shares.
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" of Income Funds, Inc.'s
registration statement) dated September 29, 1997, as it may be amended from time
to time, contains additional information about the Fund and has been filed with
the Securities and Exchange Commission. Part B is incorporated by reference into
this Prospectus and is available, without charge, by writing to Delaware
Distributors, L.P. at the above address or by calling the above telephone
numbers. The Fund's financial statements appear in its Annual Report, which will
accompany any response to requests for Part B.
The Fund also offers High-Yield Opportunities Fund A Class, High-Yield
Opportunities Fund B Class and High-Yield Opportunities Fund C Class. Shares of
these classes are subject to sales charges and other expenses, which may affect
their performance. A prospectus for these classes can be obtained by writing to
Delaware Distributors, L.P. at the above address or by calling 800-523-4640.
<PAGE>
(HYOF-IC)
TABLE OF CONTENTS
Cover Page
Synopsis
Summary of Expenses
Financial Highlights
Investment Objective and Policies
Suitability
Investment Strategy
Risk Factors
Youth and Volatility of the
High-Yield Market
Redemptions
Liquidity and Valuation
Classes of Shares
How to Buy Shares
Redemption and Exchange
Dividends and Distributions
Taxes
Calculation of Net Asset
Value Per Share
Management of the Fund
Other Investment Policies and
Risk Considerations
Appendix A--Ratings
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
BE SURE TO CONSULT YOUR FINANCIAL ADVISER WHEN MAKING INVESTMENTS. MUTUAL FUNDS
CAN BE A VALUABLE PART OF YOUR FINANCIAL PLAN; HOWEVER, SHARES OF THE FUND ARE
NOT FDIC OR NCUSIF INSURED, ARE NOT GUARANTEED BY ANY BANK OR ANY CREDIT UNION,
ARE NOT OBLIGATIONS OF ANY BANK OR ANY CREDIT UNION, AND INVOLVE INVESTMENT
RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. SHARES OF
THE FUND ARE NOT BANK OR CREDIT UNION DEPOSITS.
2
<PAGE>
(HYOF-IC)
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 and Other Investment Policies
and Risk Considerations.
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
under Investment Objectives and Policies.
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 also provides investment
management services to certain other funds in the Delaware Group. Delaware
Distributors, L.P. (the "Distributor") is the national distributor for the Fund
and for all of the other mutual funds in the Delaware Group. Delaware Service
Company, Inc. (the "Transfer Agent") is the shareholder servicing, dividend
disbursing, accounting services and transfer agent for the Fund and for all of
the other mutual funds in the Delaware Group. See Summary of Expenses and
Management of the Fund for further information regarding the Manager and the
fees payable under the Fund's Investment Management Agreement.
Purchase Price
Shares of the Class offered by this Prospectus are available at net asset
value, without a front-end or contingent deferred sales charge, and are not
subject to distribution fees under a Rule 12b-1 distribution plan. See Classes
of Shares.
Redemption and Exchange
Shares of the Class are redeemed or exchanged at the net asset value
calculated after receipt of the redemption or exchange request. See Redemption
and Exchange.
Open-End Investment Company
Income Funds, Inc. is an open-end management investment company. The
Fund's portfolio of assets is diversified as defined by the Investment Company
Act of 1940 (the "1940 Act"). Income Funds, Inc. was first organized as a
Delaware corporation in 1970 and subsequently organized as a Maryland
corporation on March 4, 1983. See Shares under Management of the Fund.
3
<PAGE>
(HYOF-IC)
SUMMARY OF EXPENSES
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)......................... None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price)............... None
Exchange Fees............................................... None*
Annual Operating Expenses
(as a percentage of average daily net assets)
Management Fees............................................. 0.13%
12b-1 Fees.................................................. None
Other Operating Expenses.................................... 0.62%+
-----
Total Operating Expenses.......................... 0.75%+
=====
*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 December 31,
1997. If the voluntary expense waivers were not in effect, it is estimated that
the "Total Operating Expenses," as a percentage of average daily net assets,
would be 1.27% 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.
4
<PAGE>
(HYOF-IC)
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. The Fund
charges no redemption fees. The following example assumes the voluntary waiver
of the management fee by the Manager as discussed in this Prospectus.
1 year 3 years
------ -------
$8 $24
This example should not be considered a representation of past or future
expenses or performance. Actual expenses may be greater or less than those
shown.
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.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
High-Yield Opportunities Fund of Delaware Group Income Funds, Inc. and have been
audited by Ernst & Young LLP, independent auditors. The data should be read in
conjunction with the financial statements, related notes, and the report of
Ernst & Young LLP, all of which are incorporated by reference into Part B.
Further information about the Fund's performance is contained in its Annual
Report to shareholders. A copy of the Fund's Annual Report (including the report
of Ernst & Young LLP) may be obtained from Income Funds, Inc. upon request at no
charge.
- --------------------------------------------------------------------------------
5
<PAGE>
(HYOF-IC)
High-Yield
Opportunities
Fund
Institutional Class
For the
period
12/30/96(1)
through
7/31/97
-------
Net Asset Value, Beginning of Period................ $5.5000
Income From Investment Operations
- ---------------------------------
Net Investment Income(2)............................ 0.2902
Net Gains on Securities
(both realized and unrealized).................. 0.2990
------
Total From Investment Operations............. 0.5892
------
Less Distributions
- ------------------
Dividends from Net Investment Income................ (0.1692)
Distributions from Capital Gains.................... none
------
Total Distributions............................. (0.1692)
------
Net Asset Value, End of Period...................... $5.9200
=======
- ------------------------
Total Return(3)..................................... 10.81%
- ------------
- ------------------------
Ratios/Supplemental Data
- ------------------------
Net Assets, End of Period (000's omitted)........... $3,330
Ratio of Expenses to Average Daily Net Assets 0.75%
Ratio of Expenses to Average Daily Net Assets
Prior to Expense Limitation..................... 1.27%
Ratio of Net Investment Income to Average
Daily Net Assets................................ 8.53%
Ratio of Net Investment Income to Average Daily Net Assets
Prior to Expense Limitation..................... 8.00%
Portfolio Turnover Rate............................. 270%
- ----------
(1) Date of initial public offering of Institutional Class; ratios have been
annualized but total return has not been annualized. Total return for
this short of a time period may not be representative of longer term
results.
(2) The average shares outstanding method has been applied for per share
information.
(3) Total return reflects the expense limitations referenced under Summary of
Expenses in the Prospectus.
6
<PAGE>
(HYOF-IC)
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
- - Ratings for more rating information 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 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, the Fund will pursue other available measures
reasonably anticipated by the Manager to facilitate repayment of the bond.
7
<PAGE>
(HYOF-IC)
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.
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.
8
<PAGE>
(HYOF-IC)
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 - Ratings
in 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.
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
9
<PAGE>
(HYOF-IC)
regulatory, financial or other reasons, such as the savings and loan crisis. A
less liquid secondary market may havean 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.
CLASSES OF SHARES
The Distributor serves as the national distributor for the Fund. Shares
of the Class may be purchased directly by contacting the Fund or its agent or
through authorized investment dealers. All purchases of shares of the Class are
at net asset value. There is no front-end or contingent deferred sales charge.
Investment instructions given on behalf of participants in an
employer-sponsored retirement plan are made in accordance with directions
provided by the employer. Employees considering purchasing shares of the Class
as part of their retirement program should contact their employer for details.
Shares of the Class are available for purchase only by: (a) retirement
plans introduced by persons not associated with brokers or dealers that are
primarily engaged in the retail securities business and rollover individual
retirement accounts from such plans; (b) tax-exempt employee benefit plans of
the Manager, or its affiliates and securities dealer firms with a selling
agreement with the Distributor; (c) institutional advisory accounts of the
Manager or its affiliates and those having client relationships with Delaware
Investment Advisers, a division of the Manager, or its affiliates and their
corporate sponsors, as well as subsidiaries and related employee benefit plans
and rollover individual retirement accounts from such institutional advisory
accounts; (d) a bank, trust company and similar financial institution investing
for its own account or for the account of its trust customers for whom such
financial institution is exercising investment discretion in purchasing shares
of the Class, except where the investment is part of a program that requires
payment to the financial institution of a Rule 12b-1 Plan fee; and (e)
registered investment advisers investing on behalf of clients that consist
solely of institutions and high net-worth individuals having at least $1,000,000
entrusted to the adviser for investment purposes, but only if the adviser is not
affiliated or associated with a broker or dealer and derives compensation for
its services exclusively from its clients for such advisory services.
High-Yield Opportunities Fund A Class, High-Yield Opportunities Fund B Class and
High-Yield Opportunities Fund C Class
In addition to offering High-Yield Opportunities Fund Institutional
Class, the Fund also offers High-Yield Opportunities Fund A Class, High-Yield
Opportunities Fund B Class and High-Yield Opportunities Fund C Class, which are
described in a separate prospectus. Shares of High-Yield Opportunities Fund A
Class, High-Yield Opportunities Fund B Class and High-Yield Opportunities Fund C
Class may be purchased through authorized investment dealers or directly by
contacting the Fund or the Distributor. 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. High-Yield Opportunities Fund B Class and
High-Yield
10
<PAGE>
(HYOF-IC)
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 High-Yield Opportunities Fund B Class and High-Yield
Opportunities Fund C Class and certain shares of 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.
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, for 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
High-Yield Opportunities Fund B Class and High-Yield Opportunities Fund C Class
and Class B Shares and Class C Shares of the other funds in the Delaware Group
offering such a class of shares may not be exchanged into 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.
11
<PAGE>
(HYOF-IC)
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, its agent or designee. The effective
date of a direct purchase is the day your wire, electronic transfer or check is
received, unless it is received after the time the share price is determined, as
noted above. Purchase orders received after such time will be effective the next
business day.
The Conditions of Your Purchase
The Fund reserves the right to reject any purchase order. If a purchase
is canceled because your check is returned unpaid, you are responsible for any
loss incurred. The Fund can redeem shares from your account(s) to reimburse
itself for any loss, and you may be restricted from making future purchases in
any of the funds in the Delaware Group. The Fund reserves the right to reject
purchase orders paid by third-party checks or checks that are not drawn on a
domestic branch of a United States financial institution. If a check drawn on a
foreign financial institution is accepted, you may be subject to additional bank
charges for clearance and currency conversion.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under $250 as a result of redemptions.
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. For example,
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.
12
<PAGE>
(HYOF-IC)
Shares of the Class may be exchanged into any other Delaware Group mutual
fund, provided: (1) the investment satisfies the eligibility and other
requirements set forth in the prospectus of the fund being acquired, including
the payment of any applicable front-end sales charge; and (2) the shares of the
fund being acquired are in a state where that fund is registered. If exchanges
are made into other shares that are eligible for purchase only by those
permitted to purchase shares of the Class, such exchange will be exchanged at
net asset value. Shares of the Class may not be exchanged into Class B Shares or
Class C Shares of the funds in the Delaware Group. The Fund may suspend,
terminate or amend the terms of the exchange privilege upon 60 days' written
notice to shareholders.
Various redemption and exchange methods are outlined below. No fee is
charged by the Fund or the Distributor for redeeming or exchanging your shares,
although in the case of an exchange, a sales charge may apply. You may also have
your investment dealer arrange to have your shares redeemed or exchanged. Your
investment dealer may charge for this service.
All authorizations given by shareholders, including selection of any of
the features described below, shall continue in effect until such time as a
written revocation or modification has been received by the Fund or its agent.
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.
13
<PAGE>
(HYOF-IC)
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.
Telephone Redemption-Proceeds to Your Bank
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must submit a written authorization and you may need to have your
signature guaranteed. For your protection, your authorization must be on file.
If you request a wire, your funds will normally be sent the next business day.
If you ask for a check, it will normally be mailed the next business day after
receipt of your redemption request to your predesignated bank account. There are
no fees for this redemption method, but the mail time may delay getting funds
into your bank account. Simply call your Client Services Representative prior to
the time the net asset value is determined, as noted above.
Telephone Exchange
You or your investment dealer of record can exchange shares into any fund
in the Delaware Group under the same registration. As with the written exchange
service, telephone exchanges are subject to the same conditions and limitations
as other exchanges noted above. Telephone exchanges may be subject to
limitations as to amounts or frequency.
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.
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 High-Yield Opportunities Fund A Class, High-Yield Opportunities
Fund B Class and High-Yield Opportunities Fund C Class.
14
<PAGE>
(HYOF-IC)
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.
TAXES
The tax discussion set forth below is included for general information
only. Investors should contact their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in 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 those 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 gains 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.
15
<PAGE>
(HYOF-IC)
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.
Income Funds, Inc. is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to shareholders who have not
complied with IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Investment Application your proper
Taxpayer Identification Number and by certifying that you are not subject to
backup withholding.
See Accounting and Tax Issues and Taxes in Part B for additional
information on tax matters relating to the Fund and its shareholders.
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 shares next computed after the order is received.
The NAV is computed as of the close of regular trading on the New York Stock
Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is open.
The 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 Income Funds,
Inc.'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.
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 July 31, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $39 billion in assets in the various
institutional or separately managed
16
<PAGE>
(HYOF-IC)
(approximately $23,844,101,000) and investment company (approximately
$15,869,009,000) accounts. The directors of Income Funds, Inc. annually review
the fees paid to the Manager.
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.
Investment management fees incurred by the Fund for the period December 30, 1996
(date of initial public offering) through July 31, 1997 were 0.65% (annualized)
and 0.13% (annualized) was paid as a result of the voluntary waiver of fees by
the Manager.
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.
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 and current market conditions, its annual portfolio
turnover rate is expected to exceed 100%. A turnover rate of 100% occurs, for
example, when all the investments in the Fund's portfolio at the beginning of
the year were replaced by the end of the year. During the period December 30,
1996 (date of initial public offering) through July 31, 1997, the Fund's
portfolio turnover rate was 270% (annualized).
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
17
<PAGE>
(HYOF-IC)
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 shares of funds in the Delaware Group of
funds in placing portfolio orders and may place orders with broker/dealers that
have agreed to defray certain expenses of such funds, such as custodian fees.
Performance Information
From time to time, the Fund may quote yield or total return performance
of the Class in advertising and other types of literature.
The current yield for the Class will be calculated by dividing the
annualized net investment income earned by the Class during a recent 30-day
period by the net asset value per share on the last day of the period. The yield
formula provides for semi-annual compounding, which assumes that net investment
income is earned and reinvested at a constant rate and annualized at the end of
a six-month period.
Total return will be based on a hypothetical $1,000 investment,
reflecting the reinvestment of all distributions. Each presentation will include
the average annual total return for one-, five- and ten-year (or life-of-fund,
if applicable) periods. The Fund may also advertise aggregate and average total
return information concerning the Class over additional periods of time.
Yield and net asset value fluctuate and are not guaranteed. Past
performance is not considered a guarantee of future results.
Statements and Confirmations
You will receive quarterly statements of your account summarizing all
transactions during the period. A confirmation statement will be sent following
all transactions other than those involving a reinvestment of dividends. You
should examine statements and confirmations immediately and promptly report any
discrepancy by calling your Client Services Representative.
Financial Information about the Fund
Each fiscal year, you will receive an audited annual report and an
unaudited semi-annual report. These reports provide detailed information about
the Fund's investments and performance. The Fund's fiscal year ends on July 31.
Distribution and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor for the Fund's shares under a separate 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. Certain recordkeeping services
and other shareholder services that otherwise would be performed by the Transfer
Agent may be performed by certain other entities and the Transfer Agent may
elect to enter into an agreement to pay such other entities for 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.
18
<PAGE>
(HYOF-IC)
The directors of Income Funds, Inc. annually review fees paid to the
Distributor and the Transfer Agent. The Distributor and the Transfer Agent are
also indirect, wholly owned subsidiaries of DMH.
Expenses
The Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement. The ratio of operating
expenses to average daily net assets for the Class is expected to equal 0.75% on
an annual basis. The ratio reflects the voluntary waiver and payment of fees by
the Manager.
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 the
Strategic Income Fund series.
Fund shares have a par value of $1.00, equal voting rights, except as
noted below, and are equal in all other respects.
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 High-Yield Opportunities
Fund A Class, High-Yield Opportunities Fund B Class and High-Yield Opportunities
Fund C Class which represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the Class, except
that shares of the Class are not subject to, and may not vote on matters
affecting, the Distribution Plans under Rule 12b-1 relating to High-Yield
Opportunities Fund A Class, High-Yield Opportunities Fund B Class and High-Yield
Opportunities Fund C Class.
Lincoln National Corporation Employees' Retirement Trust (the "Trust")
made an initial investment in the Fund, and as of July 31, 1997, the Trust held
99% of the outstanding shares of the Class. Subject to certain limited
exceptions, there are no limitations on the Trust's ability to redeem its shares
of the Fund and it may elect to do so at any time.
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 in 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 investors should refer to those sections for a further
discussion of the risks of high-yield bonds.
19
<PAGE>
(HYOF-IC)
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.
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
20
<PAGE>
(HYOF-IC)
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 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
21
<PAGE>
(HYOF-IC)
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).
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;
22
<PAGE>
(HYOF-IC)
(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.
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
23
<PAGE>
(HYOF-IC)
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.
24
<PAGE>
(HYOF-IC)
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.
The table set forth below shows the percentage of the Fund's securities
included in each of the specified rating categories and shows the percentage of
the Fund's assets held in U.S. government securities. Certain securities may not
be rated because the rating agencies were either not asked to provide ratings
(e.g., many issuers of privately placed bonds do not seek ratings) or because
the rating agencies declined to provide a rating for some reason, such as
insufficient data. The table below shows the percentage of the Fund's securities
which are not rated. The information contained in the table was prepared based
on a dollar weighted average of the Fund's portfolio composition based on month
end data for the period December 30, 1996 (date of initial public offering)
through July 31, 1997. The paragraphs following the table contain excerpts from
Moody's and S&P's rating descriptions.
Average Weighted
Rating Moody's and/or S&P Percentage of Portfolio
- ------------------------- -----------------------
United States Treasury Obligations 3.13%
Aaa/AAA N/A
Aa/AA N/A
A/A N/A
Baa/BBB N/A
Ba/BB 15.18%
B/B 79.61%
Caa/CCC N/A
Not Rated/Other 2.08%
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.
25
<PAGE>
(HYOF-IC)
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.
26
<PAGE>
(HYOF-IC)
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
- --------------------------------------------------------------------------------
SEPTEMBER 29, 1997
DELAWARE
GROUP
------------
<PAGE>
(SAI-SIF\PART B)
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific tax-exempt
funds, money market funds, global and international funds and closed-end 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.
Third Floor
80 Cheapside
London, England EC2V 6EE
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
<PAGE>
- -------------------------------------------------------------------------------
DELAWARE GROUP INCOME FUNDS, INC.
- -------------------------------------------------------------------------------
DELCHESTER FUND
- -------------------------------------------------------------------------------
STRATEGIC INCOME FUND
- -------------------------------------------------------------------------------
HIGH-YIELD OPPORTUNITIES FUND
- -------------------------------------------------------------------------------
PART B
STATEMENT OF
ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
SEPTEMBER 29, 1997
DELAWARE
GROUP
--------
<PAGE>
(SAI-SIF\PART B)
- --------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 29, 1997
- --------------------------------------------------------------------------------
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 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 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
- -------------------------------------------------------------------------------
<PAGE>
(SAI-SIF\PART B)
Delaware Group Income Funds, Inc. ("Income Funds, Inc.") is a
professionally-managed mutual fund of the series type which currently offers
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: Delchester
Fund A Class, Strategic Income Fund A Class and High-Yield Opportunities Fund A
Class (the "Class A Shares"); Delchester Fund B Class, Strategic Income Fund B
Class and High-Yield Opportunities Fund B Class (the "Class B Shares"); and
Delchester Fund C Class, Strategic Income Fund C Class and 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: Delchester Fund Institutional
Class, Strategic Income Fund Institutional Class and 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 Class C Shares for the life of the investment.
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 Prospectuses for
Delchester Fund, Strategic Income Fund and High-Yield Opportunities Fund, each
dated September 29, 1997, 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.
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. High-Yield
Opportunities Fund seeks total return and, as a secondary objective, high
current income. The investment objectives of Delchester Fund and Strategic
Income Fund are fundamental policies 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
-2-
<PAGE>
(SAI-SIF\PART B)
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 C - Ratings in Delchester Fund's Fund Classes' Prospectus
(Appendix A - Ratings in the Fund's Institutional Class' Prospectus) describes
the ratings of S&P and Moody's and provides information concerning the ratings
of the securities in the Fund's portfolio.
As a matter of practice, Delchester Fund has consistently invested more
than 80% of its assets in such securities. With respect to the remaining assets,
if any, that Delchester Fund may invest in other securities, the Fund must
invest in income-producing securities, including common stocks and preferred
stocks, some of which may have convertible features or attached warrants.
Additionally, in unusual market conditions, in order to meet redemption
requests, for temporary defensive purposes, and pending investment, the Fund may
hold a substantial portion of its assets in cash or short-term obligations for
an appreciable period of time when market conditions warrant and the Fund is
anticipating higher interest rates. Currently, Delchester Fund's assets are
invested primarily in unrated bonds and bonds rated BB or lower by S&P or Ba or
lower by Moody's.
Strategic Income Fund
Foreign and Emerging Markets Securities
Investors should recognize that investing in foreign issuers, including
issuers located in emerging market countries, involves certain considerations,
including those set forth in Strategic Income Fund's Prospectuses, which are not
typically associated with investing in United States issuers. Since the stocks
of foreign companies are frequently denominated in foreign currencies, and since
Strategic Income Fund may temporarily hold uninvested reserves in bank deposits
in foreign currencies, the Fund will be 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
-3-
<PAGE>
(SAI-SIF\PART B)
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 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
-4-
<PAGE>
(SAI-SIF\PART B)
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 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.
-5-
<PAGE>
(SAI-SIF\PART B)
Purchasing Call Options--Strategic Income Fund may purchase call
options to the extent that premiums paid by the Fund do not aggregate more than
2% of the Fund's total assets. When the Fund purchases a call option, in return
for a premium paid by the Fund to the writer of the option, the Fund obtains the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
exercise price. The advantage of purchasing call options is that Strategic
Income Fund may alter portfolio characteristics and modify portfolio maturities
without incurring the cost associated with portfolio transactions.
Strategic Income Fund may, following the purchase of a call option,
liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the 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
-6-
<PAGE>
(SAI-SIF\PART B)
value of the debt securities in the portfolio would decline, but the value of
the futures contracts to the Fund would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to hedge in anticipation of
subsequent purchases of securities at higher prices. Since the fluctuations in
the value of futures contracts should be similar to those of debt securities,
the Fund could take advantage of the anticipated rise in value of debt
securities without actually buying them until the market had stabilized. At that
time, the futures contracts could be liquidated and the Fund could then buy debt
securities on the cash market.
With respect to options on futures contracts, when Strategic Income
Fund is not fully invested, it may purchase a call option on a futures contract
to hedge against a market advance due to declining interest rates. The writing
of a call option on a futures contract constitutes a partial hedge against
declining prices of the U.S. government securities which are deliverable upon
exercise of the futures contract. If the futures price at the expiration of the
option is below the exercise price, Strategic Income Fund will retain the full
amount of the option premium which provides a partial hedge against any decline
that may have occurred in the portfolio holdings. The writing of a put option on
a futures contract constitutes a partial hedge against increasing prices of the
securities which are deliverable upon exercise of the futures contract. If the
futures price at expiration of the option is higher than the exercise price,
Strategic Income Fund will retain the full amount of the option premium which
provides a partial hedge against any increase in the price of U.S. government
securities which Strategic Income Fund intends to purchase.
If a put or call option that Strategic Income Fund has written is
exercised, the Fund will incur a loss which will be reduced by the amount of the
premium it receives. Depending on the degree of correlation between the value of
its portfolio securities and changes in the value of its futures positions,
Strategic Income Fund's losses from existing options on futures may, to some
extent, be reduced or increased by changes in the value of portfolio securities.
Strategic Income Fund will purchase a put option on futures contracts to hedge
the Fund's portfolio against the risk of rising interest rates.
To the extent that interest rates move in an unexpected direction,
Strategic Income Fund may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize a loss. For example, if
Strategic Income Fund hedged against the possibility of an increase in interest
rates which would adversely affect the price of U.S. government securities held
in its portfolio and interest rates decrease instead, Strategic Income Fund will
lose part or all of the benefit of the increased value of its U.S. government
securities which it has because it will have offsetting losses in its futures
position. In addition, in such situations, if the Fund had insufficient cash, it
may be required to sell U.S. government securities from its portfolio to meet
daily variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market. Strategic
Income Fund may be required to sell securities at a time when it may be
disadvantageous to do so.
Further, with respect to options on futures contracts, Strategic Income
Fund may seek to close out an option position by writing or buying an offsetting
position covering the same securities or contracts and have the same exercise
price and expiration date. The ability to establish and close out positions on
options will be subject to the maintenance of a liquid secondary market, which
cannot be assured.
Although not 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.
Appendix C - Ratings in Strategic Income Fund's Fund Classes'
Prospectus (Appendix A - Ratings in 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.
-7-
<PAGE>
(SAI-SIF\PART B)
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 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 Delaware Management Company, Inc. (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.
Appendix C - Ratings in High-Yield Opportunities Fund's Fund Classes'
Prospectus (Appendix A - Ratings in 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.
-8-
<PAGE>
(SAI-SIF\PART B)
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 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, 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
-9-
<PAGE>
(SAI-SIF\PART B)
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 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
-10-
<PAGE>
(SAI-SIF\PART B)
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.
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.
-11-
<PAGE>
(SAI-SIF\PART B)
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 the Manager, under the guidelines of the
Board of Directors, determines present minimal credit risks and which are of
high quality. In addition, each Fund must have collateral of at least 100% of
the repurchase price, including the portion representing the Fund's yield under
such agreements, which is monitored on a daily basis.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the Investment Company Act of
1940 (the "1940 Act") to allow the Delaware Group funds jointly to invest cash
balances. The Funds may invest cash balances in a joint repurchase agreement in
accordance with the terms of the Order and subject generally to the conditions
described above.
Portfolio Loan Transactions
Each Fund may loan up to 25% of its assets to qualified broker/dealers
or institutional investors for their use relating to short sales or other
security transactions.
It is the understanding of the Manager that the staff of the Securities
and Exchange Commission (the "SEC" or the "Commission") permits portfolio
lending by registered investment companies if certain conditions are met. These
conditions are as follows: 1) each transaction must have 100% collateral in the
form of cash, short-term U.S. government securities, or irrevocable letters of
credit payable by banks acceptable to the Fund involved from the borrower; 2)
this collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund; 3) the Fund must be able to terminate any loan after notice, at any time;
4) the Fund must receive reasonable interest on any loan, and any dividends,
interest or other distributions on the lent securities, and any increase in the
market value of such securities; 5) the Fund may pay reasonable custodian fees
in connection with the loan; 6) the voting rights on the lent securities may
pass to the borrower; however, if the directors of Income Funds, Inc. know that
a material event will occur affecting an investment loan, 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.
-12-
<PAGE>
(SAI-SIF\PART B)
2. Delchester Fund will not invest for the purpose of acquiring
control of any company.
3. Delchester Fund will not purchase or retain securities of a company
which has an officer or director who is an officer or director of Income Funds,
Inc., or an officer, director or partner of the Manager if, to the knowledge of
the Fund, one or more of such persons owns beneficially more than 1/2 of 1% of
the shares of the company, and in the aggregate more than 5% thereof.
4. Delchester Fund will not invest in securities of other investment
companies.
5. Delchester Fund will not make any investment in real estate. This
restriction does not preclude the Fund's purchase of securities issued by real
estate investment trusts.
6. Delchester Fund will not sell short any security or property.
7. Delchester Fund will not buy or sell commodities or commodity
contracts.
8. Delchester Fund will not borrow money in excess of 10% of the value
of its assets and then only as a temporary measure for extraordinary or
emergency purposes. Any borrowing will be done from a bank and to the extent
that such borrowing exceeds 5% of the value of the Fund's assets, asset coverage
of at least 300% is required. In the event that such asset coverage shall at any
time fall below 300%, the Fund shall, within three days thereafter (not
including Sundays and holidays) or such longer period as the SEC may prescribe
by rules and regulations, reduce the amount of its borrowings to an extent that
the asset coverage of such borrowings shall be at least 300%. The Fund shall not
issue senior securities as defined in the 1940 Act, except for notes to banks.
9. Delchester Fund will not make loans. However, (i) the purchase of a
portion of an issue of publicly distributed bonds, debentures or other
securities, or of other securities authorized to be purchased by the Fund's
investment policies, whether or not the purchase was made upon the original
issuance of the securities, and the entry into "repurchase agreements" are not
to be considered the making of a loan by the Fund; and (ii) the Fund may loan up
to 25% of its assets to qualified broker/dealers or institutional investors for
their use relating to short sales and other security transactions.
10. Delchester Fund will not invest in the securities of companies
which have a record of less than three years' continuous operation, including
any predecessor company or companies, if such purchase at the time thereof would
cause more than 5% of the total Fund assets to be invested in the securities of
such company or companies.
11. Delchester Fund will not act as an underwriter of securities of
other issuers, except that the Fund may acquire restricted or not readily
marketable securities under circumstances where, if such securities are sold,
the Fund might be deemed to be an underwriter for purposes of the Securities Act
of 1933.
12. No long or short positions on shares of the Fund may be taken by
Income Funds, Inc.'s officers, directors or any of its affiliated persons. Such
persons may buy shares of the Fund for investment purposes, however, as
described under Purchasing Shares.
13. Delchester Fund will not invest more than 25% of its assets in any
one particular industry.
Although not a fundamental investment restriction, Delchester Fund
currently does not invest its assets in real estate limited partnerships or oil,
gas and other mineral leases.
Strategic Income Fund
Strategic Income Fund has the following investment restrictions which
may not be amended without approval of a majority of the outstanding voting
securities, which is the lesser of more than 50% of the outstanding voting
securities of
-13-
<PAGE>
(SAI-SIF\PART B)
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.
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.
-14-
<PAGE>
(SAI-SIF\PART B)
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.
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.
-15-
<PAGE>
(SAI-SIF\PART B)
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.
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.
-16-
<PAGE>
(SAI-SIF\PART B)
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 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 each Class of Delchester Fund, as shown below, is
the average annual total return quotations through July 31, 1997, computed as
described above. The average annual total return for 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 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.
Pursuant to applicable regulation, total return shown for Delchester
Fund Institutional Class for the periods prior to the commencement of operations
of such Class is calculated by taking the performance of 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.
-17-
<PAGE>
(SAI-SIF\PART B)
Average Annual Total Return
Delchester Delchester Delchester
Fund Fund Fund
A Class A Class Institutional
(at Offer) (at NAV) Class (1)
1 year
ended
7/31/97 11.88% 17.53% 17.82%
3 years
ended
7/31/97 9.50% 11.28% 11.55%
5 years
ended
7/31/97 8.84% 9.89% 10.14%
10 years
ended
7/31/97 9.60% 10.14% 10.39%
15 years
ended
7/31/97 12.49% 12.85% 13.02%
Period
8/20/70(2)
through
7/31/97 9.68% 9.88% 9.97%
- ----------
(1) Date of initial public offering of Delchester Fund Institutional Class
was June 1, 1992.
(2) Date of initial public offering of Delchester Fund A Class.
-18-
<PAGE>
(SAI-SIF\PART B)
The performance of Delchester Fund B Class, as shown below, is the
average annual total return quotation through July 31, 1997. The average annual
total return for 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, 1997. The average annual total return for Delchester
Fund B Class excluding deferred sales charge assumes the shares were not
redeemed at July 31, 1997 and therefore does not reflect the deduction of a
CDSC.
Average Annual Total Return
Delchester Fund Delchester Fund
B Class B Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
1 year
ended
7/31/97 12.66% 16.66%
3 years
ended
7/31/97 9.63% 10.45%
Period
5/2/94(1)
through
7/31/97 8.32% 9.06%
__________________________
(1) Date of initial public offering of Delchester Fund B Class.
The performance of Delchester Fund C Class, as shown below, is the
average annual total return quotation through July 31, 1997. The average annual
total return for 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, 1997. The average annual total return for Delchester
Fund C Class excluding deferred sales charge assumes the shares were not
redeemed at July 31, 1997 and therefore does not reflect the deduction of a
CDSC.
Average Annual Total Return
Delchester Fund Delchester Fund
C Class C Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
1 year
ended
7/31/97 15.66% 16.66%
Period
11/29/95(1)
through
7/31/97 13.03% 13.03%
___________________
(1) Date of initial public offering of Delchester Fund C Class.
-19-
<PAGE>
(SAI-SIF\PART B)
The performance of Strategic Income Fund A Class and Strategic Income
Fund Institutional Class, as shown below, is the aggregate total return
quotations through July 31, 1997, computed as described above. The aggregate
total return for Strategic Income Fund A Class at offer reflects the maximum
front-end sales charge of 4.75% paid on the purchase of shares. The aggregate
total return for Strategic Income 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.
Aggregate Total Return (1)
Strategic Strategic Strategic
Income Income Income
Fund Fund Fund
A Class A Class Institutional
(at Offer) (at NAV) Class
Period
10/1/96(2)
through
7/31/97 4.95% 10.11% 10.36%
(1) 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 of the Fund do not exceed 0.75%
(in each case, exclusive of taxes, interest, brokerage commissions,
extraordinary expenses and applicable 12b-1 expenses) through December
31, 1997. In the absence of such waiver, performance would have been
affected negatively.
(2) Date of initial public offering of Strategic Income Fund A Class and
Strategic Income Fund Institutional Class; total return for this short
of a time period may not be representative of longer-term results.
-20-
<PAGE>
(SAI-SIF\PART B)
The performance of Strategic Income Fund B Class, as shown below, is
the aggregate total return quotation through July 31, 1997. The aggregate total
return for Strategic Income 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, 1997. The aggregate total return for Strategic Income
Fund B Class excluding deferred sales charge assumes the shares were not
redeemed at July 31, 1997 and therefore does not reflect the deduction of a
CDSC.
Aggregate Total Return
Strategic Income Fund Strategic Income Fund
B Class B Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
Period
10/1/96(2)
through
7/31/97 5.53% 9.53%
(1) 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 of the Fund do not exceed 0.75%
(in each case, exclusive of taxes, interest, brokerage commissions,
extraordinary expenses and applicable 12b-1 expenses) through December
31, 1997. In the absence of such waiver, performance would have been
affected negatively.
(2) Date of initial public offering of Strategic Income Fund B Class; total
return for this short of a time period may not be representative of
longer-term results.
-21-
<PAGE>
(SAI-SIF\PART B)
The performance of Strategic Income Fund C Class, as shown below, is
the aggregate total return quotation through July 31, 1997. The aggregate total
return for Strategic Income 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, 1997. The aggregate total return for Strategic Income
Fund C Class excluding deferred sales charge assumes the shares were not
redeemed at July 31, 1997 and therefore does not reflect the deduction of a
CDSC.
Aggregate Total Return (1)
Strategic Income Fund Strategic Income Fund
C Class C Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
Period
10/1/96(2)
through
7/31/97 8.53% 9.53%
(1) 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 of the Fund do not exceed 0.75%
(in each case, exclusive of taxes, interest, brokerage commissions,
extraordinary expenses and applicable 12b-1 expenses) through December
31, 1997. In the absence of such waiver, performance would have been
affected negatively.
(2) Date of initial public offering of Strategic Income Fund C Class; total
return for this short of a time period may not be representative of
longer-term results.
-22-
<PAGE>
(SAI-SIF\PART B)
The performance of High-Yield Opportunities Fund A Class and High-Yield
Opportunities Fund Institutional Class, as shown below, is the aggregate total
return quotations through July 31, 1997, computed as described above. The
aggregate total return for High-Yield Opportunities Fund A Class at offer
reflects the maximum front-end sales charge of 4.75% paid on the purchase of
shares. The aggregate total return for High-Yield Opportunities Fund A Class at
net asset value (NAV) does not reflect any front-end sales charge. Securities
prices fluctuated during the periods covered and past results should not be
considered as representative of future performance. Performance information is
not provided for High-Yield Opportunities Fund B Class and C Class because such
shares were not offered to the public prior to the date of this Part B.
Aggregate Total Return (1)
High-Yield High-Yield High-Yield
Opportunities Opportunities Opportunities
Fund Fund Fund
A Class (2) A Class (2) Institutional
(at Offer) (at NAV) Class
Period
12/30/96(3)
through
7/31/97 5.62% 10.81% 10.81%
(1) 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 of the Fund do
not exceed 0.75% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses) through December 31, 1997. In the
absence of such waiver, performance would have been affected
negatively.
(2) Delaware Distributors, L.P. has elected voluntarily to waive its right
to receive 12b-1 Plan fees (including service fees) from the
commencement of the public offering of Class A Share of the Fund
through December 31, 1997. In the absence of such waiver, performance
would have been affected negatively.
(3) Date of initial public offering of High-Yield Opportunities Fund A
Class and High-Yield Opportunities Fund Institutional Class; total
return for this short of a time period may not be representative of
longer-term results.
As stated in the Funds' Prospectuses, each Fund may also quote the
current yield of each of its Classes in advertisements and investor
communications.
-23-
<PAGE>
(SAI-SIF\PART B)
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. 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. 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 Income Funds, Inc. in the future.
For the 30-day period ended July 31, 1997, the yield of each Class of Delchester
Fund, Strategic Income Fund and High-Yield Opportunities Fund was as follows:
Strategic High-Yield
Delchester Fund Income Fund Opportunities Fund
--------------- ----------- ------------------
Class A Shares 8.51% 7.11% N/A
Class B Shares 8.16% 6.68% N/A
Class C Shares 8.16% 6.68% N/A
Institutional Class 9.16% 7.72% N/A
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.
The average weighted portfolio maturity at July 31, 1997 for Delchester
Fund, Strategic Income Fund and High-Yield Opportunities Fund was 8.0 years,
6.67 years and 9.01 years, respectively.
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
-24-
<PAGE>
(SAI-SIF\PART B)
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, and a direct investment in
an index is not possible.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and
Morningstar, Inc. are performance evaluation services that maintain
statistical performance databases, as reported by a diverse universe of
independently-managed mutual funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety
of historical data including total return, capital appreciation and
income on the stock market as well as other investment asset classes,
and inflation. With its permission, this information will be used
primarily for comparative purposes and to illustrate general financial
planning principles.
Interactive Data Corporation is a statistical access service that
maintains a database of various international industry indicators, such
as historical and current price/earning information, individual equity
and fixed-income price and return information.
Compustat Industrial Databases, a service of S&P, may also be used in
preparing performance and historical stock and bond market exhibits.
This firm maintains fundamental databases that provide financial,
statistical and market information covering more than 7,000 industrial
and non-industrial companies.
Salomon Brothers and Lehman Brothers are statistical research firms
that maintain databases of international market, bond market, corporate
and government-issued securities of various maturities. This
information, as well as unmanaged indices compiled and maintained by
these firms, will be used in preparing comparative illustrations. In
addition, the performance of multiple indices compiled and maintained
by these firms may be combined to create a blended performance result
for comparative purposes. Generally, the indices selected will be
representative of the types of securities in which the Funds may invest
and the assumptions that were used in calculating the blended
performance will be described.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. In addition, current rate information on
municipal debt obligations of various durations, as reported daily by The Bond
Buyer, may also be used. The Bond Buyer is published daily and is an
industry-accepted source for current municipal bond market information.
From time to time, the Funds may quote actual total return performance
for each Class in advertising and other types of literature compared to indices
or averages of alternative financial products available to prospective
investors. For example, the performance comparisons may include the average
return of various bank instruments, some of which may carry certain return
guarantees, offered by leading banks and thrifts as monitored by Bank Rate
Monitor, and those of generally-accepted corporate bond and government security
price indices of various durations prepared by Lehman Brothers and Salomon
Brothers, Inc. These indices are not managed for any investment goal.
Comparative information on the Consumer Price Index may also be included. The
Consumer Price Index, as prepared by the U.S. Bureau of Labor Statistics, is the
most commonly used measure of inflation. It indicates the cost fluctuations of a
representative group of consumer goods. It does not represent a return from an
investment.
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
-25-
<PAGE>
(SAI-SIF\PART B)
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 tables present examples, for purposes of illustration
only, of cumulative total return performance for each Class through July 31,
1997. For these purposes, the calculations reflect maximum sales charges, if
any, and assume the reinvestment of any capital gains distributions and income
dividends paid during the indicated periods. The performance does not reflect
any income taxes payable by shareholders on the reinvested distributions
included in the calculations. The performance of Class A Shares presented in the
tables reflects the maximum front-end sales charge paid on the purchase of
shares, but performance of Class A Shares may also be shown without reflecting
the impact of any front-end sales charge. The performance of Class B Shares and
Class C Shares is calculated both with the applicable CDSC included and
excluded. Comparative information on the Consumer Price Index is also included.
-26-
<PAGE>
(SAI-SIF\PART B)
Cumulative Total Return
Delchester Delchester
Fund Fund Consumer
A Class Institutional Price
(at Offer) Class(2) Index(3)
3 months
ended
7/31/97 1.84% 6.86% 0.19%
6 months
ended
7/31/97 2.74%(4) 8.04% 0.88%
9 months
ended
7/31/97 7.33% 12.86% 1.39%
1 year
ended
7/31/97 11.88% 17.82% 2.23%
3 years
ended
7/31/97 31.28% 38.82% 8.15%
5 years
ended
7/31/97 52.71% 62.08% 14.23%
10 years
ended
7/31/97 150.06% 168.80% 41.08%
15 years
ended
7/31/97 513.10% 527.42% 64.54%
Period
8/20/70(1)
through
7/31/97 1,105.40% 1,195.55% 309.19%
- ----------
(1) Date of initial public offering of Delchester Fund A Class.
(2) Date of initial public offering of Delchester Fund Institutional Class
was June 1, 1992. Pursuant to applicable regulation, total return shown
for Delchester Fund Institutional Class for the periods prior to the
commencement of operations of such Class is calculated by taking the
performance of 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--Lipper Analytical.
(4) Cumulative total return at net asset value for the six months ended
July 31, 1997 was 7.90%.
-27-
<PAGE>
(SAI-SIF\PART B)
Cumulative Total Return
Delchester Delchester
Fund Fund
B Class B Class
(Including (Excluding Consumer
Deferred Deferred Price
Sales Charge) Sales Charge) Index(2)
3 months
ended
7/31/97 2.66% 6.66% 0.19%
6 months
ended
7/31/97 3.51% 7.51% 0.88%
9 months
ended
7/31/97 8.03% 12.03% 1.39%
1 year
ended
7/31/97 12.66% 16.66% 2.23%
3 years
ended
7/31/97 31.74% 34.74% 8.15%
Period
5/2/94(1)
through
7/31/97 29.64% 32.56% 8.89%
- ----------
(1) Date of initial public offering of Delchester Fund B Class.
(2) Source--Lipper Analytical.
-28-
<PAGE>
(SAI-SIF\PART B)
Cumulative Total Return
Delchester Delchester
Fund Fund
C Class C Class
(Including (Excluding Consumer
Deferred Deferred Price
Sales Charge) Sales Charge) Index(2)
3 months
ended
7/31/97 5.66% 6.66% 0.19%
6 months
ended
7/31/97 6.50% 7.50% 0.88%
9 months
ended
7/31/97 11.03% 12.03% 1.39%
1 year
ended
7/31/97 15.66% 16.66% 2.23%
Period
11/29/95(1)
through
7/31/97 22.72% 22.72% 4.49%
- ----------
(1) Date of initial public offering of Delchester Fund C Class.
(2) Source--Lipper Analytical.
-29-
<PAGE>
(SAI-SIF\PART B)
Cumulative Total Return (1)
Strategic Strategic
Income Income
Fund Fund Consumer
A Class Institutional Price
(at Offer) Class Index(2)
3 months
ended
7/31/97 0.22% 5.38% 0.19%
6 months
ended
7/31/97 0.81%(4) 6.01% 0.88%
9 months
ended
7/31/97 3.52% 8.78% 1.39%
Period
10/1/96(3)
through
7/31/97 4.95% 10.36% 1.71%
- ----------
(1) 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 of the Fund does not exceed
0.75% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses and applicable 12b-1 expenses)
through December 31, 1997. In the absence of such waiver, performance
would have been affected negatively.
(2) Source--Lipper Analytical.
(3) Date of initial public offering of Strategic Income Fund A Class and
Strategic Income Fund Institutional Class; total return for this short
of a time period may not be representative of longer term results.
(4) Cumulative total return at net asset value for the six months ended
July 31, 1997 was 5.85%.
-30-
<PAGE>
(SAI-SIF\PART B)
Cumulative Total Return (1)
Strategic Strategic
Income Income
Fund Fund
B Class B Class
(Including (Excluding Consumer
Deferred Deferred Price
Sales Charge) Sales Charge) Index(2)
3 months
ended
7/31/97 1.12% 5.12% 0.19%
6 months
ended
7/31/97 1.49% 5.49% 0.88%
9 months
ended
7/31/97 4.18% 8.18% 1.39%
Period
10/1/96(3)
through
7/31/97 5.53% 9.53% 1.71%
(1) 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 of the Fund do not exceed 0.75%
(in each case, exclusive of taxes, interest, brokerage commissions,
extraordinary expenses and applicable 12b-1 expenses) through December
31, 1997. In the absence of such waiver, performance would have been
affected negatively.
(2) Source--Lipper Analytical.
(3) Date of initial public offering of Strategic Income Fund B Class; total
return for this short of a time period may not be representative of
longer term results.
-31-
<PAGE>
(SAI-SIF\PART B)
Cumulative Total Return (1)
Strategic Strategic
Income Income
Fund Fund
C Class C Class
(Including (Excluding Consumer
Deferred Deferred Price
Sales Charge) Sales Charge) Index(2)
3 months
ended
7/31/97 4.12% 5.12% 0.19%
6 months
ended
7/31/97 4.49% 5.49% 0.88%
9 months
ended
7/31/97 7.18% 8.18% 1.39%
Period
10/1/96(3)
through
7/31/97 8.53% 9.53% 1.71%
- ----------
(1) 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 of the Fund do not exceed 0.75%
(in each case, exclusive of taxes, interest, brokerage commissions,
extraordinary expenses and applicable 12b-1 expenses) through December
31, 1997. In the absence of such waiver, performance would have been
affected negatively.
(2) Source--Lipper Analytical.
(3) Date of initial public offering of Strategic Income Fund C Class; total
return for this short of a time period may not be representative of
longer term results.
-32-
<PAGE>
(SAI-SIF\PART B)
Cumulative Total Return (1)
High-Yield High-Yield
Opportunities Opportunities
Fund Fund Consumer
A Class (2) Institutional Price
(at Offer) Class Index(3)
3 months
ended
7/31/97 2.22% 7.29% 0.19%
6 months
ended
7/31/97 3.47%(4) 8.63% 0.88%
Period
12/30/96 (5)
through
7/31/97 5.62% 10.81% 1.20%
- ----------
(1) 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 of the Fund do
not exceed 0.75% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses) through December 31, 1997. In the
absence of such waiver, performance would have been affected
negatively.
(2) Delaware Distributors, L.P. has elected voluntarily to waive its right
to receive 12b-1 Plan fees (including service fees) from the
commencement of the public offering of Class A Share of the Fund
through December 31, 1997. In the absence of such waiver, performance
would have been affected negatively.
(3) Source -- Lipper Analytical.
(4) Cumulative total return at net asset value for the six months ended
July 31, 1997 was 8.63%.
(5) Date of initial public offering of High-Yield Opportunities Fund A
Class and High-Yield Opportunities Fund Institutional Class; total
return for this short of a time period may not be representative of
longer term results.
-33-
<PAGE>
(SAI-SIF\PART B)
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 and, in the case of
Strategic Income Fund, the Sub-Adviser'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 and the Sub-Adviser, including the number
of such clients serviced by the Manager and the Sub-Adviser.
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Security prices tend to move up and down over various market cycles and logic
says to invest when prices are low. However, even experts can't always pick the
highs and the lows. By using a strategy known as dollar-cost averaging, you
schedule your investments ahead of time. If you invest a set amount on a regular
basis, that money will always buy more shares when the price is low and fewer
when the price is high. You can choose to invest at any regular interval--for
example, monthly or quarterly--as long as you stick to your regular schedule.
Dollar-cost averaging looks simple and it is, but there are important things to
remember.
Dollar-cost averaging works best over longer time periods, and it
doesn't guarantee a profit or protect against losses in declining markets. If
you need to sell your investment when prices are low, you may not realize a
profit no matter what investment strategy you utilize. That's why dollar-cost
averaging can make sense for long-term goals. Since the potential success of a
dollar-cost averaging program depends on continuous investing, even through
periods of fluctuating prices, you should consider your dollar-cost averaging
program a long-term commitment and invest an amount you can afford and probably
won't need to withdraw. You also should consider your financial ability to
continue to purchase shares during periods of high fund share prices. Delaware
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.
-34-
<PAGE>
(SAI-SIF\PART B)
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $ 5.00 20
Month 4 $100 $10.00 10
-------------------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of any stock or bond fund in the Delaware Group
of funds.
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional shares of
the Funds, your investment is given yet another opportunity to grow. It's called
the Power of Compounding and the following chart illustrates just how powerful
it can be.
COMPOUNDED RETURNS
Results of various assumed fixed rates of return on a $10,000
investment compounded monthly for 10 years:
7% Rate 9% Rate 11% Rate
of Return of Return of Return
--------- --------- ---------
1 year $10,723 $10,938 $11,157
2 years $11,498 $11,964 $12,448
3 years $12,330 $13,086 $13,889
4 years $13,221 $14,314 $15,496
5 years $14,177 $15,657 $17,289
6 years $15,201 $17,126 $19,289
7 years $16,300 $18,732 $21,522
8 years $17,479 $20,489 $24,012
9 years $18,743 $22,411 $26,791
10 years $20,098 $24,514 $29,891
-35-
<PAGE>
(SAI-SIF\PART B)
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 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.
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, 1995, 1996 and 1997, no
brokerage commissions were paid by Delchester Fund, Strategic Income Fund or
High-Yield Opportunities 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, 1997, there were no portfolio
transactions of Delchester Fund, Strategic Income Fund or High-Yield
Opportunities Fund resulting in brokerage commissions directed to brokers for
brokerage and research services.
As provided in the Securities Exchange Act of 1934 (the "1934 Act"),
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
-36-
<PAGE>
(SAI-SIF\PART B)
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 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 Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), and subject to seeking best price and
execution, the Funds may place orders with broker/dealers that have agreed to
defray certain expenses of the funds in the Delaware Group of funds such as
custodian fees, and may, at the request of the Distributor, give consideration
to sales of shares of such funds 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%, although it is
possible that in any particular year market conditions or other factors might
result in portfolio activity at a greater rate than anticipated. Due to current
market conditions, Strategic Income Fund and High-Yield Opportunities Fund
anticipate that their respective annual rates of portfolio turnover will exceed
100%. Because of the historically high rate of new issuances and refinancings in
the high-yield bond market during the Funds' most recent fiscal year, the
portfolio turnover rate for each Fund was higher than anticipated. This higher
rate of portfolio turnover is expected to continue so long as the current rate
of new issuances and refinancings is maintained.
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.
-37-
<PAGE>
(SAI-SIF\PART B)
The portfolio turnover rate of the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by the monthly average of the value of the portfolio securities owned by
the Fund during the particular fiscal year, exclusive of securities whose
maturities at the time of acquisition are one year or less.
-38-
<PAGE>
(SAI-SIF\PART B)
During the past two fiscal years, the portfolio turnover rates of the
Funds were as follows:
July 31
1996 1997
---- ----
Delchester Fund 108% 154%
Strategic Income Fund (1) N/A 183% (3)
High-Yield Opportunities Fund (2) N/A 270% (3)
(1) Date of initial public offering was October 1, 1996.
(2) Date of initial public offering was December 30, 1996.
(3) Annualized.
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 of such classes
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 are responsible for 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 Conduct Rules, as amended, relating to investment
company sales charges. Income Funds, Inc. and the Distributor intend to operate
in compliance with these rules.
-39-
<PAGE>
(SAI-SIF\PART B)
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 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 High-Yield Opportunities Fund from the commencement of public
offering through December 31, 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 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 or in the case of any retirement plan
accounts including self-directed IRAs. However, purchases not involving the
issuance of certificates are confirmed to the investor and credited to the
shareholder's account on the books maintained by Delaware Service Company, Inc.
(the "Transfer Agent"). The investor will have the same rights of ownership with
respect to such shares as if certificates had been issued. An investor that is
permitted to obtain a certificate may receive a certificate representing full
share denominations purchased by sending a letter signed by each owner of the
account to the Transfer Agent requesting the certificate. No charge is assessed
by Income Funds, Inc. for any certificate issued. A shareholder may be subject
to fees for replacement of a lost or stolen certificate, under certain
conditions, including the cost of obtaining a bond covering the lost or stolen
certificate. Please contact a Fund for further information. Investors who hold
certificates representing any of their shares may only redeem those shares by
written request. The investor's certificate(s) must accompany such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, 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 Class A Shares of Strategic Income Fund, pursuant to Board action) or to
purchase either Class B or Class C Shares of a Fund
-40-
<PAGE>
(SAI-SIF\PART B)
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.
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 % 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> <C>
Less than $100,000 4.75% 5.02% 4.91% 5.07% 4.00%
$100,000 but under $250,000 3.75 3.95 3.86 3.89 3.00
$250,000 but under $500,000 2.50 2.58 2.63 2.53 2.00
$500,000 but under $1,000,000* 2.00 1.97 2.11 2.03 1.60
</TABLE>
* There is no front-end sales charge on purchases of $1,000,000 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.
** Based on the net asset value per share of Class A Shares as of the end
of Income Funds, Inc.'s most recent fiscal year.
*** Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
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.
-41-
<PAGE>
(SAI-SIF\PART B)
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 charges shown above. Dealers who receive 90% or more of
the sales charge may be deemed to be underwriters under the Securities
Act of 1933 (the "1933 Act").
- --------------------------------------------------------------------------------
-42-
<PAGE>
(SAI-SIF\PART B)
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:
Dealer's Commission
(as a percentage of
Amount of Purchase amount purchased)
------------------ -----------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Fund Classes' Prospectuses) may be aggregated with those of
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 Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth 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.
-43-
<PAGE>
(SAI-SIF\PART B)
The following table sets forth the rates of the CDSC for Class B Shares
of each Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ -------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares, 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 of shares to which the Plan applies. The Plans do
not apply to 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 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 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 Class C Shares' average daily net assets for the year. Income Funds,
Inc.'s Board of Directors may reduce these amounts at any time. The Distributor
has agreed to waive the distribution fees with respect to Delchester Fund and
High-Yield Opportunities Fund to 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.
-44-
<PAGE>
(SAI-SIF\PART B)
In addition, the Distributor has elected voluntarily to waive all payments under
the 12b-1 Plan for Class A Shares, Class B Shares and Class C Shares of
High-Yield Opportunities Fund during the commencement of the public offering of
the Fund through December 31, 1997.
Although the maximum fee payable under the 12b-1 Plan relating to
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 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 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 Class A Shares on June 1, 1992 pursuant to a Plan of
Recapitalization approved by shareholders of 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 Delchester Fund A Class under its
Plan, the fee is a Class A Shares' expense so that all shareholders of
Delchester Fund A Class, regardless of whether they originally purchased or
received shares in 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 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 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 securities of Class B 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
-45-
<PAGE>
(SAI-SIF\PART B)
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, 1997, payments from Class A Shares,
Class B Shares and Class C Shares of Delchester Fund amounted to $2,559,303,
$2,230,146 and $121,277, respectively. Such amounts were used for the following
purposes:
<TABLE>
<CAPTION>
Delchester Delchester Delchester
Fund Fund Fund
A Class B Class C Class
---------- ---------- ----------
<S> <C> <C> <C>
Advertising $3,049 $437 --------
Annual/Semi-Annual Reports $40,497 -------- --------
Broker Trails $2,111,970 $505,510 $7,011
Broker Sales Charges -------- $877,021 $91,615
Dealer Service Expenses $10,633 $2,414 --------
Interest on Broker Sales Charges -------- $684,081 $4,463
Commissions to Wholesalers $125,819 $87,012 $9,509
Promotional-Broker Meetings $117,981 $28,153 $531
Promotional-Other $108,424 $127 --------
Prospectus Printing $19,964 -------- --------
Telephone $6,651 $927 $36
Wholesaler Expenses $14,315 $44,464 $8,112
Other -------- -------- --------
</TABLE>
For the period ended July 31, 1997, payments from Class A Shares, Class
B Shares and Class C Shares of Strategic Income Fund amounted to $15,465,
$28,489 and $8,275, respectively. Such amounts were used for the following
purposes:
<TABLE>
<CAPTION>
Strategic Strategic Strategic
Income Income Income
Fund Fund Fund
A Class B Class C Class
--------- --------- ---------
<S> <C> <C> <C>
Advertising $2,729 -------- --------
Annual/Semi-Annual Reports $22,442 -------- --------
Broker Trails $11,788 $5,527 --------
Broker Sales Charges -------- $399,692 $7,278
Dealer Service Expenses $35,572 $29,326 $3,143
Interest on Broker Sales Charges -------- $11,758 $431
Commissions to Wholesalers $54,673 $43,563 $3,731
Promotional-Broker Meetings $1,286 $506 $175
Promotional-Other $88,546 -------- --------
Prospectus Printing $9,425 -------- --------
Telephone $220 $144 $19
Wholesaler Expenses $91,552 $73,467 $10,210
Other -------- -------- --------
</TABLE>
-46-
<PAGE>
(SAI-SIF\PART B)
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. 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.
Current and former officers, directors and employees of Income Funds,
Inc., any other fund in the Delaware Group, the Manager, the Manager's
affiliates, 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 other 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. Class A Shares may also be purchased at net asset
value by current and former officers, directors and employees (and members of
their families) of the Dougherty Financial Group LLC. Purchases of Class A
Shares may also be made by clients of registered representatives of an
authorized investment dealer at net asset value within 12 months of a change of
the registered representative's employment, if the purchase is funded by
proceeds from an investment where a front-end sales charge, contingent deferred
sales charge or other sales charge has been assessed. Purchases of Class A
Shares may also be made at net asset value by bank employees who provide
services in connection with agreements between the bank and unaffiliated brokers
or dealers concerning sales of shares of Delaware Group funds. Officers,
directors and key employees of institutional clients of the Manager, the
Sub-Adviser or any of their affiliates, may purchase Class A Shares at net asset
value. Moreover, purchases may be effected at net asset value for the benefit of
the clients of brokers, dealers and registered investment advisers affiliated
with a broker or dealer, if such broker, dealer or investment adviser has
entered into an agreement with the Distributor providing specifically for the
purchase of Class A Shares in connection with special investment products, such
as wrap accounts or similar fee based programs. Such purchasers are required to
sign a letter stating that the purchase is for investment only and that the
securities may not be resold except to the issuer. Such purchasers may also be
required to sign or deliver such other documents as Income Funds, Inc. may
reasonably require to establish eligibility for purchase at net asset value.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the Funds in the Delaware Group at net asset value.
Purchases of Class A Shares at net asset value may also be made by the
following: financial institutions investing for the account of their trust
customers if they are not eligible to purchase shares of the institutional class
of the Fund; any group retirement plan (excluding defined benefit pension
plans), or such plans of the same employer, for which plan participant records
are maintained on the Delaware Investment & Retirement Services, Inc. ("DIRSI")
proprietary record keeping system that (i) has in excess of $500,000 of plan
assets invested in Class A Shares of Delaware Group funds and any stable value
product available through the Delaware Group, or (ii) is sponsored by an
employer that has at any point after May 1, 1997 had more than 100 employees
while such plan has held Class A Shares
-47-
<PAGE>
(SAI-SIF\PART B)
of a Delaware Group fund and such employer has properly represented to DIRSI in
writing that it has the requisite number of employees and has received written
confirmation back from DIRSI.
Purchases of Class A Shares of Delchester Fund at net asset value may
also be made by bank sponsored retirement plans that are no longer eligible to
purchase Institutional Class Shares as a result of a change in the distribution
arrangements.
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 Class A Shares intended to be
purchased until such purchase is completed within the 13-month period. A Letter
of Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as noted
below, the purchaser will be asked to pay an amount equal to the difference
between the front-end sales charge on Class A Shares purchased at the reduced
rate and the front-end sales charge otherwise applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the Transfer Agent will surrender an appropriate number
of the escrowed shares for redemption in order to realize the difference. Such
purchasers may include the value (at offering price at the level designated in
their Letter of Intention) of all their shares of the Funds and of any class of
any of the other mutual funds in the Delaware Group (except shares of any
Delaware Group fund which do not carry a front-end sales charge, CDSC or Limited
CDSC, other than shares of Delaware Group Premium Fund, Inc. beneficially owned
in connection with the ownership of variable insurance products, unless they
were acquired through an exchange from a Delaware Group fund which carried a
front-end sales charge, CDSC or Limited CDSC) previously purchased and still
held as of the date of their Letter of Intention toward the completion of such
Letter.
Employers offering a Delaware Group retirement plan may also complete a
Letter of Intention to obtain a reduced front-end sales charge on investments in
Class A Shares made by the plan. The aggregate investment level of the Letter of
Intention will be determined and accepted by the Transfer Agent at the point of
plan establishment. The level and any reduction in front-end sales charge will
be based on actual plan participation and the projected investments in Delaware
Group funds that are offered with a front-end sales charge, CDSC or Limited CDSC
for a 13-month period. The Transfer Agent reserves the right to adjust the
signed Letter of Intention based on this acceptance criteria. The 13-month
period will begin on the date this Letter of Intention is accepted by the
Transfer Agent. If actual investments exceed the anticipated level and equal an
amount that would qualify the plan for further discounts, any front-end sales
charges will be automatically adjusted. In the event this Letter of Intention is
not fulfilled within the 13-month period, the plan level will be adjusted
(without completing another Letter of Intention) and the employer will be billed
for the difference in front-end sales charges due, based on the plan's assets
under management at that time. Employers may also include the value (at offering
price at the level designated in their Letter of Intention) of all their shares
intended for purchase that are offered with a front-end sales charge, CDSC or
Limited CDSC of any class. Class B Shares and Class C Shares of a Fund and other
Delaware Group funds which offer corresponding classes of shares may also be
aggregated for this purpose.
-48-
<PAGE>
(SAI-SIF\PART B)
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of Class A Shares, Class B Shares and/or Class C
Shares of the Funds, as well as shares of any other class of any of the other
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). In addition, assets held by investment advisory clients of the
Manager or its affiliates in a stable value account may be combined with other
Delaware Group fund holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). If, for example, any such purchaser has previously purchased and still
holds Class A Shares and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $60,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $60,000 purchase would currently be 3.75%. For the purpose of this
calculation, the shares presently held shall be valued at the public offering
price that would have been in effect were the shares purchased simultaneously
with the current purchase. Investors should refer to the table of sales charges
for Class A Shares to determine the applicability of the Right of Accumulation
to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of a Fund (and of the Institutional Classes
holding shares which were acquired through an exchange from one of the other
mutual funds in the Delaware Group offered with a front-end sales charge) who
redeem such shares have one year from the date of redemption to reinvest all or
part of their redemption proceeds in Class A Shares of that Fund or in Class A
Shares of any of the other funds in the Delaware Group, subject to applicable
eligibility and minimum purchase requirements, in states where shares of such
other funds may be sold, at net asset value without the payment of a front-end
sales charge. This privilege does not extend to Class A Shares where the
redemption of the shares triggered the payment of a Limited CDSC. Persons
investing redemption proceeds from direct investments in mutual funds in the
Delaware Group offered without a front-end sales charge will be required to pay
the applicable sales charge when purchasing Class A Shares. The reinvestment
privilege does not extend to a redemption of either Class B Shares or Class C
Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
-49-
<PAGE>
(SAI-SIF\PART B)
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Funds' shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Fund Classes' Prospectuses) in connection with
the features described above.
Group Investment Plans
Group Investment Plans that are not eligible to purchase shares of the
Institutional Classes may also benefit from the reduced front-end sales charges
for investments in Class A Shares set forth in the table on page , based on
total plan assets. If a company has more than one plan investing in the Delaware
Group of funds, then the total amount invested in all plans would be used in
determining the applicable front-end sales charge reduction upon each purchase,
both initial and subsequent, upon notification to the Fund in which the
investment is being made at the time of each such purchase. Employees
participating in such Group Investment Plans may also combine the investments
made in their plan account when determining the applicable front-end sales
charge on purchases to non-retirement Delaware Group investment accounts if they
so notify the Fund in connection with each purchase. For other retirement plans
and special services, see Retirement Plans for the Fund Classes under Investment
Plans.
The Institutional Classes
The Institutional Class of each Fund is available for purchase only by:
(a) retirement plans introduced by persons not associated with brokers or
dealers that are primarily engaged in the retail securities business and
rollover individual retirement accounts from such plans; (b) tax-exempt employee
benefit plans of the Manager, the Sub-Adviser or their affiliates and securities
dealer firms with a selling agreement with the Distributor; (c) institutional
advisory accounts of the Manager, the Sub-Adviser or their affiliates and those
having client relationships with Delaware Investment Advisers, a division of the
Manager, or its affiliates and their corporate sponsors, as well as subsidiaries
and related employee benefit plans and rollover individual retirement accounts
from such institutional advisory accounts; (d) 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.
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.
-50-
<PAGE>
(SAI-SIF\PART B)
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 Institutional Class shares at the net
asset value, at the end of the day of receipt. A reinvestment plan may be
terminated at any time. This plan does not assure a profit nor protect against
depreciation in a declining market.
-51-
<PAGE>
(SAI-SIF\PART B)
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 Appendix B--Classes Offered in
the Fund Classes' Prospectus for the funds in the Delaware Group that are
eligible for investment by holders of Fund shares.
Capital gains and/or dividend distributions to participants in the
following retirement plans are automatically reinvested into the same Delaware
Group fund in which their investments are held: SAR/SEP, SEP/IRA, SIMPLE IRA,
SIMPLE 401(k), Profit Sharing and Money Purchase Pension Plans, 401(k) Defined
Contribution Plans or 403(b)(7) or 457 Deferred Compensation Plans.
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, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) or 457 Deferred
Compensation Plans.
* * *
-52-
<PAGE>
(SAI-SIF\PART B)
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.
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 in Wealth Builder at
any time by written notice to the fund from which exchanges are made.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) or 457 Deferred
Compensation Plans. This option also is not available to shareholders of the
Institutional Classes.
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. Effective September 1, 1997, the Delaware Group
Asset Planner Service is only available
-53-
<PAGE>
(SAI-SIF\PART B)
to financial advisers or investment dealers who have previously used this
service. 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. With the help of
a financial adviser, you may also design a customized asset allocation strategy.
The sales charge on an investment through the Asset Planner service is
determined by the individual sales charges of the underlying funds and their
percentage allocation in the selected Strategy. Exchanges from existing Delaware
Group accounts into the Asset Planner service may be made at net asset value
under the circumstances described under Investing by Exchange in the Prospectus.
Also see Buying Class A Shares at Net Asset Value under Classes of Shares. The
minimum initial investment per Strategy is $2,000; subsequent investments must
be at least $100. Individual fund minimums do not apply to investments made
using the Asset Planner service. Class A, Class B and Class C Shares are
available through the Asset Planner service. Generally, only shares within the
same class may be used within the same Strategy. However, Class A Shares of the
Fund and of other funds in the Delaware Group may be used in the same Strategy
with consultant class shares that are offered by certain other Delaware Group
funds. See Appendix B - Classes Offered in the Prospectus for the funds in the
Delaware Group that offer consultant class shares.
An annual maintenance fee, currently $35 per Strategy, is due at the
time of initial investment and by September 30 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 30.
However, effective November 1, 1996, the annual maintenance 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.
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.
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, SIMPLE IRAs,
Simplified Employee Pension Plans, Salary Reduction 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.
Purchases of Class B Shares are subject to a maximum purchase
limitation of $250,000 for retirement plans. Purchases 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
-54-
<PAGE>
(SAI-SIF\PART B)
the plan as well as the services selected. Additional information about fees is
included in retirement plan materials. Fees are quoted upon request. Annual
maintenance fees may be shared by Delaware Management Trust Company, the
Transfer Agent, other affiliates of the Manager and others that provide services
to such plans.
Certain shareholder investment services available to non-retirement
plan shareholders may not be available to retirement plan shareholders. Certain
retirement plans may qualify to purchase shares of the Institutional Classes.
See The Institutional Classes, above. For additional information on any of the
plans and Delaware's retirement services, call the Shareholder Service Center
telephone number.
It is advisable for an investor considering any one of the retirement
plans described below to consult with an attorney, accountant or a qualified
retirement plan consultant. For further details, including applications for any
of these plans, contact your investment dealer or the Distributor.
Taxable distributions from the retirement plans described below may be
subject to withholding.
Please contact your investment dealer or the Distributor for the
special application forms required for the plans described below.
Prototype Profit Sharing or Money Purchase Pension Plans
Prototype Plans are available for self-employed individuals,
partnerships and corporations. 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 taxpayer's
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.
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.
-55-
<PAGE>
(SAI-SIF\PART B)
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 A -- IRA Information for additional IRA information.
Simplified Employee Pension Plan ("SEP/IRA")
A SEP/IRA may be established by an employer who wishes to sponsor a
tax-sheltered retirement program by making contributions on behalf of all
eligible employees. Each of the Fund Classes is available for investment by a
SEP/IRA.
Salary Reduction Simplified Employee Pension Plan ("SAR/SEP")
Although new SAR/SEP plans may not be established after December 31,
1996, existing plans may be maintained by employers having 25 or fewer
employees. An employer may elect to make additional contributions to such
existing plans.
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 .
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
-56-
<PAGE>
(SAI-SIF\PART B)
such an arrangement. Applicable front-end sales charges with respect to Class A
Shares for such purchases are set forth in the table on page .
Deferred Compensation Plan for State and Local Government Employees ("457")
Section 457 of the Code permits state and local governments, their
agencies and certain other entities to establish a deferred compensation plan
for their employees who wish to participate. This enables employees to defer a
portion of their salaries and any federal (and possibly state) taxes thereon.
Such plans may invest in shares of any of the Fund Classes. Although investors
may use their own plan, there is available a Delaware Group 457 Deferred
Compensation Plan. Interested investors should contact the Distributor or their
investment dealers to obtain further information. Applicable front-end sales
charges for such purchases of Class A Shares are set forth in the table on
page .
SIMPLE IRA
A SIMPLE IRA combines many of the features of an IRA and a 401(k) Plan
but is easier to administer than a typical 401(k) Plan. It requires employers to
make contributions on behalf of their employees and also has a salary deferral
feature that permits employees to defer a portion of their salary into the plan
on a pre-tax basis.
SIMPLE 401(k)
A SIMPLE 401(k) is like a regular 401(k) except that plan sponsors are
limited to 100 employees and, in exchange for mandatory plan sponsor
contributions, discrimination testing is no longer required. Class B Shares are
not available for purchase by such plans.
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, Martin Luther King, Jr.'s Birthday, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. When the New York Stock Exchange is closed, the 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 each
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
-57-
<PAGE>
(SAI-SIF\PART B)
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. Foreign
currencies and the prices of foreign securities denominated in foreign
currencies are translated to U.S. Dollars based on rates in effect as of 12
p.m., Eastern time. 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 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.
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, subject to 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.
-58-
<PAGE>
(SAI-SIF\PART B)
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.
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
-59-
<PAGE>
(SAI-SIF\PART B)
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.
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 Class A Shares, Class B Shares and Class C Shares. 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.
-60-
<PAGE>
(SAI-SIF\PART B)
To reduce the shareholder's risk of attempted fraudulent use of the
telephone redemption procedure, payment will be made only to the bank account
designated on the authorization form.
If expedited payment under these procedures could adversely affect a
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Funds nor the Funds' Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, each Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, such Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders of the Fund Classes are generally tape recorded. A written
confirmation will be provided for all purchase, exchange and redemption
transactions initiated by telephone.
Systematic Withdrawal Plans
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 ^ Limited Contingent Deferred Sales Charge - Class
-61-
<PAGE>
(SAI-SIF\PART B)
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.
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.
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
-62-
<PAGE>
(SAI-SIF\PART B)
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.
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
$191,345,000 at July 31, 1997 which for federal income tax purposes may be
carried forward and applied against future capital gains. The capital loss
carryforward expires as follows: 1998--$10,862,000, 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 $50,288,920 as
of July 31, 1997.
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 July 31, 1997, the Manager and its affiliates in
the Delaware Group, including the Sub-Adviser, were managing in the aggregate
more than $39 billion in assets in various institutional or separately managed
(approximately $23,844,101,000) and investment company (approximately
$15,869,009,000) accounts.
-63-
<PAGE>
(SAI-SIF\PART B)
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, 1997, the total net assets of Delchester Fund
were $1,366,985,570. 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 $6,469,140 for 1995, $6,921,586 for 1996 and $7,362,089
for 1997.
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. On July 31, 1997, the total
net assets of Strategic Income Fund were $21,371,068. 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 incurred by
Strategic Income Fund for the period October 1, 1996 (date of initial public
offering) through July 31, 1997 were $73,164 and because $73,164 was waived in
connection with the voluntary waiver of fees, no fees were paid to the Manager.
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 December 31, 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. On July 31, 1997, the
total net assets of High-Yield Opportunities Fund were $9,319,622. 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. Investment
management fees incurred by High-Yield Opportunities Fund for the
-64-
<PAGE>
(SAI-SIF\PART B)
period December 30, 1996 (date of initial public offering) through July 31,
1997 were $30,869 and $6,031 was paid and $24,838 was waived in connection with
the voluntary waiver of fees by the Manager.
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 December 31,
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 for Class A Shares, Class B Shares and Class C Shares reflect the
impact of their respective 12b-1 Plans.
-65-
<PAGE>
(SAI-SIF\PART B)
The ratios of expenses to average daily net assets for the fiscal year
ended July 31, 1997 for each Class of Delchester Fund and the period ended July
31, 1997 for each Class of Strategic Income Fund and Class A and Institutional
Class of High-Yield Opportunities Fund were as follows:
<TABLE>
<CAPTION>
Institutional
Class A Shares Class B Shares Class C Shares Class
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Delchester Fund 1.04% 1.79% 1.79% 0.79%
Strategic Income Fund (1) 1.00% 1.75% 1.75% 0.75%
High-Yield Opportunities Fund (2) 0.75% N/A N/A 0.75%
</TABLE>
(1) Date of initial public offering was October 1, 1996.
(2) Date of initial public offering was December 30, 1996.
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 Class A Shares, Class B Shares and Class C
Shares of High-Yield Opportunities Fund during the commencement of the public
offering of the Fund through December 31, 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 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.
OFFICERS AND DIRECTORS
The business and affairs of Income Funds, Inc. are managed under the
direction of its Board of Directors.
Certain officers and directors of Income Funds, Inc. hold identical
positions in each of the other funds in the Delaware Group. On August 31, 1997,
Income Funds, Inc.'s officers and directors owned less than 1% of the
outstanding shares of Class A Shares, Class B Shares, Class C Shares and
Institutional Class shares of Delchester Fund, Class A Shares, Class B Shares,
Class C Shares and Institutional Class shares of Strategic Income Fund, and
Institutional Class shares of High-Yield Opportunities Fund. As of the same
date, Income Funds, Inc.'s officers and directors owned 99.02% of the
outstanding shares of Class A Shares of High-Yield Opportunities Fund.
-66-
<PAGE>
(SAI-SIF\PART B)
As of August 31, 1997, 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 Merrill Lynch, Pierce, Fenner & Smith
Class B Mutual Fund Operations
Attention Fund Administration
4800 Deer Lake Dr East 3rd Floor
Jacksonville, FL 32246 4,017,231 9.43%
Delchester Fund Merrill Lynch, Pierce, Fenner & Smith
C Class Mutual Fund Operations
Attention Fund Administration
4800 Deer Lake Dr. East, 3rd Floor
Jacksonville, FL 32246 597,969 18.30%
Delchester Fund Nationwide Life Insurance Co.
Institutional Class c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218 2,064,656 31.89%
Bear Stearns
FBO Raymond G. Perelman
Charitable Remainder Unitrust
One Metrotech Center North
Brooklyn, NY 11201 1,670,675 25.80%
Delchester Fund Delaware Management Company
Institutional Class Employee Profit Sharing Trust
c/o Rick Seidel
1818 Market Street
Philadelphia, PA 19103 776,558 11.99%
Ogden Financial Services Inc.
Attention George Warren
3411 Silverside Road
103 Springer Building
Wilmington, DE 19810 632,864 9.77%
</TABLE>
As of August 31, 1997, 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 Merrill Lynch, Inc.
Fund B Class Mutual Fund Operations
P.O. Box 41621
</TABLE>
-67-
<PAGE>
(SAI-SIF\PART B)
<TABLE>
<S> <C> <C> <C>
Jacksonville, FL 32203 103,233 7.28%
Strategic Income Merrill Lynch, Inc.
Fund C Class Mutual Funds Operations
P.O. Box 41621
Jacksonville, FL 32203 172,631 46.65%
Advest, Inc.
90 State House Square
Hartford, CT 06103 20,388 5.51%
Strategic Income Fund Chicago Trust Company
Institutional Class FBO Lincoln National Corporation
Employees Retirement Trust
1000 N. Water Street TR 14
Milwaukee, WI 53202 583,648 96.93%
</TABLE>
As of August 31, 1997, management believes the following accounts held
5% or more of the outstanding shares of a Class of shares of High-Yield
Opportunities Fund:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
High-Yield Opportunities Wayne A. Stork
Fund A Class 5727 Twin Silo Road
Doylestown, PA 18901 924,100 91.36%
DMTC Custodian for
Richard G. Unruh
164 Rose Lane
Haverford, PA 19041 75,625 7.47%
High-Yield Opportunities Chicago Trust Company
Fund Institutional Class FBO Lincoln National Corp
Employee Retirement Plan
c/o Marshall & Ilsley Trust Company
P.O. Box 2977
Milwaukee, WI 53201 561,517 99.99%
</TABLE>
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.
-68-
<PAGE>
(SAI-SIF\PART B)
Certain officers and directors of Income Funds, Inc. hold identical
positions in each of the other funds in the Delaware Group. 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 (60)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of Income Funds, Inc., 32 other investment companies in the
Delaware Group, Delaware Management Holdings, Inc., DMH
Corp., Delaware International Holdings Ltd. and Founders
Holdings, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various
executive capacities at different times within the Delaware
organization.
Richard G. Unruh, Jr. (57)
Executive Vice President of Income Funds, Inc., each of the other 32
investment companies in the Delaware Group, Delaware
Management Holdings, Inc. and Delaware Capital Management,
Inc.
Executive Vice President and Director of Delaware Management Company,
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 (50)
Executive Vice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc., each of the other 32 investment companies
in the Delaware Group, Delaware Management Company, Inc. and
Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of 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 32
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.
- --------------------
-69-
<PAGE>
(SAI-SIF\PART B)
* Director affiliated with Income Funds, Inc.'s investment manager and
considered an "interested person" as defined in
the 1940 Act.
-70-
<PAGE>
(SAI-SIF\PART B)
Anthony D. Knerr (58)
Director and/or Trustee of Income Funds, Inc. and each of the other 32
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 32
investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal
Officer of the Smithsonian Institution, Washington, DC, and from
1975 to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (76)
Director and/or Trustee of Income Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Thomas F. Madison (61)
Director and/or Trustee of Income Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications-- Markets.
* Jeffrey J. Nick (44)
Director and/or Trustee of Income Funds, Inc. and 32 other investment
companies in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was Managing
Director of Lincoln National UK plc and from 1989 to 1992, he was
Senior Vice President responsible for corporate planning and
development for Lincoln National Corporation.
- --------------------
* Director affiliated with Income Funds, Inc.'s investment manager and
considered an "interested person" as defined in the 1940 Act.
-71-
<PAGE>
(SAI-SIF\PART B)
Charles E. Peck (71)
Director and/or Trustee of Income Funds, Inc. and each of the other 32
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 (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of Income Funds, Inc., each of the other 32 investment
companies in the Delaware Group, Delaware Management Holdings, Inc,
Founders CBO Corporation, Delaware Capital Management, Inc. and
Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH Corp.,
Delaware Distributors, Inc., Founders Holdings, Inc. and Delaware
International Holdings Ltd.
President/Chief Executive Officer/Chief Financial Officer and Director
of Delaware Service Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services, 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.
George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of Income Funds,
Inc., each of the other 32 investment companies in the Delaware
Group, Delaware Distributors, L.P. and Delaware Management
Holdings, Inc.
Senior Vice President, Secretary, General Counsel 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.
Executive Vice President, Secretary, General Counsel and Director of
Delaware Management Trust Company.
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.
-72-
<PAGE>
(SAI-SIF\PART B)
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. During the past five years, Mr. Zenouzi has served in
various capacities at different times within the Delaware
organization.
Paul Grillo (38)
Vice President/Portfolio Manager of Income Funds, Inc. and of 11 other
investment companies in the Delaware Group.
During the past five years, Mr. Grillo has served in various
capacities at different times within the Delaware organization.
Joseph H. Hastings (47)
Senior Vice President/Corporate Controller of Income Funds, Inc., each
of the other 32 investment companies in the Delaware Group and
Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of 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. 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.
Senior Vice President/Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
During the past five years, Mr. Hastings has served in various
capacities at different times within the Delaware organization.
Michael P. Bishof (35)
Senior Vice President/Treasurer of Income Funds, Inc., each of the
other 32 investment companies in the Delaware Group, Delaware
Distributors, Inc. and Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management
Company, Inc. and Delaware Service Company, Inc.
Senior Vice President and Treasurer/Manager of Investment Accounting of
Delaware Distributors, L.P.
Senior Vice President and 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.
-73-
<PAGE>
(SAI-SIF\PART B)
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, 1997 and an estimate of annual benefits
to be received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of July 31, 1997.
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Total
Accrued Estimated Compensation
as Part Annual from all 33
Aggregate of Income Benefits Delaware
Compensation from Funds, Inc. Upon Group Investment
Name Income Funds, Inc. Expenses Retirement* Companies
<S> <C> <C> <C>
W. Thacher Longstreth $4,412 None $38,000 $53,598
Ann R. Leven $4,942 None $38,000 $58,557
Walter P. Babich $4,835 None $38,000 $57,557
Anthony D. Knerr $4,835 None $38,000 $57,557
Charles E. Peck $4,313 None $38,000 $50,412
Thomas F. Madison** $1,032 None $38,000 $15,123
</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, 1997, he or
she would be entitled to annual payments totaling $38,000, 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.
** Thomas F. Madison joined Income Funds, Inc.'s Board of Directors on
April 30, 1997.
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
-74-
<PAGE>
(SAI-SIF\PART B)
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.
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
-75-
<PAGE>
(SAI-SIF\PART B)
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.
Trend Fund seeks long-term growth by investing in common stocks issued
by emerging growth companies exhibiting strong capital appreciation potential.
Small Cap Value Fund seeks capital appreciation by investing primarily
in common stocks whose market values appear low relative to their underlying
value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur 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.
Blue Chip Fund seeks to achieve long-term capital appreciation. Current income
is a secondary objective. It seeks to achieve these objectives by investing
primarily in equity securities and any securities that are convertible into
equity securities. Quantum Fund seeks to achieve long-term capital appreciation.
It seeks to achieve this objective by investing primarily in equity securities
of medium- to large-sized companies expected to grow over time that meet the
Fund's "Social Criteria" strategy.
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
instruments 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
-76-
<PAGE>
(SAI-SIF\PART B)
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. Tax-Free New
Jersey Fund seeks a high level of current interest income exempt from federal
income tax and New Jersey state and local taxes, consistent with preservation of
capital. Tax-Free Ohio Fund seeks a high level of current interest income exempt
from federal income tax and Ohio state and local taxes, consistent with
preservation of capital.
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.
U.S. Growth Fund seeks to maximize capital appreciation by investing
in companies of all sizes which have low dividend yields, strong balance sheets
and high expected earnings growth rates relative to their industry. Overseas
Equity Fund seeks to maximize total return (capital appreciation and income),
principally through investments in an internationally diversified portfolio of
equity securities. New Pacific Fund seeks long-term capital appreciation by
investing primarily in companies which are domiciled in or have their principal
business activities in the Pacific Basin.
Delaware Group Premium Fund, Inc. offers 15 funds available exclusively
as funding vehicles for certain insurance company separate accounts. Decatur
Total Return Series seeks the highest possible total rate of return by selecting
issues that exhibit the potential for capital appreciation while providing
higher than average dividend income. Delchester Series seeks as high a current
income as possible by investing in rated and unrated corporate bonds, U.S.
government securities and commercial paper. Capital Reserves Series seeks a high
stable level of current income while minimizing fluctuations in principal by
investing in a diversified portfolio of short- and intermediate-term securities.
Cash Reserve Series seeks the highest level of income consistent with
preservation of capital and liquidity through investments in short-term money
market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware 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
-77-
<PAGE>
(SAI-SIF\PART B)
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. Trend Series seeks long-term capital appreciation by
investing primarily in small-cap common stocks and convertible securities of
emerging and other growth-oriented companies. These securities will have been
judged to be responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over time. Emerging Markets Series seeks to achieve long-term capital
appreciation by investing primarily in equity securities of issuers located or
operating in emerging countries. Convertible Securities Series seeks a high
level of total return on its assets through a combination of capital
appreciation and current income by investing primarily in convertible
securities. Quantum Series seeks to achieve long-term capital appreciation by
investing primarily in equity securities of medium to large-sized companies
expected to grow over time that meet the Series' "Social Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a high
level of current income consistent with the prudent investment risk by investing
in U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Tax-Free Arizona Insured Fund seeks to provide a high
level of current income exempt from federal income tax and the Arizona personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Minnesota Insured Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax, consistent with
the preservation of capital.
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund seeks to provide
a high level of current income exempt from federal income tax and the Minnesota
personal income tax, consistent with preservation of capital. The Fund seeks to
reduce market risk by maintaining an average weighted maturity from five to ten
years.
Delaware-Voyageur Tax-Free California Insured Fund seeks to provide a
high level of current income exempt from federal income tax and the California
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Florida Insured Fund seeks to provide a high level of
current income exempt from federal income tax, consistent with the preservation
of capital. The Fund will seek to select investments that will enable its shares
to be exempt from the Florida intangible personal property tax.
Delaware-Voyageur Tax-Free Florida Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. The Fund will seek to select investments that will enable its shares to
be exempt from the Florida intangible personal property tax. Delaware-Voyageur
Tax-Free Kansas Fund seeks to provide a high level of current income exempt from
federal income tax, the Kansas personal income tax and the Kansas Intangible
personal property tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Missouri Insured Fund seeks to provide a high level
of current income exempt from federal income tax and the Missouri personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free New Mexico Fund seeks to provide a high level of current income exempt
from federal income tax and the New Mexico personal income tax, consistent with
the preservation of capital. Delaware-Voyageur Tax-Free Oregon Insured Fund
seeks to provide a high level of current income exempt from federal income tax
and the Oregon personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Utah Fund seeks to provide a high level of current
income exempt from federal income tax,
-78-
<PAGE>
(SAI-SIF\PART B)
consistent with the preservation of capital. Delaware-Voyageur Tax-Free
Washington Insured Fund seeks to provide a high level of current income exempt
from federal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Florida Intermediate Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital. The Fund will seek to select investments that will
enable its shares to be exempt from the Florida intangible personal property
tax. The Fund seeks to reduce market risk by maintaining an average weighted
maturity from five to ten years.
Delaware-Voyageur Tax-Free Arizona Fund seeks to provide a high level
of current income exempt from federal income tax and the Arizona personal income
tax, consistent with the preservation of capital. Delaware-Voyageur Tax-Free
California Fund seeks to provide a high level of current income exempt from
federal income tax and the California personal income tax, consistent with the
preservation of capital. Delaware-Voyageur Tax-Free Iowa Fund seeks to provide a
high level of current income exempt from federal income tax and the Iowa
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Idaho Fund seeks to provide a high level of current
income exempt from federal income tax and the Idaho personal income tax,
consistent with the preservation of capital. Delaware-Voyageur Minnesota High
Yield Municipal Bond Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax primarily through
investment in medium and lower grade municipal obligations. National High Yield
Municipal Fund seeks to provide a high level of income exempt from federal
income tax, primarily through investment in medium and lower grade municipal
obligations. Delaware-Voyageur Tax-Free New York Fund seeks to provide a high
level of current income exempt from federal income tax and the personal income
tax of the state of New York and the city of New York, consistent with the
preservation of capital. Delaware-Voyageur Tax-Free Wisconsin Fund seeks to
provide a high level of current income exempt from federal income tax and the
Wisconsin personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Colorado Fund seeks to provide a high level
of current income exempt from federal income tax and the Colorado personal
income tax, consistent with the preservation of capital.
Aggressive Growth Fund seeks long-term capital appreciation, which the
Fund attempts to achieve by investing primarily in equity securities believed to
have the potential for high earnings growth. Although the Fund, in seeking its
objective, may receive current income from dividends and interest, income is
only an incidental consideration in the selection of the Fund's investments.
Growth Stock Fund has an objective of long-term capital appreciation. The Fund
seeks to achieve its objective from equity securities diversified among
individual companies and industries. Tax-Efficient Equity Fund seeks to obtain
for taxable investors a high total return on an after-tax basis. The Fund will
attempt to achieve this objective by seeking to provide a high long-term
after-tax total return through managing its portfolio in a manner that will
defer the realization of accrued capital gains and minimize dividend income.
Delaware-Voyageur Tax-Free Minnesota Fund seeks to provide a high level
of current income exempt from federal income tax and the Minnesota personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free North Dakota Fund seeks to provide a high level of current income
exempt from federal income tax and the North Dakota personal income tax,
consistent with the preservation of capital.
For more complete information about any of the 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).
-79-
<PAGE>
(SAI-SIF\PART B)
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 15 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, Inc., 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 ("DDLP") (for all periods after January 3, 1995) and, in its
capacity as such for Delchester Fund, DDI, prior to January 3, 1995, received
net commissions from each Fund on behalf of Class A Shares, after reallowances
to dealers, as follows:
Delchester Fund A Class
Total
Amount of Amounts Net
Underwriting Reallowed Commission
Fiscal Year Ended Commission to Dealers to Distributor
----------------- ---------- ---------- --------------
July 31, 1997 $2,938,512 $2,431,253 $507,259
July 31, 1996 3,186,228 2,659,208 527,020
July 31, 1995 5,089,170 4,248,856 840,314
-80-
<PAGE>
(SAI-SIF\PART B)
Strategic Income Fund A Class
Total
Amount of Amounts Net
Underwriting Reallowed Commission
Fiscal Year Ended Commission to Dealers to Distributor
----------------- ---------- ---------- --------------
July 31, 1997 (1) $281,015 $266,705 $14,310
(1) Date of initial public offering was October 1, 1996.
High-Yield Opportunities Fund A Class
Total
Amount of Amounts Net
Underwriting Reallowed Commission
Fiscal Year Ended Commission to Dealers to Distributor
----------------- ---------- ---------- --------------
July 31, 1997 (1) $-0- $-0- $-0-
(1) Date of initial public offering was December 30, 1996.
The Distributor and, in its capacity as such, DDI received in the
aggregate Limited CDSC payments with respect to Delchester Fund A Class as
follows:
Fiscal Year Ended Limited CDSC Payments
----------------- ---------------------
July 31, 1997 $ 563
July 31, 1996 2,090
July 31, 1995 966
The Distributor and, in its capacity as such, DDI received in the
aggregate CDSC payments with respect to Delchester Fund B Class as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1997 $596,397
July 31, 1996 407,317
July 31, 1995 184,351
The Distributor received CDSC payments with respect to Delchester Fund
C Class as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1997 $9,434
July 31, 1996 (1) 502
(1) Date of initial public offering was November 29, 1995.
-81-
<PAGE>
(SAI-SIF\PART B)
The Distributor received Limited CDSC payments with respect to
Strategic Income Fund A Class as follows:
Fiscal Year Ended Limited CDSC Payments
----------------- ---------------------
July 31, 1997 (1) $-0-
(1) Date of initial public offering was October 1, 1996.
The Distributor received CDSC payments with respect to Strategic Income
Fund B Class as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1997 (1) $2,376
(1) Date of initial public offering was October 1, 1996.
The Distributor received CDSC payments with respect to Strategic Income
Fund C Class as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1997 (1) $384
(1) Date of initial public offering was October 1, 1996.
The Distributor received Limited CDSC payments with respect to
High-Yield Opportunities Fund A Class as follows:
Fiscal Year Ended Limited CDSC Payments
----------------- ---------------------
July 31, 1997 (1) $-0-
(1) Date of initial public offering was December 30, 1996.
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.
-82-
<PAGE>
(SAI-SIF\PART B)
The Manager and its affiliates own the name "Delaware Group." Under
certain circumstances, including the termination of Income Funds, Inc.'s
advisory relationships with the Manager or their distribution relationships with
the Distributor, the Manager and its affiliates could cause Income Funds, Inc.
to delete the words "Delaware Group" from Income Funds, Inc.'s name.
The Chase Manhattan Bank ("Chase"), 4 Chase Metrotech Center, Brooklyn,
NY 11245 is custodian of Delchester Fund's 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.
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 Delchester Fund A Class, and fifty million shares each to Delchester Fund B
Class, Delchester Fund C Class and Delchester Fund Institutional Class; one
hundred million shares to Strategic Income Fund A Class, twenty-five million
shares each to Strategic Income Fund B Class and Strategic Income Fund C Class
and fifty million shares to Strategic Income Fund Institutional Class; and one
hundred million shares to High- Yield Opportunities Fund A Class, twenty-five
million shares each to High-Yield Opportunities Fund B Class and High-Yield
Opportunities Fund C Class and fifty million shares to High-Yield Opportunities
Fund Institutional Class.
All shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable and, except as described above, have
equal voting rights.
Until May 31, 1992, Delchester Fund offered shares of two retail
classes, Delchester I class and Delchester II class (now, Class A Shares of
Delchester Fund). Delchester I class shares were offered with a higher sales
charge than that applicable to 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 Delchester I class had
their shares converted into shares of 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 Delchester II class was changed to Delchester Fund
class. Effective May 2, 1994, Delchester Fund class became known as Delchester
Fund A Class and Delchester Fund (Institutional) class became known as
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. Beginning September 30, 1996, Income Funds, Inc.
-83-
<PAGE>
(SAI-SIF\PART B)
began offering Strategic Income Fund series and beginning December 27, 1996
began offering the High-Yield Opportunities 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.
-84-
<PAGE>
(SAI-SIF\PART B)
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.
-85-
<PAGE>
(SAI-SIF\PART B)
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 - $24,650
---------------
Joint -- $0 - $41,200
How Much
Cumulative How Much You Have
End of Investment You Have With Full
Year Amount Without IRA IRA Deduction
---- ------ ----------- -------------
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
[Without IRA--investment of $1,700 ($2,000 less 15%) earning 8.5% (10% less
15%)]
28% Tax Bracket Single -- $24,651 - $59,750
---------------
Joint -- $41,201 - $99,600
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
---- ------ --- --------- ---------
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
[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%]
-86-
<PAGE>
(SAI-SIF\PART B)
31% Tax Bracket Single -- $59,751 - $124,650
---------------
Joint -- $99,601 - $151,750
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
---- ------ --- --------- ---------
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
[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 -- $124,651 - $271,050
----------------
Joint -- $151,751 - $271,050
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
---- ------ --- --------- ---------
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
[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%]
-87-
<PAGE>
(SAI-SIF\PART B)
39.6% Tax Bracket* Single -- over $271,050
------------------
Joint -- over $271,050
How Much How Much You Have
Cumulative You Have With Full IRA
End of Investment Without No
Year Amount IRA Deduction Deduction
---- ------ --- --------- ---------
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
[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 $271,050. The
above tables do not reflect the personal exemption phaseout nor the
limitations of itemized deductions that may apply.
-88-
<PAGE>
(SAI-SIF\PART B)
$2,000 SINGLE INVESTMENT AT A RETURN OF 10%
COMPOUNDED MONTHLY
<TABLE>
<CAPTION>
TAXABLE-- TAXABLE-- TAXABLE-- TAXABLE-- TAXABLE-- TAX
YEARS 39.6%* 36%* 31% 28% 15% DEFERRED
- ----- ------ ---- --- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
10 $ 3,653 $ 3,787 $ 3,980 $ 4,100 $ 4,665 $ 5,414
15 4,938 5,210 5,614 5,870 7,125 8,908
20 6,673 7,169 7,918 8,405 10,882 14,656
30 12,190 13,572 15,756 17,231 25,385 39,675
40 22,267 25,696 31,351 35,323 59,214 107,401
</TABLE>
$2,000 INVESTED ANNUALLY AT A RETURN OF 10%
COMPOUNDED MONTHLY
<TABLE>
<CAPTION>
TAXABLE-- TAXABLE-- TAXABLE-- TAXABLE-- TAXABLE-- TAX
YEARS 39.6%* 36%* 31% 28% 15% DEFERRED
- ----- ------ ---- --- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
10 $ 28,276 $ 28,891 $ 29,773 $ 30,317 $ 32,819 $ 36,018
15 50,241 51,913 54,348 55,875 63,110 72,877
20 79,928 83,590 89,014 92,468 109,373 72,877
30 174,276 187,150 206,891 219,878 287,948 397,466
40 347,756 383,214 441,441 481,071 704,501 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 $271,050. The above
tables do not reflect the personal exemption phaseout nor the
limitations of itemized deductions that may apply.
-89-
<PAGE>
(SAI-SIF\PART B)
-90-
<PAGE>
(SAI-SIF\PART B)
THE VALUE OF STARTING YOUR IRA EARLY
The following illustrates how much more you would have contributing
$2,000 each January--the earliest opportunity--compared to contributing on April
15th of the following year--the latest, for each tax year.
After 5 years $3,528 more
10 years $6,113
20 years $17,228
30 years $47,295
Compounded returns for the longest period of time is the key. The above
illustration assumes a 10% rate of return and the reinvestment of all proceeds.
And it pays to shop around. If you get just 2% more per year, it can
make a big difference when you retire. A constant 8% versus 10% return,
compounded monthly, illustrates the point. This chart is based on a yearly
investment of $2,000 on January 1. After 30 years the difference can mean as
much as 50% more!
8% 10%
-- ---
10 years $31,828 $36,018
30 years 259,288 397,466
The statistical exhibits above are for illustration purposes only and
do not reflect the actual Fund performance either in the past or in the future.
-91-
<PAGE>
(SAI-SIF\PART B)
FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditors for Income Funds,
Inc. and, in its capacity as such, audits the annual financial statements of
each of the Funds. The Funds' Statements of Net Assets, Statements of Assets and
Liabilities, Statements of Operations, Statements 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, 1997 are included in
each 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 Reports into this Part B.
-92-
