<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
File No. 2-37707
File No. 811-2071
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. ______
Post-Effective Amendment No. __60__ /x/
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. __60__ /x/
DELAWARE GROUP INCOME FUNDS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
1818 Market Street, Philadelphia, Pennsylvania 19103
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (215) 255-2923
--------------
George M. Chamberlain, Jr., 1818 Market Street, Philadelphia, PA 19103
- --------------------------------------------------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Public Offering: September 29, 1998
------------------
It is proposed that this filing will become effective:
_____ immediately upon filing pursuant to paragraph (b)
__X__ on September 29, 1998 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)(1)
_____ on (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)(2)
_____ on (date) pursuant to paragraph (a)(2) of Rule 485
Title of Securities Being Registered
Delchester Fund A Class, Delchester Fund B Class, Delchester Fund C Class,
Delchester Fund Institutional Class, High-Yield Opportunities Fund A Class,
High-Yield Opportunities Fund B Class, High-Yield Opportunities Fund C Class,
High-Yield Opportunities Fund Institutional Class, Strategic Income
Fund A Class, Strategic Income Fund B Class, Strategic Income Fund C Class,
Strategic Income Fund Institutional Class
<PAGE>
--- C O N T E N T S ---
This Post-Effective Amendment No. 60 to Registration File No. 2-37707 includes
the following:
1. Facing Page
2. Contents Page
3. Cross-Reference Sheet
4. Part A - Prospectuses
5. Part B - Statement of Additional Information
6. Part C - Other Information
7. Signatures
<PAGE>
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Delchester Fund/
High-Yield Opportunities Fund
A Class/ Institutional
B Class/ Class
C Class
<S> <C> <C> <C>
1 Cover Page..................................................... Cover Page Cover Page
2 Synopsis....................................................... Synopsis; Synopsis;
Summary of Summary of
Expenses Expenses
3 Condensed Financial Information................................ Financial Financial
Highlights Highlights
4 General Description of Registrant ............................. Investment Investment
Objectives and Objectives and
Policies; Shares; Policies; Shares;
Other Investment Other Investment
Policies and Risk Policies and Risk
Considerations Considerations
5 Management of the Fund ........................................ Management Management
of the Funds of the Funds
6 Capital Stock and Other Securities ............................ The Delaware Dividends and
Difference; Distributions;
Dividends and Taxes; Shares
Distributions;
Taxes; Shares
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET*
PART A
(Continued)
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Delchester Fund
High-Yield Opportunities Fund
A Class/ Institutional
B Class/ Class
C Class
<S> <C> <C> <C>
7 Purchase of Securities Being Offered........................... Cover; How Cover; How
to Buy Shares; to Buy Shares;
Calculation of Calculation of
Offering Price Net Asset
and Net Asset Value
Value Per Share; Per Share;
Management Management
of the Funds of the Funds
8 Redemption or Repurchase....................................... How to Buy How to Buy
Shares; Shares;
Redemption Redemption
and Exchange and Exchange
9 Legal Proceedings.............................................. None None
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET
PART A
(Continued)
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Strategic Income Fund
A Class/ Institutional
B Class/ Class
C Class
<S> <C> <C> <C>
1 Cover Page..................................................... Cover Page Cover Page
2 Synopsis....................................................... Synopsis; Synopsis;
Summary of Summary of
Expenses Expenses
3 Condensed Financial Information................................ Financial Financial
Highlights Highlights
4 General Description of Registrant ............................. Investment Investment
Objective and Objective and
Policies; Shares; Policies; Shares;
Other Investment Other Investment
Policies and Risk Policies and Risk
Considerations Considerations
5 Management of the Fund ........................................ Management Management
of the Fund of the Fund
6 Capital Stock and Other Securities ............................ The Delaware Dividends and
Difference; Distributions;
Dividends and Taxes; Shares
Distributions;
Taxes; Shares
</TABLE>
<PAGE>
CROSS-REFERENCE SHEET
PART A
(Continued)
<TABLE>
<CAPTION>
Location in
Item No. Description Prospectuses
- -------- ----------- ------------
Strategic Income Fund
A Class/ Institutional
B Class/ Class
C Class
<S> <C> <C> <C>
7 Purchase of Securities Being Offered........................... Cover; How to Cover; How to
Buy Shares; Buy Shares;
Calculation of Calculation of
Offering Price Net Asset
and Net Asset Value
Value Per Share; Per Share;
Management Management
of the Fund of the Fund
8 Redemption or Repurchase....................................... How to Buy How to Buy
Shares; Shares;
Redemption and Redemption and
Exchange Exchange
9 Legal Proceedings.............................................. None None
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
PART B
<TABLE>
<CAPTION>
Location in Statement
Item No. Description of Additional Information
- -------- ----------- -------------------------
<S> <C> <C>
10 Cover Page..................................................... Cover Page
11 Table of Contents.............................................. Table of Contents
12 General Information and History................................ General Information
13 Investment Objectives and Policies............................. Investment Objectives
and Policies
14 Management of the Registrant................................... Officers and Directors
15 Control Persons and Principal Holders
of Securities.................................................. Officers and Directors
16 Investment Advisory and Other Services......................... Plans Under Rule 12b-1 for the
Fund Classes (under Purchasing
Shares); Investment Management
Agreements and Sub-Advisory
Agreement; Officers and
Directors;General Information;
Financial Statements
17 Brokerage Allocation........................................... Trading Practices and Brokerage
18 Capital Stock and Other Securities............................. Capitalization and
Noncumulative Voting
(under General Information)
19 Purchase, Redemption and Pricing of
Securities Being Offered....................................... Purchasing Shares;
Determining Offering Price
and Net Asset Value;
Redemption and Repurchase;
Exchange Privilege
20 Tax Status..................................................... Taxes
21 Underwriters .................................................. Purchasing Shares
22 Calculation of Performance Data................................ Performance Information
23 Financial Statements........................................... Financial Statements
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
PART C
<TABLE>
<CAPTION>
Location
Item No. Description in Part C
- ------- ----------- ---------
<S> <C> <C>
24 Financial Statements and Exhibits.............................. Item 24
25 Persons Controlled by or under Common
Control with Registrant........................................ Item 25
26 Number of Holders of Securities................................ Item 26
27 Indemnification................................................ Item 27
28 Business and Other Connections of
Investment Adviser............................................. Item 28
29 Principal Underwriters......................................... Item 29
30 Location of Accounts and Records............................... Item 30
31 Management Services............................................ Item 31
32 Undertakings................................................... Item 32
</TABLE>
<PAGE>
Delaware Investments 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 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 Investments at 800-523-1918.
INVESTMENT MANAGER
Delaware Management Company
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
- -----------------------------------------
DELCHESTER FUND
HIGH-YIELD OPPORTUNITIES FUND
- -----------------------------------------
A CLASS
- -----------------------------------------
B CLASS
- -----------------------------------------
C CLASS
- -----------------------------------------
PROSPECTUS
- -----------------------------------------
SEPTEMBER 29, 1998
DELAWARE
INVESTMENTS
- -----------
<PAGE>
Delchester Fund
High-Yield Opportunities Fund
A Class/B Class/C Class
PROSPECTUS
September 29, 1998
1818 Market Street, Philadelphia, PA 19103
For Prospectus and Performance:
Nationwide 800-523-1918
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
The Prospectus describes shares of Delchester Fund series and High-Yield
Opportunities Fund series (individually, a "Fund" and collectively, the
"Funds") of Delaware Group Income Funds, Inc. ("Income Funds, Inc."), a
professionally-managed mutual fund of the series type. Delchester Fund's
investment objective is to seek as high a current income as is consistent with
providing reasonable safety. High-Yield Opportunities Fund's investment
objective is to seek to provide investors with total return and, as a secondary
objective, high current income.
Each 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 either Fund. See
Investment Objectives and Policies, Risk Factors, and Appendix A--Ratings.
Each Fund offers three retail classes of shares: "Class A Shares," "Class
B Shares" and "Class C Shares" (individually , a "Class" and collectively, the
"Classes").
This Prospectus relates only to the Classes and sets forth information
that you should read and consider before you invest. Please retain it for
future reference. The Funds' Statement of Additional Information ("Part B" of
Income Funds, Inc.'s registration statement), dated September 29, 1998, as it
may be amended from time to time, contains additional information about the
Funds and has been filed with the Securities and Exchange Commission ("SEC").
Part B is incorporated by reference into this Prospectus and is available,
without charge, by writing to Delaware Distributors, L.P. at the above address
or by calling the above number. Each Fund's financial statements appear in its
Annual Report for the fiscal year ended July 31, 1998, which will accompany any
response to requests for Part B. In addition, the SEC maintains a Web site
(http://www.sec.gov) that contains Part B, material we incorporated by
reference, and other information regarding registrants that electronically file
with the SEC.
<PAGE>
Each Fund also offers an Institutional Class, which is available for
purchase only by certain investors. A prospectus for the Institutional Classes
can be obtained by writing to Delaware Distributors, L.P. at the above address
or by calling the above number.
TABLE OF CONTENTS
COVER PAGE................................................................. 1
SYNOPSIS................................................................... 2
SUMMARY OF EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS....................................................... 6
INVESTMENT OBJECTIVES AND POLICIES
Suitability...............................................................10
Investment Strategy.......................................................10
RISKS FACTORS
Volatility of the High-Yield Market.......................................12
Redemptions...............................................................12
Liquidity and Valuation...................................................12
THE DELAWARE DIFFERENCE
Plans and Services........................................................13
CLASSES OF SHARES..........................................................15
HOW TO BUY SHARES..........................................................22
REDEMPTION AND EXCHANGE....................................................25
DIVIDENDS AND DISTRIBUTIONS................................................30
TAXES......................................................................31
CALCULATION OF OFFERING PRICE AND
NET ASSET VALUE PER SHARE.................................................33
MANAGEMENT OF THE FUNDS....................................................34
OTHER INVESTMENT POLICIES AND
RISK CONSIDERATIONS.......................................................39
APPENDIX A -- RATINGS......................................................44
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 FUNDS 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 FUNDS ARE NOT BANK OR CREDIT UNION DEPOSITS.
-2-
<PAGE>
SYNOPSIS
Investment Objectives and Risk Factors
Delchester Fund--The investment objective of Delchester Fund is to seek as
high a current income as is consistent with providing reasonable safety.
High-Yield Opportunities Fund--The investment objective of High-Yield
Opportunities Fund is to seek to provide investors with total return and, as a
secondary objective, high current income.
Each Fund invests primarily in high-yield securities (junk bonds) and
greater risks may be involved with an investment in a Fund than an investment in
a mutual fund comprised primarily of investment grade bonds.
Delchester Fund seeks to achieve its objective by investing principally in
corporate bonds rated BBB or lower by Standard & Poor's Rating Group ("S&P") or
Baa or lower by Moody's Investors Service, Inc. ("Moody's") and High-Yield
Opportunities Fund seeks to achieve its objective by investing principally in
corporate bonds rated BB or lower by S&P or Ba or lower by Moody's, or, in each
Fund's case, 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).
Each Fund may also invest in U.S. government securities and commercial paper.
High-Yield Opportunities Fund may also invest in foreign government paper.
For further details, see Investment Objectives and Policies and Other
Investment Policies and Risk Considerations.
Investment Manager, Distributor and Transfer Agent
Delaware Management Company (the "Manager") is the investment manager for
each Fund and, in that capacity, provides investment advice to each 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 Investments family. Delaware Distributors,
L.P. (the "Distributor") is the national distributor for each Fund and for all
of the other mutual funds in the Delaware Investments family. Delaware Service
Company, Inc. (the "Transfer Agent") is the shareholder servicing, dividend
disbursing, accounting services and transfer agent for each Fund and for all of
the other mutual funds in the Delaware Investments family. See Summary of
Expenses and Management of the Funds for further information regarding the
Manager and the fees payable under each 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. 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; if a dealer's
commission is paid in connection with those purchases, a contingent deferred
sales charge ("Limited CDSC") of 1% will be imposed if shares are redeemed
during the first year after the purchase and 0.50% will be imposed if shares
are redeemed during the second year after the purchase. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange. Class A Shares are also subject to annual
12b-1 Plan expenses for the life of the investment.
-3-
<PAGE>
The price of Class B Shares is equal to the net asset value per share.
Class B Shares are subject to a CDSC of: (i) 4% if shares are redeemed within
two years of purchase; (ii) 3% if shares are redeemed during the third or
fourth year following purchase; (iii) 2% if shares are redeemed during the
fifth year following purchase; (iv) 1% if shares are redeemed during the sixth
year following purchase; and (v) 0% thereafter. Class B Shares are subject to
annual 12b-1 Plan expenses which are assessed against such shares 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
which are assessed against such shares for the life of the investment.
See Classes of Shares and Distribution (12b-1) and Service under
Management of the Funds.
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 each Fund may be redeemed or exchanged at the net asset
value calculated after receipt of the redemption or exchange request. Neither
the Funds 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 Funds
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, registered management investment
company. Each Fund operates as a diversified fund as defined under the
Investment Company Act of 1940 (the "1940 Act"). Income Funds, Inc. was
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 Funds.
-4-
<PAGE>
SUMMARY OF EXPENSES
A general comparison of the sales arrangements and other expenses
applicable to Class A, Class B and Class C Shares follows:
<TABLE>
<CAPTION>
Delchester Fund
-------------------------------------
Class A Class B Class C
Shareholder Transaction Expenses Shares Shares Shares
- -------------------------------- --------- --------- ---------
<S> <C> <C> <C>
-------------------------------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ....................... 4.75% None None
Maximum Sales Charge imposed on Reinvested Dividends
(as a percentage of offering price) ....................... None None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or
redemption proceeds, as applicable ........................ None(1) 4.00%(2) 1.00%(3)
Redemption Fees ............................................ None(4) None(4) None(4)
<CAPTION>
High-Yield
Opportunities Fund
-------------------------------------
Class A Class B Class C
Shareholder Transaction Expenses Shares Shares Shares
- -------------------------------- --------- --------- ---------
<S> <C> <C> <C>
--------------------------------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ....................... 4.75% None None
Maximum Sales Charge imposed on Reinvested Dividends
(as a percentage of offering price) ....................... None None None
Maximum Contingent Deferred Sales Charge
(as a percentage of original purchase price or
redemption proceeds, as applicable ........................ None(1) 4.00%(2) 1.00%(3)
Redemption Fees ............................................ None(4) None(4) None(4)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Delchester Fund
--------------------------------------
Annual Operating Expenses Class A Class B Class C
(as a percentage of average daily net assets) Shares Shares Shares
- -------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
--------------------------------------
Management Fees (after voluntary
waivers in the case of High-Yield Opportunities Fund) 0.57% 0.57% 0.57%
12b-1 Expenses ........................................ 0.25%(6,7) 1.00%(6) 1.00%(6)
(including service fees)
Other Operating Expenses .............................. 0.24% 0.24% 0.24%
----------- ------- -------
Total Operating Expenses (after voluntary
waivers in the case of High-Yield Opportunities Fund) 1.06% 1.81% 1.81%
=========== ======= =======
<CAPTION>
High-Yield
Opportunities Fund
-------------------------------------------------
Annual Operating Expenses Class A Class B Class C
(as a percentage of average daily net assets) Shares Shares Shares
- -------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
-------------------------------------------------
Management Fees (after voluntary
waivers in the case of High-Yield Opportunities Fund) 0.26%(5) 0.26%(5) 0.26%(5)
12b-1 Expenses ........................................ 0.30%(6/8) 1.00%(6/8) 1.00%(6/8)
(including service fees)
Other Operating Expenses .............................. 0.69%(5) 0.69%(5) 0.69%(5)
-------- -------- --------
Total Operating Expenses (after voluntary
waivers in the case of High-Yield Opportunities Fund) 1.25%(5) 1.95%(5) 1.95%(5)
======== ======== ========
</TABLE>
(1) 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
Limited CDSC of 1% will be imposed on certain redemptions made during the
first year after purchase and 0.50% will be imposed on certain redemptions
made during the second year after purchase. Additional Class A purchase
options involving the imposition of a CDSC may be permitted as described
in this Prospectus from time to time. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value
under Redemption and Exchange.
(2) 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
-5-
<PAGE>
following purchase; and (v) 0% thereafter. See Deferred Sales Charge
Alternative -- Class B Shares under Classes of Shares.
(3) Class C Shares are subject to a CDSC of 1% if the shares are redeemed
within 12 months of purchase. See Level Sales Charge Alternative -- Class
C Shares under Classes of Shares.
(4) First Union National Bank currently charges $7.50 per redemption for
redemptions payable by wire.
(5) Beginning January 1, 1998, 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 High-Yield Opportunities 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 0.95% on
an annualized basis through March 31, 1999. From the commencement of
operations through December 31, 1997, commitments of waiver and payment by
the Manager that were different from that currently in effect for the Fund
were in place. See Management of the Funds. The expense information set
forth above has been restated to reflect the current fees. If the
voluntary expense waivers by the Manager were not in effect, the Total
Operating Expenses, as a percentage of average daily net assets, would be
1.44%, 2.14% and 2.14%, respectively, for Class A Shares, Class B Shares
and Class C Shares, reflecting management fees of 0.65%.
(6) Class A Shares, Class B Shares and Class C Shares are subject to separate
12b-1 Plans. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by rules of
the National Association of Securities Dealers, Inc. (the "NASD"). See
Distribution (12b-1) and Service under Management of the Funds.
(7) The actual 12b-1 Plan expenses to be paid and, consequently, the Total
Operating Expenses of Class A Shares, may vary because of the formula
adopted by the Board of Directors for use in calculating the 12b-1 Plan
expenses for this class beginning June 1, 1992, but the 12b-1 Plan
expenses will not be more than 0.30% nor less than 0.10%. See Distribution
(12b-1) and Service under Management of the Funds and Part B.
(8) From the commencement of operations through February 16, 1998, the
Distributor waived its right to receive 12b-1 fees. Beginning February 17,
1998, High-Yield Opportunities Fund commenced paying 12b-1 fees and the
expense information set forth in this section has been restated to reflect
these fees.
Investors utilizing the 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 Asset Planner in Part B.
For expense information about the Funds' Institutional Class, see the
separate prospectus relating to those classes.
-6-
<PAGE>
The following example illustrates the expenses that an investor would pay
on a $1,000 investment over various time periods, assuming (1) a 5% annual rate
of return, (2) redemption and no redemption at the end of each time period and
(3) for Class B Shares and Class C Shares, payment of a CDSC at the time of
redemption, if applicable. For High-Yield Opportunities Fund, the following
example assumes the voluntary waiver of the management fee by the Manager as
discussed in this Prospectus.
<TABLE>
<CAPTION>
Delchester Fund Assuming Redemption Assuming No Redemption
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares ......... $581 $80 $103 $ 171 $58 $80 $103 $ 171
Class B Shares ......... $ 58 $87 $118 $1932 $18 $57 $ 98 $1932
Class C Shares ......... $ 28 $57 $ 98 $ 213 $18 $57 $ 98 $ 213
</TABLE>
<TABLE>
<CAPTION>
High-Yield
Opportunities Fund Assuming Redemption Assuming No Redemption
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares ......... $60(1) $85 $113 $ 191 $60 $85 $113 $191
Class B Shares ......... $60 $91 $125 $2092 $20 $61 $105 $209(2)
Class C Shares ......... $30 $61 $105 $ 227 $20 $61 $105 $227
</TABLE>
(1) Generally, no redemption charge is assessed upon redemption of Class A
Shares. Under certain circumstances, however, a Limited CDSC, which has not
been reflected in this calculation, may be imposed on certain redemptions
within two years after a purchase. See Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange.
(2) At the end of approximately eight years after purchase, Class B Shares will
be automatically converted into Class A Shares. The example above assumes
conversion of Class B Shares at the end of the eighth year. However, the
conversion may occur as late as three months after the eighth anniversary of
purchase, during which time the higher 12b-1 Plan fees payable by Class B
Shares will continue to be assessed. The ten-year expense numbers for Class
B Shares reflect the expenses of Class B Shares for years one through eight
and the expenses for Class A Shares for years nine and ten. 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.
-7-
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
Delchester Fund and 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 each Fund's performance is
contained in the Funds' Annual Report to shareholders. A copy of the Funds'
Annual Report (including the report of Ernst & Young LLP) may be obtained from
the Funds upon request at no charge.
- --------------------------------------------------------------------------------
-8-
<PAGE>
<TABLE>
<CAPTION>
Delchester Fund
Class A Shares
----------------------------------------------------------------
Year Ended
7/31/98 7/31/97 7/31/96 7/31/95
<S> <C> <C> <C> <C>
Net asset value, beginning of
year .............................. $ 6.570 $ 6.140 $ 6.280 $ 6.450
Income from investment operations
Net investment income .............. 0.608 0.598 0.628 0.668
Net realized and unrealized gain
(loss) on investments ............. 0.070 0.430 (0.141) (0.167)
--------- --------- -------- ---------
Total from investment
operations ....................... 0.678 1.028 0.487 0.501
--------- --------- -------- ---------
Less dividends and distributions
Dividends from net investment
income ............................ (0.598) (0.598) (0.627) (0.671)
--------- --------- -------- ---------
Total dividends and
distributions .................... (0.598) (0.598) (0.627) (0.671)
--------- --------- -------- ---------
Net asset value, end of year ....... $ 6.650 $ 6.570 $ 6.140 $ 6.280
========= ========= ======== =========
- ------------------------------------
Total return(2)..................... 10.73% 17.53% 8.10% 8.46%
- -----------------------------------
Ratios and supplemental data
Net assets, end of year
(000 omitted)(3) .................. $1,060,136 $1,030,328 $973,939 $1,020,763
Ratio of expenses to average net
assets ............................ 1.06% 1.04% 1.02% 1.09%
Ratio of net investment income
to average net assets ............. 9.16% 9.48% 10.11% 10.77%
Portfolio turnover ................. 117% 154% 108% 92%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Delchester Fund
Class A Shares
------------------------------------------------------------------------------------------
Year Ended
7/31/94 7/31/93 7/31/92 7/31/911 7/31/901 7/31/891
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year .............................. $ 7.070 $ 6.900 $ 6.260 $ 6.300 $ 7.480 $ 7.750
Income from investment operations
Net investment income .............. 0.744 0.774 0.781 0.805 0.880 0.911
Net realized and unrealized gain
(loss) on investments ............. (0.618) 0.165 0.640 (0.040) (1.180) (0.270)
-------- -------- -------- -------- ---------- --------
Total from investment
operations ....................... 0.126 0.939 1.421 0.765 (0.300) 0.641
-------- -------- -------- -------- ---------- --------
Less dividends and distributions
Dividends from net investment
income ............................ (0.746) (0.769) (0.781) (0.805) (0.880) (0.911)
-------- -------- -------- -------- ---------- --------
Total dividends and
distributions .................... (0.746) (0.769) (0.781) (0.805) (0.880) (0.911)
-------- -------- -------- -------- ---------- --------
Net asset value, end of year ....... $ 6.450 $ 7.070 $ 6.900 $ 6.260 $ 6.300 $ 7.480
======== ======== ======== ======== ========== ========
- --------------------------------------------------------------------------------
Total return2 ...................... 1.60% 14.46% 23.94% 14.51% (3.80%) 8.78%
- --------------------------------------------------------------------------------
Ratios and supplemental data
Net assets, end of year
(000 omitted)(3) .................. $983,569 $955,113 $760,290 $505,530 $ 531,802 $708,215
Ratio of expenses to average net
assets ............................ 1.05% 1.04% 1.08% 1.20% 1.15% 1.15%
Ratio of net investment income
to average net assets ............. 10.48% 11.17% 11.58% 14.15% 13.17% 12.00%
Portfolio turnover ................. 92% 72% 101% 38% 72% 66%
</TABLE>
- -----------
(1) Delchester I class was converted into Delchester Fund class (known as
Delchester Fund A Class beginning May 2, 1994) on June 1, 1992, pursuant to
a Plan of Recapitalization approved by shareholders of Delchester I class.
For the periods 1989-1991, the historical information for Delchester Fund A
Class has been shown. Delchester Fund A Class was initially offered on
November 2, 1987. To simplify the presentation of fiscal year 1988 data, for
the period November 2, 1987 through July 31, 1988, Delchester I class data
have been substituted for that of Delchester Fund A Class. With the
exception of the applicable 12b-1 payments, Delchester I class and
Delchester Fund A Class were identical for purposes of data presentations.
(2) Does not reflect any maximum front-end sales charge nor the Limited CDSC
that varies from 0.50%-1% depending on the holding period for Class A
Shares, applicable to certain redemptions made within two years after
purchase. See Contingent Deferred Sales Charge for Certain Redemptions of
Class A Shares Purchased at Net Asset Value.
(3) All net assets of Delchester I class and Delchester Fund A Class have been
aggregated for the periods prior to June 1, 1992.
-9-
<PAGE>
<TABLE>
<CAPTION>
Delchester Fund
Class B Shares
-------------------------------------------------------------
Period
5/2/941
Year Ended through
7/31/98 7/31/97 7/31/96 7/31/95 7/31/94
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ......... $ 6.570 $ 6.140 $ 6.280 $ 6.450 $ 6.730
Income from investment operations
Net investment income ...................... 0.556 0.550 0.581 0.624 0.120
Net realized and unrealized gain (loss)
on investments ............................ 0.072 0.430 (0.141) (0.170) (0.280)
-------- --------- -------- -------- --------
Total from investment operations .......... 0.628 0.980 0.440 0.454 (0.160)
-------- --------- -------- -------- --------
Less dividends and distributions
Dividends from net investment
income .................................... (0.548) (0.550) (0.580) (0.624) (0.120)
-------- --------- -------- -------- --------
Total dividends and distributions.......... (0.548) (0.550) (0.580) (0.624) (0.120)
-------- --------- -------- -------- --------
Net asset value, end of period ............. $ 6.650 $ 6.570 $ 6.140 $ 6.280 $ 6.450
======== ========= ======== ======== ========
- --------------------------------------------
Total return ............................... 9.91%(3) 16.66%(3) 7.30%(3) 7.64%(3) (1)
- --------------------------------------------
Ratios and supplemental data
Net assets, end of period
(000 omitted) ............................. $376,463 $ 273,499 $176,266 $111,860 $21,776
Ratio of expenses to average net assets 1.81% 1.79% 1.77% 1.82% 1.83%(1)
Ratio of net investment income to
average net assets ........................ 8.41% 8.73% 9.36% 10.14% 9.70%(1)
Portfolio turnover ......................... 117% 154% 108% 92% 92%
<CAPTION>
Delchester Fund
Class C Shares
------------------------------------------
Period
11/29/95(2)
Year Ended through
7/31/98 7/31/97 7/31/96
<S> <C> <C> <C>
Net asset value, beginning of year ......... $ 6.570 $ 6.140 $ 6.210
Income from investment operations
Net investment income ...................... 0.555 0.550 0.385
Net realized and unrealized gain (loss)
on investments ............................ 0.073 0.430 (0.069)
--------- --------- --------
Total from investment operations .......... 0.628 0.980 0.316
--------- --------- --------
Less dividends and distributions
Dividends from net investment
income .................................... (0.548) (0.550) (0.386)
--------- --------- --------
Total dividends and distributions.......... (0.548) (0.550) (0.386)
--------- --------- ---------
Net asset value, end of period ............. $ 6.650 $ 6.570 $ 6.140
========= ========= =========
- --------------------------------------------
Total return ............................... 9.91%(3) 16.66%(3) 5.20%(2)(3)
- --------------------------------------------
Ratios and supplemental
data
Net assets, end of period
(000 omitted) ............................. $ 50,945 $ 19,094 $ 4,953
Ratio of expenses to average net assets 1.81% 1.79% 1.77%(2)
Ratio of net investment income to
average net assets ........................ 8.41% 8.73% 9.36%(2)
Portfolio turnover ......................... 117% 154% 108%
</TABLE>
- -----------
(1) Date of initial public offering. Ratios have been annualized. Total return
has been omitted as management believes that such information for this
relatively short period is not meaningful.
(2) Date of initial public offering; ratios have been annualized but total
return has not been annualized. Total return for this short of a time period
may not be representative of longer-term results.
(3) Does not include any applicable CDSC. See Contingent Deferred Sales Charge
-- Class B Shares and Class C Shares.
-10-
<PAGE>
<TABLE>
<CAPTION>
High-Yield Opportunities Fund
Class A Shares
---------------------------------
For the period
12/30/96(1)
Year Ended through
7/31/98 7/31/97
<S> <C> <C>
Net asset value, beginning of period ................................................. $ 5.920 $ 5.500
Income from investment operations
Net investment income(2) ............................................................. 0.523 0.290
Net realized and unrealized gain (loss) on investments ............................... 0.336 0.299
-------- --------
Total from investment operations .................................................... 0.859 0.589
-------- --------
Less dividends and distributions
Dividends from net investment income ................................................. (0.605) (0.169)
Distribution from net realized gain on investment transactions ....................... (0.254) none
-------- --------
Total dividends and distributions ................................................... (0.859) (0.169)
-------- --------
Net asset value, end of period ....................................................... $ 5.200 $ 5.920
======== ========
- ---------------------------------------
Total return(3)(4).................................................................... 15.66% 10.81%
- ---------------------------------------
Ratios and supplemental data
Net assets, end of period (000 omitted) .............................................. $ 9,670 $ 5,990
Ratio of expenses to average net assets .............................................. 1.14% 0.75%
Ratio of expenses to average net assets prior to expense limitation .................. 1.44% 1.57%
Ratio of net investment income to average net assets ................................. 8.88% 8.53%
Ratio of net investment income to average net assets prior to expense limitation ..... 8.58% 7.70%
Portfolio turnover ................................................................... 317% 270%
</TABLE>
- ---------------
(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) Net investment income per share information was based on the average share
outstanding method.
(3) Does not reflect any maximum sales charge nor the Limited CDSC that varies
from 0.50%-1% depending on the holding period for Class A Shares applicable
to certain redemptions made within two years after purchase. See Contingent
Deferred Sales Charge for Certain Redemptions of Class A Shares Purchased at
Net Asset Value.
(4) Total return reflects the expense limitations and waivers of 12b-1 Plan
expenses referenced under Management of the Funds.
-11-
<PAGE>
<TABLE>
<CAPTION>
High-Yield High-Yield
Opportunities Opportunities
Fund Fund
B Class C Class
For the period For the period
2/17/98(1) 2/17/98(1)
through through
7/31/98 7/31/98
-------------------- -------------------
<S> <C> <C>
Net asset value, beginning of period ................................................. $ 5.870 $ 5.870
Income from investment operations
Net investment income(2).............................................................. 0.161 0.161
Net realized and unrealized gain (loss) on investments ............................... 0.044 0.044
--------- ---------
Total from investment operations .................................................... 0.205 0.205
--------- ---------
Less dividends and distributions
Dividends from net investment income ................................................. (0.155) (0.155)
Distribution from net realized gain on investment transactions ....................... none none
--------- ---------
Total dividends and distributions ................................................... (0.155) (0.155)
--------- ---------
Net asset value, end of period ....................................................... $ 5.920 $ 5.920
========= =========
- -----------------------------
Total return(3)(4).................................................................... 3.54% 3.54%
- -----------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) .............................................. $ 1,603 $ 547
Ratio of expenses to average net assets .............................................. 1.84% 1.84%
Ratio of expenses to average net assets prior to expense limitation .................. 2.14% 2.14%
Ratio of net investment income to average net assets ................................. 8.18% 8.18%
Ratio of net investment income to average net assets prior to expense limitation ..... 7.88% 7.88%
Portfolio turnover ................................................................... 317% 317%
</TABLE>
- -----------------
(1) Date of initial public offering; ratios have been annualized but total
return has not been annualized. Total return for this short of a time
period may not be representative of longer term results.
(2) Net investment income per share information was based on the average share
outstanding method.
(3) Does not include any applicable CDSC. See Contingent Deferred Sales Charge
-- Class B Shares and Class C Shares.
(4) Total return reflects the expense limitations referenced under Management
of the Funds.
-12-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
SUITABILITY
Delchester Fund -- The Fund may be suitable for investors interested in
high current income flow. The Fund's objective of high current income also may
be suited for longer term investments, such as tax-deferred retirement plans
(e.g., IRA, 401(k), Profit Sharing, etc.), where the income stream can be left
to compound on a tax-deferred basis.
High-Yield Opportunities Fund -- The Fund may be suitable for the investor
interested in total return. High current income is a 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 of each Class may fluctuate in response to the
condition of individual companies and general market and economic conditions
and, as a result, neither Fund is appropriate for a short-term investor.
Neither Fund can 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 each Fund's objective.
The types of securities in which each Fund invests are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as
yield, in making an investment decision. While investments in unrated,
lower-rated and restricted securities have the potential for higher yields,
they are more speculative and increase the credit risk of each 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 Fund's net
asset value. Investors should be willing to accept the risks, including the
risk of net asset value fluctuations, associated with investing in these
securities.
Ownership of Fund shares can reduce the bookkeeping and administrative
inconveniences that is typically connected with direct purchases of the types
of securities in which the Funds invest.
Investors should not consider a purchase of Fund shares as equivalent to a
complete investment program. The Delaware Investments includes a family of
funds, generally available through registered investment dealers, which may be
used in concert to create a more complete investment program.
INVESTMENT STRATEGY
Delchester Fund
The investment objective of Delchester Fund is to seek as high a current
income as is consistent with providing reasonable safety. The strategy is to
invest primarily in those securities having a liberal and consistent yield and
those tending to reduce the risk of market fluctuations. The Fund will invest
at least 80% of its assets at the time of purchase in:
(1) Corporate Bonds. The Fund will invest in both rated and unrated bonds.
Unrated bonds may be more speculative in nature than rated bonds; or
-13-
<PAGE>
(2) Government Securities. Securities of, or guaranteed by, the U.S.
government, its agencies or instrumentalities; or
(3) Commercial Paper. Commercial paper of companies having, at the time of
purchase, an issue of outstanding debt securities rated as described above or
commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group ("S&P") or
rated P-1 or P-2 by Moody's Investors Service, Inc. ("Moody's").
The Fund has consistently invested more than 80% of its assets in these
securities. The Fund must invest the remaining assets, if any, in
income-producing securities, including common stocks and preferred stocks, some
of which may have convertible features or attached warrants. Currently, the
Fund's assets are invested primarily in unrated corporate bonds and bonds rated
BB or lower by S&P or Ba or lower by Moody's.
High-Yield Opportunities Fund
The investment objective of High-Yield Opportunities 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.
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 Manager. The Fund generally
will not purchase corporate bonds which, at the time of purchase, are rated
lower than CCC by S&P or Caa by Moody's. If a corporate bond held by the Fund
drops below these levels, including a security that goes into default, the Fund
will commence with an orderly sale of the security in a manner devised to
minimize any adverse affect on the Fund. If a sale of the security is not
practicable for any reason, the Fund will pursue other available measures
reasonably anticipated by the Manager to facilitate repayment of
the bond.
The Fund may also invest in securities of, or guaranteed by, the U.S. and
foreign governments, their agencies or instrumentalities and commercial paper
of companies having, at the time of purchase, an issue of outstanding debt
securities rated as described above or commercial paper rated A-1 or A-2 by S&P
or rated P-1 or P-2 by Moody's or, if unrated, judged to be of comparable
quality by the Manager.
* * *
Each 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. High-Yield Opportunities
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.
Each 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
-14-
<PAGE>
resale restrictions. A Fund will not purchase illiquid assets, if more than
10% of Delchester Fund's and 15% High-Yield Opportunities Fund's net assets
would consist of such illiquid securities. See Restricted/Illiquid Securities
in Part B.
High-Yield Opportunities 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.
Each 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.
The market values of fixed-income securities generally fall when interest
rates rise and, conversely, rise when interest rates fall. Lower-rated and
unrated fixed-income securities tend to reflect short-term corporate and market
developments to a greater extent than higher-rated fixed-income securities,
which react primarily to fluctuations in the general level of interest rates.
These lower-rated or unrated securities generally have higher yields, but, as a
result of factors such as reduced creditworthiness of issuers, increased risks
of default and a more limited and less liquid secondary market, are subject to
greater volatility and risk of loss of income and principal than are
higher-rated securities. The Manager will attempt to reduce such risk through
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets.
Although each Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained. The objective of Delchester Fund
may not be changed without shareholder approval.
The investment policies of the Funds 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.
For a description of the other investment policies of each Fund, see
Other Investment Policies and Risk Considerations in this Prospectus. Part B
provides more information concerning each Fund's investment policies and sets
forth other investment restrictions.
-15-
<PAGE>
RISK FACTORS
Generally
Each 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.
Delchester Fund's assets may be invested primarily in bonds rated BBB or
lower by S&P or Baa or lower by Moody's and in unrated corporate bonds.
High-Yield Opportunities Fund's assets may be invested 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 either 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:
VOLATILITY OF THE HIGH-YIELD MARKET
Although the market for high-yield bonds has been in existence for many
years, including periods of economic downturns, the high-yield market grew
rapidly during the long economic expansion which took place in the United
States during the 1980s. During that economic expansion, the use of high-yield
debt securities to fund highly leveraged corporate acquisitions and
restructurings increased dramatically. As a result, the high-yield market grew
substantially during that economic expansion. Although experts disagree on the
impact recessionary periods have had and will have on the high-yield market,
some analysts believe a protracted economic downturn would severely disrupt the
market for high-yield bonds, would adversely affect the value of outstanding
bonds and would adversely affect the ability of high-yield issuers to repay
principal and interest. Those analysts cite volatility experienced in the
high-yield market in the past as evidence for their position. It is likely that
protracted periods of economic uncertainty would result in increased volatility
in the market prices of high-yield bonds, an increase in the number of
high-yield bond defaults and corresponding volatility in the Funds' net asset
value. At times in the past, uncertainty and volatility in the high-yield
market resulted in volatility in the Funds' net asset value.
REDEMPTIONS
If, as a result of volatility in the high-yield market or other factors, a
Fund experiences substantial net redemptions of the Fund's shares for a
sustained period of time (i.e., more shares of the Fund are redeemed than are
purchased), the Fund may be required to sell securities without regard to the
investment merits of the securities to be sold. If a Fund sells a substantial
number of securities to generate proceeds for redemptions, the asset base of
the Fund will decrease and the Fund's expense ratio
may increase.
-16-
<PAGE>
LIQUIDITY AND VALUATION
The secondary market for high-yield securities is currently dominated by
institutional investors, including mutual funds and certain financial
institutions. There is generally no established retail secondary market for
high-yield securities. As a result, the secondary market for high-yield
securities is more limited and less liquid than other secondary securities
markets. The high-yield secondary market is particularly susceptible to
liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings
and loan crisis. A less liquid secondary market may have an adverse effect on a
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 a 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. A Fund's privately placed high-yield
securities are particularly susceptible to the liquidity and valuation risks
outlined above.
-17-
<PAGE>
THE DELAWARE DIFFERENCE
PLANS AND SERVICES
The Delaware Difference is our commitment to provide you with superior
information and quality service on
your investments in the funds in the Delaware
Investments family.
SHAREHOLDER PHONE DIRECTORY
Shareholder Service Center and Investor Information Center
800-523-1918
Information on Existing Regular Investment Accounts and Retirement Plan
Accounts; Wire Investments; Wire Liquidations; Telephone Liquidations and
Telephone Exchanges; Fund Information; Literature; Price; Yield and
Performance Figures
Delaphone
800-362-FUND
(800-362-3863)
Performance Information
During business hours, you can call the Investor Information Center 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 Delaware Investments' Shareholder
Service Center. Our representatives can answer any questions about your
account, the Funds, various service features and other funds in the Delaware
Investments family.
Delaphone Service
Delaphone is an account inquiry service for investors with Touch-Tone(R)
phone service. It enables you to get information on your account faster than
the mailed statements and confirmations. Delaphone also provides current
performance information on the Funds, as well as other funds in the Delaware
Investments family. 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.
-18-
<PAGE>
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, if any, are
automatically reinvested in your account, unless you elect to receive them in
cash. You may also elect to have the dividends earned in one fund automatically
invested in another Delaware Investments 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.
Retirement Planning
An investment in either Fund may be a suitable investment option for
tax-deferred retirement plans. Delaware Investments offers a full spectrum of
qualified and non-qualified retirement plans, including the popular 401(k)
deferred compensation plan, IRA, and the new Roth IRA. Just call Delaware
Investments at 1-800-523-1918 for more information.
MoneyLine(SM) Services
Delaware Investments offers the following services for fast and convenient
transfer of funds between your personal bank account and your Fund account:
1. MoneyLine(SM) Direct Deposit Service
If you elect to have your dividends and distributions paid in cash and
such dividends and distributions are in an amount of $25 or more, you may
choose the MoneyLineSM Direct Deposit Service and have such payments
transferred from your Fund account to your predesignated bank account. See
Dividends and Distributions. In addition, you may elect to have your Systematic
Withdrawal Plan payments transferred from your Fund account to your
predesignated bank account through this service. See Systematic Withdrawal
Plans under Redemption and Exchange. This service is not available for certain
retirement plans.
2. MoneyLine(SM) On Demand
You or your investment dealer may request purchases and redemptions of
Fund shares by using MoneyLineSM On Demand. When you authorize your Fund to
accept such requests from you or your investment dealer, funds will be
withdrawn from (for share purchases) or deposited to (for share redemptions)
your predesignated bank account. Your request will be processed the same day
if you call prior to 4 p.m., Eastern time. There is a $25 minimum and a
$50,000 maximum limit for MoneyLineSM On Demand transactions. This service is
not available for retirement plans, except for purchases of shares by IRAs.
For each MoneyLineSM Service, it may take up to four business days for
the transactions to be completed. You can initiate either service by
completing an Account Services form. If the name and address on your
designated bank account are not identical to the name and address on your Fund
account, you must have your signature guaranteed. The Funds do not charge a
fee for any MoneyLineSM Service; however, your bank may charge a fee. Please
call the Shareholder Service Center for additional information about these
services.
-19-
<PAGE>
Right of Accumulation
With respect to Class A Shares, the Right of Accumulation feature allows
you to combine the value of your current holdings of Class A Shares, Class B
Shares and Class C Shares of a Fund with the dollar amount of new purchases of
Class A Shares of a 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 Delaware Investments
funds. 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 shares of funds in the Delaware Investments family over a 13-month
period. See Classes of Shares and Part B.
12-Month Reinvestment Privilege
The 12-Month Reinvestment Privilege permits you to reinvest proceeds from
a redemption of Class A Shares, within one year of the date of the redemption,
without paying a front-end sales charge. See Part B.
Exchange Privilege
The Exchange Privilege permits shareholders to exchange all or part of
their shares into shares of other mutual funds in Delaware Investments family,
subject to certain exceptions and limitations. For additional information on
exchanges, see Investing by Exchange under How to Buy Shares and Redemption and
Exchange.
Wealth Builder Option
You may elect to invest in a Fund through regular liquidations of shares
in your accounts in other funds in the Delaware Investments family. 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 Funds
Each fiscal year, you will receive an audited annual report and an
unaudited semi-annual report. These reports provide detailed information about
each Fund's investments and performance. Income Funds, Inc.'s fiscal year ends
on July 31.
-20-
<PAGE>
CLASSES OF SHARES
Alternative Purchase Arrangements
Shares may be purchased at a price equal to the next determined net asset
value per share, subject to a sales charge which may be imposed, at the
election of the purchaser, at the time of the purchase for Class A Shares
("front-end sales charge alternative"), or on a contingent deferred basis for
Class B Shares ("deferred sales charge alternative") or Class C Shares ("level
sales charge alternative").
Class A Shares. An investor who elects the front-end sales charge
alternative acquires Class A Shares, which incur a sales charge when they are
purchased, but generally are not subject to any sales charge when they are
redeemed. Class A Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of 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 Funds.
Class B Shares. An investor who elects the deferred sales charge
alternative acquires Class B Shares, which do not incur a front-end sales
charge when they are purchased, but are subject to a contingent deferred sales
charge if they are redeemed within six years of purchase. Class B Shares are
subject to annual 12b-1 Plan expenses of up to a maximum of 1% (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. 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 automatically will 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 the Class A Shares will apply. See Automatic
Conversion of Class B Shares, below.
Class C Shares. An investor who elects the level sales charge alternative
acquires Class C Shares, which do not incur a front-end sales charge when they
are purchased, but are subject to a contingent deferred sales charge if they
are redeemed within 12 months of purchase. 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. 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.
-21-
<PAGE>
The alternative purchase arrangements described above permit investors to
choose the method of purchasing shares that is most suitable given the amount
of their purchase, the length of time they expect to hold their shares and
other relevant circumstances. Investors should determine whether, given their
particular circumstances, it is more advantageous to purchase Class A Shares
and incur a front-end sales charge, purchase Class B Shares and have the
entire initial purchase amount invested in a 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 a 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. The higher 12b-1 Plan
expenses on Class B Shares and Class C Shares will be offset to the extent a
return is realized on the additional money initially invested upon the
purchase of such shares. However, there can be no assurance as to the return,
if any, that will be realized on such additional money. In addition, the
effect of any return earned on such additional money will diminish over time.
In comparing Class B Shares to Class C Shares, investors should also consider
the duration 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.
For the distribution and related services provided to, and the expenses
borne on behalf of, a Fund, 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 Shares, Class B Shares 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 Funds.
Dividends, if any, paid on Class A Shares, Class B Shares and Class C
Shares will be calculated in the same manner, at the same time, on the same day
and will be in the same amount, except that the additional amount of 12b-1 Plan
expenses relating to Class B Shares and Class C Shares will be borne
exclusively by such shares. See Calculation of Offering Price and Net Asset
Value Per Share.
The NASD has adopted certain rules relating to investment company sales
charges. Income Funds, Inc. and the Distributor intend to operate in compliance
with these rules.
Front-End Sales Charge Alternative -- Class A Shares
Class A Shares may be purchased at the offering price, which reflects a
maximum front-end sales charge of 4.75%. See Calculation of Offering Price and
Net Asset Value Per Share.
-22-
<PAGE>
Purchases of $100,000 or more carry a reduced front-end sales charge as
shown in the following table.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Dealer's
Front-End Sales Charge as % of Commission(3)
Offering as % of
Amount of Purchase Price Amount Invested(2) Offering Price
- -------------------------------------------------------------------------------------------------
High-Yield
Delchester Opportunities
Fund Fund
-----------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 5.07% 5.07% 4.00%
$100,000 but under $250,000 3.75 3.89 3.89 3.00
$250,000 but under $500,000 2.50 2.53 2.53 2.00
$500,000 but under $1,000,0001 2.00 2.03 2.03 1.60
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) 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 Limited CDSC
of 1% may apply upon redemption of such shares made during the first year
after purchase and 0.50% may apply upon redemption of such shares made
during the second year after purchase.
(2) Based on the net asset value per share of the respective Class A Shares as
of the end of Income Funds Inc.'s most recent fiscal year.
(3) Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
A Fund must be notified when a sale takes place which would qualify for
the reduced front-end sales charge on the basis of previous or current
purchases. The reduced front-end sales charge will be granted upon
confirmation of the shareholder's holdings by such Fund. Such reduced
front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which
the Distributor may reallow to dealers up to the full amount of the
front-end sales charge shown above. In addition, certain dealers who enter
into an agreement to provide extra training and information on Delaware
Investments' products and services and who increase sales of shares of the
funds in the Delaware Investments family 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
1933 Act.
- --------------------------------------------------------------------------------
-23-
<PAGE>
Beginning July 1, 1998, 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 $5 million 1.00%
Next $20 million up to $25 million 0.50
Amount over $25 million 0.25
Such Class A Shares are subject to a Limited CDSC of 1% if shares are
redeemed during the first year after the purchase and 0.50% if shares are
redeemed during the second year after the purchase.
For accounts with assets over $1 million, the dealer commission resets
annually to the highest incremental commission rate on the anniversary of the
first purchase. In determining a financial adviser's eligibility for the
dealer's commission, purchases of Class A Shares of other funds from Delaware
Investments family as to which a Limited CDSC applies 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 funds in the Delaware Investments family 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 a Fund and shares of other funds in Delaware
Investments family, 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 Investments
fund holdings. In addition, assets held by investment advisory clients of the
Manager or its affiliates in any stable value account may be combined with
other Delaware Investments 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 fund in the Delaware Investments family
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.
-24-
<PAGE>
This privilege also permits you to use these combinations under a Letter
of Intention. A Letter of Intention allows you to make purchases over a
13-month period and qualify the entire purchase for a reduction in front-end
sales charges on Class A Shares.
Combined purchases of $1,000,000 or more, including certain purchases made
at net asset value pursuant to a Right of Accumulation or under a Letter of
Intention, may result in the payment of a dealer's commission and the
applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge Alternative -- Class A Shares, above.
Allied Plans
Class A Shares are available for purchase by participants in certain
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 Investments funds ("eligible Delaware Investments fund
shares"), as well as shares of designated classes of non-Delaware Investments
funds ("eligible non-Delaware Investments 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 Investments and eligible non-Delaware Investments
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 Investments fund shares.
Participants in Allied Plans may exchange all or part of their eligible
Delaware Investments fund shares for other eligible Delaware Investments fund
shares or for eligible non-Delaware Investments fund shares at net asset value
without payment of a front-end sales charge. However, exchanges of eligible fund
shares, both Delaware Investments and non-Delaware Investments, which were not
subject to a front-end sales charge, will be subject to the applicable sales
charge if exchanged for eligible Delaware Investments 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
Investments 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 Investments fund shares in connection with Allied Plans, all
participant holdings in the Allied Plan will be aggregated.
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 Investments and non-Delaware Investments fund shares.
When eligible Delaware Investments fund shares are exchanged into eligible
non-Delaware Investments 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.
-25-
<PAGE>
Buying Class A Shares at Net Asset Value
Class A Shares of a Fund may be purchased at net asset value under the
Delaware Investments 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 Delaware Investments family,
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 funds in the
Delaware Investments family. 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. Investors may be charged a fee when effecting transactions in Class A
Shares through a broker or agent that offers these special investment products.
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 a 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 Retirement Financial Services, Inc.'s (formerly named
Delaware Investment & Retirement Services, Inc.) proprietary record keeping
system that (i) has in excess of $500,000 of plan assets invested in Class A
Shares of funds in the Delaware Investments family and any stable product
available through Delaware Investments, 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 fund in the Delaware Investments family and
such employer has properly represented to Retirement Financial Services, Inc.
in writing that it has the requisite number of employees and has received
written confirmation back from Retirement Financial Services, Inc. See Group
Investment Plans for information regarding the applicability of the Limited
CDSC.
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
Investments account in connection with loans originated from accounts
previously maintained by another investment firm will also be invested at net
asset value.
Investors in Delaware Investments Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A
Shares of any of the funds in Delaware Investments family at net
asset value.
-26-
<PAGE>
A Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
Group Investment Plans
Group Investment Plans (e.g., SEP/IRA, SAR/SEP, SIMPLE IRA, SIMPLE 401(k),
Profit Sharing, Money Purchase Pension, 401(k) Defined Contribution Plans and
403(b)(7) and 457 Deferred Compensation Plans) may benefit from the reduced
front-end sales charges available on the Class A Shares, based on total plan
assets. If a company has more than one plan investing in the funds in the
Delaware Investments family, 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 in which it is investing 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 investment
accounts in Delaware Investments if, at the time of each such purchase, they
notify the Fund in which they are investing that they are eligible to combine
purchase amounts held in their plan account.
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 a fund in the Delaware Investments family.
See Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value under Redemption and Exchange.
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, call the Shareholder
Service Center.
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 compensates
dealers or brokers for selling Class B Shares at the time of purchase from its
own assets in an amount equal to no more than 4% of the dollar amount
purchased. In addition, from time to time, upon written notice to all of its
dealers, the Distributor may hold special promotions for specified periods
during which the Distributor may pay additional compensation to dealers or
brokers for selling Class B Shares at the time of purchase. As discussed below,
however, Class B Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of 1% for approximately eight years after purchase 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 a 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
-27-
<PAGE>
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 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 compensates
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount
purchased. As discussed below, however, Class C Shares are subject to annual
12b-1 Plan expenses and, if redeemed within
12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees, 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 a Fund,
-28-
<PAGE>
even if those shares are later exchanged for shares of another fund in the
Delaware Investments family. In the event of an exchange of the shares, the
"net asset value of such shares at the time of redemption" will be the net
asset value of the shares that were acquired in the exchange.
The following table sets forth the rates of the CDSC for Class B Shares of
the Funds:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
- --------------------------- --------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. See Automatic Conversion of Class B Shares, above. Investors are
reminded that the Class A Shares into which 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 funds in the Delaware Investments family. 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 shares of the funds in the Delaware Investments family,
the Distributor may, from time to time, pay to participate in dealer-sponsored
seminars and conferences, reimburse dealers for expenses incurred in connection
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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 SEC. 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 described above will be restricted in some fashion.
The Distributor intends to comply with the NASD's Conduct Rules as they may be
amended.
Institutional Classes
In addition to offering Class A, Class B and Class C Shares, each Fund
also offers an Institutional Class, which is described in a separate prospectus
and is available for purchase only by certain investors. 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
Institutional Class, contact the Distributor by writing to the address or by
calling the telephone number listed on the back cover of this Prospectus.
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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.
The Fund makes it easy to invest by arrangement with your investment
dealer, by mail, by wire and by exchange.
Investing through Your Investment Dealer
You can make a purchase of shares of a 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, Delaware Investments can refer you to one.
Investing by Mail
1. Initial Purchases--An Investment Application or, in the case of a retirement
plan account, an appropriate retirement plan application, must be completed,
signed and sent with a check payable to the specific Fund and Class selected to
Delaware Investments at 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to the specific Fund and Class selected. Your check
should be identified with your name(s) and account number. An investment slip
(similar to a deposit slip) is provided at the bottom of transaction
confirmations and dividend statements that you will receive from Income Funds,
Inc. Use of this investment slip can help expedite processing of your check
when making additional purchases. Your investment may be delayed if you send
additional purchases by certified mail.
Investing by Wire
You may purchase shares by requesting your bank to transmit funds by wire
to First Union National Bank.
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
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application, to the specific Fund and Class selected, to Delaware Investments
at 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments anytime by wiring
funds to First Union National Bank, as described above. You should advise the
Shareholder Service Center by telephone of each wire you send.
If you want to wire investments to your 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
Investments family, you may write and authorize an exchange of part or all of
your investment into shares of a 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 of a Fund may exchange all or part of their
shares for certain of the shares of other funds available in the Delaware
Investments family, including other Class A Shares, but may not exchange their
Class A Shares for Class B Shares or Class C Shares of a Fund or of any other
fund in the Delaware Investments family. Holders of Class B Shares of a Fund
are permitted to exchange all or part of their Class B Shares only into Class B
Shares of other funds in the Delaware Investments family. Similarly, holders of
Class C Shares of a Fund are permitted to exchange all or part of their Class C
Shares only into Class C Shares of other funds in the Delaware Investments
family. Class B Shares of a Fund and Class C Shares of a 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 a 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 a 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 a 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 Classes of Shares for information on exchanges by
participants in an Allied Plan.
Additional Methods of Adding to Your Investment
Call the Shareholder Service Center for more information if you wish to
use the following services:
1. Automatic Investing Plan
The Automatic Investing Plan enables you to make regular monthly
investments without writing or mailing checks. You may authorize Income Funds,
Inc. to transfer a designated amount monthly from your checking account to
your Fund account. Many shareholders use this as an automatic savings plan.
Shareholders should allow a reasonable amount of time for initial purchases
and changes to these plans to become effective.
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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) Deferred
Compensation Plans or 457 Deferred Compensation Plans.
2. Direct Deposit
You may have your employer or bank make regular investments directly to
your Fund account for you (for example: payroll deduction, pay by phone,
annuity payments). The Funds also accept 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 your Fund.
3. MoneyLineSM On Demand
Through the MoneyLineSM On Demand service, you or your investment dealer
may call the Fund in which you are investing to request a transfer of funds
from your predesignated bank account to your Fund account. See MoneyLineSM
Services under The Delaware Difference for additional information about this
service.
4. Wealth Builder Option
You can use our Wealth Builder Option to invest in a Fund through regular
liquidations of shares in your accounts in other funds available from Delaware
Investments family. You may also elect to invest in other mutual funds in the
Delaware Investments family 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 Delaware Investments family and invested automatically into any
other account in a fund in the Delaware Investments family that you may
specify. If in connection with the election of the Wealth Builder Option, you
wish to open a new account to receive the automatic investment, such new
account must meet the minimum initial purchase requirements described in the
prospectus of the fund that you select. All investments under this option are
exchanges and are therefore subject to the same conditions and limitations as
other exchanges noted above. You can terminate your participation at any time
by written notice to the fund from which the exchanges are made. See Redemption
and Exchange.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, or 403(b)(7) and 457 Deferred
Compensation Plans.
5. Dividend Reinvestment Plan
You can elect to have your distributions (capital gains and/or dividend
income) paid to you by check or reinvested in your Fund account. Or, you may
invest your distributions in certain other funds in the Delaware
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Investments family, subject to the exceptions noted below as well as the
eligibility and minimum purchase requirements set forth in each fund's
prospectus.
Reinvestments of distributions into Class A Shares of a Fund or of other
funds in the Delaware Investments family are made without a front-end sales
charge. Reinvestments of distributions into Class B Shares of a Fund or of other
funds in the Delaware Investments family or into Class C Shares of a Fund or of
other funds in the Delaware Investments family 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 a Fund may not reinvest their distributions
into Class B Shares or Class C Shares of any fund in the Delaware Investments
family, including the Funds. Holders of Class B Shares of a Fund may reinvest
their distributions only into Class B Shares of the funds in the Delaware
Investments family which offer that class of shares. Similarly, holders of
Class C Shares of a Fund may reinvest their distributions only into Class C
Shares of the funds in the Delaware Investments family which offer that class
of shares. For more information about reinvestments, call the Shareholder
Service Center.
Capital gains and/or dividend distributions for participants in the
following retirement plans are automatically reinvested into the same Delaware
Investments fund into 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 Plan, 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 is the date
the order is received by a 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
Each 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. A 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 Investments family. Each 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.
Each Fund also reserves the right, following shareholder notification, to
charge a service fee on non-retirement accounts that, as a result of a
redemption, have remained below the minimum stated account balance for a period
of three or more consecutive months. Holders of such accounts may be notified
of their insufficient account balance and advised that they have until the end
of the current calendar quarter to raise their
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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.
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
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REDEMPTION AND EXCHANGE
You can redeem or exchange your shares in a number of different ways. The
exchange service is useful if your investment requirements change and you want
an easy way to invest in other bond funds, equity funds, tax-advantaged funds
or money market funds. This service is also useful if you are anticipating a
major expenditure and want to move a portion of your investment into a fund
that has the checkwriting feature. Exchanges are subject to the requirements of
each fund and all exchanges of shares constitute taxable events. See Taxes.
Further, in order for an exchange to be processed, shares of the fund being
acquired must be registered in the state where the acquiring shareholder
resides. You may want to consult your financial adviser or investment dealer to
discuss which funds in Delaware Investments family will best meet your changing
objectives, and the consequences of any exchange transaction. You may also call
Delaware Investments 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 a 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, a 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. Each
Fund may suspend, terminate, or amend the terms of the exchange privilege upon
60 days' written notice to shareholders.
Each Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. Each 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, 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. Each Fund reserves the right to reject
a written or telephone redemption request or delay payment of redemption
proceeds if there has been a recent change to the shareholder's address of
record.
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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 Investments
family (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 a Fund, the Fund's CDSC
schedule may be higher than the CDSC schedule relating to the New Shares
acquired as a result of the exchange. For purposes of computing the CDSC that
may be payable upon a disposition of the New Shares, the period of time that an
investor held the Original Shares is added to the period of time that an
investor held the New Shares. With respect to Class B Shares, the automatic
conversion schedule of the Original Shares may be longer than that of the New
Shares. Consequently, an investment in New Shares by exchange may subject an
investor to the higher 12b-1 fees applicable to Class B Shares of a 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 a 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 a Fund or its agent.
Written Redemption
You can write to each 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, each Fund requires a signature by all owners of the account
and a signature guarantee for each owner. A signature guarantee can be obtained
from a commercial bank, a trust company or a member of a Securities Transfer
Association Medallion Program ("STAMP"). A signature guarantee cannot be
provided by a notary public. A signature guarantee is designed to protect the
shareholders, the Funds and their agents from fraud. Each Fund reserves the
right to reject a signature guarantee supplied by an eligible institution based
on its creditworthiness. The Funds 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.
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Written Exchange
You may also write to a 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 Investments family, 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
certificate(s).
The Telephone Redemption--Check to Your Address of Record service and the
Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your
account in writing that you do not wish to have such services available with
respect to your account. Each 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 Funds by telephone during periods when market or
economic conditions lead to an unusually large volume of telephone requests.
Neither a 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, 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. 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. First
Union National Bank'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.
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MoneyLine(SM) On Demand
Through the MoneyLineSM On Demand service, you or your investment dealer
may call a Fund to request a transfer of funds from your Fund account to your
predesignated bank account. See MoneyLineSM Services under The Delaware
Difference for additional information about this service.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to adjust
your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in the Delaware Investments family under the same
registration, subject to the same conditions and limitations as other exchanges
noted above. As with the written exchange service, telephone exchanges are
subject to the requirements of each fund, as described above. Telephone
exchanges may be subject to limitations as to amounts or frequency.
Systematic Withdrawal Plans
1. Regular Plans
This plan provides shareholders with a consistent monthly (or quarterly)
payment. This is particularly useful to shareholders living on fixed incomes,
since it can provide them with a stable supplemental amount. With accounts of at
least $5,000, you may elect monthly withdrawals of $25 (quarterly $75) or more.
The Funds do not recommend any particular monthly amount, as each shareholder's
situation and needs vary. Payments are normally made by check. In the
alternative, you may elect to have your payments transferred from your Fund
account to your predesignated bank account through the MoneyLineSM Direct
Deposit Service. Through this service, it may take up to four business days for
the transaction to be completed. There are no separate fees for this redemption
method. See MoneyLineSM Services under The Delaware Difference for more
information about this service.
2. Retirement Plans
For shareholders eligible under the applicable retirement plan to receive
benefits in periodic payments, the Systematic Withdrawal Plan provides you with
maximum flexibility. A number of formulas are available for calculating your
withdrawals depending upon whether the distributions are required or optional.
Withdrawals must be for $25 or more; however, no minimum account balance is
required. The MoneyLineSM Direct Deposit Service described above is not
available for certain retirement plans.
* * *
Shareholders should not purchase additional shares while participating in
a Systematic Withdrawal Plan.
Redemptions of Class A Shares via a Systematic Withdrawal Plan may be
subject to a Limited CDSC if the original purchase was made at net asset value
within the 12 months prior to the withdrawal and a dealer's commission was paid
on that purchase. See Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value, below.
The applicable CDSC for Class B Shares and Class C Shares redeemed via a
Systematic Withdrawal Plan will be waived if, on the date that the Plan is
established, the annual amount selected to be withdrawn is less than 12% of the
account balance. If the annual amount selected to be withdrawn exceeds 12% of
the account balance on the date that the Systematic Withdrawal Plan is
established, all redemptions under the Plan will be subject to the applicable
CDSC. Whether a waiver of the CDSC is available or not, the first shares to be
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redeemed for each Systematic Withdrawal Plan payment will be those not subject
to a CDSC because they have either satisfied the required holding period or
were acquired through the reinvestment of distributions. The 12% annual limit
will be reset on the date that any Systematic Withdrawal Plan is modified (for
example, a change in the amount selected to be withdrawn or the frequency or
date of withdrawals), based on the balance in the account on that date. See
Waiver of Contingent Deferred Sales Charge -- Class B and Class C Shares,
below.
For more information on Systematic Withdrawal Plans, call the Shareholder
Service Center.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
For purchases of $1,000,000 or more made on or after July 1, 1998, a
Limited CDSC will be imposed on certain redemptions of Class A Shares (or
shares into which such Class A Shares are exchanged) according to the following
schedule: (1) 1.00% if shares are redeemed during the first year after the
purchase; and (2) 0.50% if such shares are redeemed during the second year
after the purchase, if such purchases were made at net asset value and triggered
the payment by the Distributor of the dealer's commission described above.
The Limited CDSC will be paid to the Distributor and will be assessed on
an amount equal to the lesser of: (1) the net asset value at the time of
purchase of the Class A Shares being redeemed or (2) the net asset value of such
Class A Shares at the time of redemption. For purposes of this formula, the "net
asset value at the time of purchase" will be the net asset value at purchase of
the Class A Shares even if those shares are later exchanged for shares of
another Delaware Investments 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 two years will not
be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Investments 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
two-year holding period. The Limited CDSC is assessed if such two year period
is not satisfied irrespective of whether the redemption triggering its payment
is of Class A Shares of a 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 a 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
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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 Code; (v) returns of
excess contributions to an IRA; (vi) distributions by other employee benefit
plans to pay benefits; (vii) distributions described in (ii), (iv), and (vi)
above pursuant to a systematic withdrawal plan; and (viii) redemptions by the
classes of shareholders who are permitted to purchase shares at net asset
value, regardless of the size of the purchase (see Buying Class A Shares at
Net Asset Value under Classes of Shares).
Waiver of Contingent Deferred Sales Charge -- Class B and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares in connection
with the following redemptions: (i) redemptions that result from a 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, SEP/IRA or 403(b)(7)
or 457 Deferred Compensation Plans; (iii) periodic distributions from an IRA,
SIMPLE IRA, SAR/SEP, SEP/IRA, 403(b)(7) or 457 Deferred Compensation Plan due to
death, disability and attainment of age 59 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 a 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 Plan, 401(k) Defined Contribution Plan upon attainment of age 70
1/2, and IRA distributions qualifying under Section 72(t) of the Code; (iv)
distributions from a 403(b)(7) Deferred Compensation Plan, 457 Deferred
Compensation Plan, Profit Sharing Plan, or 401(k) Defined Contribution Plan,
under hardship provisions of the plan; (v) distributions from a 403(b)(7)
Deferred Compensation Plan, 457 Deferred Compensation Plan, Profit Sharing
Plan, Money Purchase Pension Plan or a 401(k) Defined Contribution Plan upon
attainment of normal retirement age under the plan or upon separation from
service; (vi) periodic distributions from an IRA or SIMPLE IRA on or after
attainment of age 59 1/2; and (vii) distributions from an account if the
redemption results from the death of all registered owners of the account (in
the case of accounts established under the Uniform Gifts to Minors or Uniform
Transfers to Minors Acts or trust accounts, the waiver applies upon the death
of all beneficial owners) or a total and permanent disability (as defined in
Section 72 of the Code) of all registered owners occurring after the purchase
of the shares being redeemed.
In addition, the CDSC will be waived on Class B and Class C Shares
redeemed in accordance with a Systematic Withdrawal Plan if the annual amount
selected to be withdrawn under the Plan does not exceed 12% of the value of the
account on the date that the Systematic Withdrawal Plan was established or
modified.
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DIVIDENDS AND DISTRIBUTIONS
Each 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.
Each Fund's dividends are expected to be declared daily and paid monthly.
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 a 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 a Fund will share proportionately in the investment income
and expenses of that Fund, except that the per share dividends from net
investment income on Class A 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 Funds.
Both dividends and distributions, if any, are automatically reinvested in
your account at net asset value unless you elect otherwise. Any check in
payment of dividends or other distributions which cannot be delivered by the
United States Post Office or which remains uncashed for a period of more than
one year may be reinvested in your account at the then-current net asset value
and the dividend option may be changed from cash to reinvest. If you elect to
take your dividends and distributions in cash and such dividends and
distributions are in an amount of $25 or more, you may choose the MoneyLineSM
Direct Deposit Service and have such payments transferred from your Fund
account to your predesignated bank account. This service is not available for
certain retirement plans. See MoneyLineSM Services under The Delaware
Difference for more information about this service.
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TAXES
The tax discussion set forth below is included for general information
only. Investors should contact their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in a Fund.
Each Fund has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Code. As such, a 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 and it satisfies certain
other requirements relating to the sources of its income and diversification of
its assets.
On August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997 Act") was
signed into law. This new law made sweeping changes in the Code. Because many
of these changes are complex, and only indirectly affect a Fund and its
distributions to you, they are discussed in Part B. Changes in the treatment of
capital gains, however, are discussed in this section.
Each Fund intends to distribute substantially all of its net investment
income and net capital gains, if any. Dividends from net investment income or
net short-term capital gains will be taxable to those investors who are subject
to income taxes as ordinary income, even though received in additional shares.
No portion of Delchester Fund's distributions will be eligible for the
dividends-received deduction for corporations. Only a nominal portion of
High-Yield Opportunities Fund's dividends will be eligible for the dividends
received deduction for corporations.
Distributions paid by a 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 a Fund. The Funds do 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 a 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.
Treatment of Capital Gain Distributions under the Taxpayer Relief Act of 1997
The 1997 Act creates a category of long-term capital gain for individuals
who will be taxed at new lower tax rates. For investors who are in the 28% or
higher federal income tax brackets, these gains will be taxed at a maximum rate
of 20%. For investors who are in the 15% federal income tax bracket, these
gains will be taxed at a maximum rate of 10%. Capital gain distributions will
qualify for these new maximum tax rates, depending on when a Fund's securities
were sold and how long they were held by the Fund before they were sold. The
holding periods for which the new rates apply were revised by the Internal
Revenue Service Restructuring and Reform Act of 1998. Investors who want more
information on holding periods and other qualifying rules relating to these new
rates should review the expanded discussion in Part B, or should contact their
own tax advisers.
Income Funds, Inc. will advise you in its annual information reporting at
calendar year end of the amount of its capital gain distributions which will
qualify for these maximum federal tax rates.
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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 a Fund and received by
the shareholder on December 31 of the calendar year in which they are declared.
The sale of shares of a 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 a Fund and any other fund in the Delaware Investments family. 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 such Fund or in another fund in
the Delaware Investments family and a sales charge that would otherwise apply
to the reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment.
The automatic conversion of Class B Shares into Class A Shares at the end
of approximately eight years after purchase will be tax-free for federal tax
purposes. See Automatic Conversion of Class B Shares under Classes
of Shares.
High-Yield Opportunities Fund may be subject to foreign withholding taxes
on income from certain of its foreign securities.
In addition to the federal taxes described above, shareholders may or may
not be subject to various state and local taxes. For example, distributions of
interest income and capital gains realized from certain types of U.S.
government securities may be exempt from state personal income taxes. Because
investors' state and local taxes may be different than the federal taxes
described above, investors should consult their own tax advisers.
Each year, Income Funds, Inc. will mail to you information on the tax
status of a Fund's dividends and distributions. Shareholders will also receive
each year information as to the portion of dividend income, if any, that is
derived from U.S. government securities that are exempt from state income tax.
Of course, shareholders who are not subject to tax on their income would not be
required to pay tax on amounts distributed to them by a Fund.
Each Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this withholding
requirement by certifying on your Investment Application your proper Taxpayer
Identification Number and by certifying that you are not subject to
backup withholding.
See in Part B for additional information on tax matters relating to each
Fund and its shareholders.
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CALCULATION OF OFFERING PRICE AND NET ASSET VALUE PER SHARE
The net asset value ("NAV") per share is computed by adding the value of
all securities and other assets in the portfolio, deducting any liabilities
(expenses and fees are accrued daily) and dividing by the number of shares
outstanding. Debt securities are priced on the basis of valuations provided by
an independent pricing service using methods approved by Income Fund, Inc.'s
Board of Directors. Equity securities for which marked quotations are available
are priced at market value. Short-term investments having a maturity of less
than 60 days are valued at amortized cost, which approximates market value. All
other securities are valued at their fair value as determined in good faith and
in a method approved by Income Funds, Inc.'s Board of Directors.
Class A Shares are purchased at the offering price per share, while Class B
Shares and Class C Shares are purchased at the NAV per share. The offering price
per share of Class A Shares consists of the NAV per share next computed after
the order is received, plus any applicable front-end sales charges.
The offering price and NAV are computed as of the close of regular trading
on the New York Stock Exchange (ordinarily, 4 p.m., Eastern time) on days when
the Exchange is open.
The net asset values of all outstanding shares of each class of a Fund
will be computed on a pro-rata basis for each outstanding share based on the
proportionate participation in a 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 that Fund represented by the value of shares of such classes,
except that Delchester Fund Institutional Class and 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.
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MANAGEMENT OF THE FUNDS
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 each Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Investments family since 1938. On July 31, 1998, the Manager and its
affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $43 billion in assets
in various institutional or separately managed (approximately $25,873,990,000)
and investment company (approximately $17,929,500,000) accounts.
The Manager is a series of Delaware Management Business Trust. The Manager
changed its form of organization from a corporation to a business trust on
March 1, 1998. 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 each Fund's portfolio and makes investment decisions
which are implemented by Income Funds, Inc.'s Trading Department. The Manager
also administers Income Funds, Inc.'s affairs and pays the salaries of all the
directors, officers and employees of Income Funds, Inc. who are affiliated
with the Manager. For these services, Delchester Fund pays the Manager an
annual fee of 0.60% on the first $500 million of average daily net assets of
the Fund, 0.575% on the next $250 million and 0.55% on the average daily net
assets in excess of $750 million, less the Fund's proportionate share of all
directors' fees paid to the unaffiliated directors by Income Funds, Inc.
Investment management fees paid by Delchester Fund for the fiscal year ended
July 31, 1998 were 0.57% of average daily net assets. For the services noted
above, High-Yield Opportunities Fund pays the Manager 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 High-Yield Opportunities Fund
for the fiscal year ended July 31, 1998 were 0.65% of average daily net assets
and 0.26% was paid as a result of the voluntary waiver of fees by the Manager
as described below. The directors of Income Funds, Inc. annually review fees
paid to the Manager.
The Manager elected voluntarily to waive that portion, if any, of the
annual management fees payable by the 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 did not exceed, on an annual basis, 0.75%
(exclusive of 12b-1 Plan Expenses, taxes, interest, brokerage commissions and
extraordinary expenses), from the commencement of the public offering of the
Class through December 31, 1997. Beginning January 1, 1998, the Manager elected
voluntarily to waive that portion, if any, of the annual management fees
payable by the High-Yield Opportunities Fund and to pay certain of the Fund's
expenses to the extent necessary to ensure that the Total Operating Expenses of
each Class do not exceed,
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on an annual basis, 0.95% (exclusive of 12b-1 Plan expenses, taxes, interest,
brokerage commissions and extraordinary expenses). This waiver of fees and
payment of expenses will extend through March 31, 1999.
Paul A. Matlack and Gerald T. Nichols have primary responsibility for
making day-to-day investment decisions for each Fund. Mr. Matlack and Mr.
Nichols have been members of Delchester Fund's management team since 1990, and
were named co-managers of the Fund in January 1993. Mr. Matlack and Mr. Nichols
have been members of High-Yield Opportunities Fund since the Fund's inception.
Mr. Matlack is a CFA charterholder and graduate of the University of
Pennsylvania with an MBA in Finance from George Washington University. He began
his career at Mellon Bank as a credit specialist, and later served as a
corporate loan officer for Mellon Bank and then Provident National Bank. Mr.
Nichols is a graduate of the University of Kansas, where he received a BS in
Business Administration and an MS in Finance. Prior to joining Delaware
Investments, 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.
In making investment decisions for the Funds, Mr. Matlack and Mr. Nichols
regularly consult with Paul E. Suckow. Mr. Suckow is Executive Vice
President/Chief Investment Officer, Fixed Income of Income Funds, Inc. Mr.
Suckow 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 Delaware Investments from 1981 to 1985. He returned to Delaware
Investments 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 Funds normally will not invest for short-term trading purposes.
However, a Fund may sell securities without regard to the length of time they
have been held. Given each 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. High portfolio turnover (over 100%) involves correspondingly greater
brokerage commissions and other transaction costs and may affect taxes payable
by the Funds' shareholders that are subject to federal income taxes. The
turnover rate may also be affected by cash requirements from redemptions and
repurchases of Fund shares.
Each 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, each Fund
may consider a broker/dealer's sales of shares of funds in the Delaware
Investments family 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, each Fund may quote total return performance of its
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
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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. Each Fund may also advertise aggregate and average total return
information concerning a Class over additional periods of time. 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. 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 Delchester Fund's shares under a Distribution Agreement with
Income Funds, Inc. dated April 3, 1995, as amended on November 29, 1995. The
Distributor serves as the national distributor for
High-Yield Opportunities Fund's shares under a Distribution Agreement with
Income Funds, Inc. dated 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 each
Fund (the "Plans"). The Plans permit a Fund to pay the Distributor from the
assets of the respective Classes a monthly fee for the Distributor's services
and expenses in distributing and promoting sales of shares.
These expenses include, among other things, preparing and distributing
advertisements, sales literature, and prospectuses and reports used for sales
purposes, compensating sales and marketing personnel, holding special
promotions for specified periods of time, and paying distribution and
maintenance fees to brokers, dealers and others. In connection with the
promotion of 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, a 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 12b-1 Plan expenses relating to each of the Class B Shares and Class C
Shares of a Fund are also used to pay the Distributor for advancing the
commission costs to dealers with respect to the initial sale of such shares.
The aggregate fees paid by a 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 by a Fund to the Distributor, dealers and
others for
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providing personal service and/or maintaining shareholder accounts) of each
Fund's 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 the Institutional Class of shares of either
Fund. Those shares are not included in calculating the Plans' fees, and the
Plans are not used to assist in the distribution and marketing of the shares of
the Institutional Classes.
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for each Fund
pursuant to an amended and restated agreement dated as of September 14, 1998.
The Transfer Agent also provides accounting services to each 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.
* * *
As with other mutual funds, financial and business organizations and
individuals around the world, each Fund could be adversely affected if the
computer systems used by its service providers do not properly process and
calculate date-related information from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." Income Funds, Inc. is taking steps
to obtain satisfactory assurances that the Funds' major service providers are
taking steps reasonably designed to address the Year 2000 Problem with respect
to the computer systems that such service providers use. There can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the business of the Funds.
Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro." It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. If High-Yield Opportunities Fund is
invested in securities of participating countries it could be adversely
affected if the computer systems used by its major service providers are not
properly prepared to handle the implementation of this single currency or the
adoption of the Euro by additional countries in the future. Income Funds, Inc.
is taking steps to obtain satisfactory assurances that the major service
providers of High-Yield Opportunities Fund are taking steps reasonably designed
to address these matters with respect to the computer systems that such service
providers use. There can be no assurances that these steps will be sufficient
to avoid any adverse impact on the business of the Fund.
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Expenses
Each 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 for the fiscal year ended July 31, 1998 for each Class
of each Fund was
as follows:
- --------------------------------------------------------------------------------
High-Yield Opportunities Fund
With Voluntary Without
Voluntary
Expense Waivers Expense Waivers
Delchester Fund and Payments and Payments
----------------- ----------------- ------------------
Class A Shares 1.06% 1.14% 1.44%
Class B Shares 1.81% 1.84% 2.14%
Class C Shares 1.81% 1.84% 2.14%
- --------------------------------------------------------------------------------
Shares
Income Funds, Inc. is an open-end management investment company. Each
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 Funds, Income Funds, Inc. presently
also offers three other series of shares, the Corporate Bond Fund series, the
Extended Duration Bond 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.
In addition to Class A Shares, Class B Shares and Class C Shares, each
Funds also offers Institutional Class shares. Shares of each class represent
proportionate interests in the assets of the respective Fund and have the same
voting and other rights and preferences as the other classes of that Fund,
except that shares of the 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 the initial investment in the High-Yield Opportunities Fund, and as August
31, 1998, the Trust held 21% of the
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outstanding shares of the Fund. 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.
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OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
High-Yield, High Risk Securities
The discussion in this section supplements the description of the risks of
high-yield securities found earlier in this Prospectus under Risk Factors.
Delchester Fund's assets may be invested primarily in bonds rated BBB or
lower by S&P or Baa or lower by Moody's and in unrated corporate bonds.
High-Yield Opportunities Fund's assets may be invested primarily in bonds rated
BB or lower by S&P or Ba or lower by Moody's, and in bonds of comparable
quality. 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 a 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 a 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 a Fund's net asset value per share.
Zero-Coupon Bonds and Pay-In-Kind Bonds
Each 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
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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 a 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, a Fund accrues, and is required to distribute to shareholders, income on
such bonds, However, the Fund may not receive the cash associated with this
income until the bonds are sold or mature. If the Fund did not have sufficient
cash to make the required distribution of accrued income, the Fund could be
required to sell other securities in its portfolio or to borrow to generate the
cash required.
Restricted/Illiquid Securities
Each 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 Funds.
Delchester Fund may invest no more than 10% of the value of its net assets
in illiquid securities and High-Yield Opportunities 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 a Fund's 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, a Fund's
holdings of illiquid securities exceed the Fund's 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.
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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.
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, a Fund will only enter into loan arrangements
after a review of all pertinent facts by the Manager, subject to overall
supervision by the Board of Directors, including the creditworthiness of the
borrowing broker, dealer or institution and then only if the consideration to
be received from such loans would justify the risk. Creditworthiness will be
monitored on an ongoing basis by the Manager.
Repurchase Agreements
In order to invest its short-term cash reserves or when in a temporary
defensive posture, each 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., a 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 10% of Delchester
Fund's and 15% of High-Yield Opportunities Fund's assets may be invested in
illiquid securities of which, no more than 10% may be invested in repurchase
agreements of over seven days' maturity. 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 102% of the repurchase
price, including the portion representing the Fund's yield under such
agreements, which is monitored on a daily basis.
U.S. Government Securities
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by federal agencies and U.S.
government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment. Agencies which are backed by the full faith and
credit of the United States include the Export-Import Bank, Farmers Home
Administration, Federal Financing Bank, and others. Certain agencies and
instrumentalities, such as the Government National Mortgage Association
("GNMA"), are, in effect, backed by the full faith and credit of the United
States through provisions in their charters that they may make "indefinite and
unlimited" drawings on the Treasury, if needed to service its debt. Debt from
certain other agencies and instrumentalities, including the Federal Home Loan
Bank and Federal National Mortgage Association, are not guaranteed by the
United States, but those institutions are protected by the discretionary
authority for the U.S. Treasury to purchase certain amounts of their securities
to assist the institutions in meeting their debt obligations. Finally, other
agencies and instrumentalities, such as the Farm Credit System, Tennessee
Valley Authority and the Federal Home Loan Mortgage Corporation, are federally
chartered institutions under U.S. government supervision, but
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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.
Foreign Investment Information
High-Yield Opportunities 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
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Manager does not believe that any current repatriation restrictions would
affect the Fund's decision to invest in such countries.
Short-Term Investments
The short-term investments in which the Funds 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;
(4) U.S. government securities (see U.S. Government Securities); and
(5) Repurchase agreements collateralized by securities listed above.
Unseasoned Companies
High-Yield Opportunities Fund may invest in relatively new or unseasoned
companies which are in their early stages of development, or small companies
positioned in new and emerging industries where the opportunity for rapid
growth is expected to be above average. Securities of unseasoned companies
present greater risks than securities of larger, more established companies.
The companies in which the Fund may invest may have relatively small revenues,
limited product lines, and may have a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing or favorable
terms, or they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due
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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
High-Yield Opportunities 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.
Investments by Fund of Funds
Each Fund accepts investments from the series of Delaware Group
Foundation Funds, a fund of funds (the "Foundation Funds"). From time to time,
a Fund may experience large investments or redemptions due to allocations or
rebalancings by the Foundation Funds. While it is impossible to predict the
overall impact of these transactions over time, there could be adverse effects
on portfolio management to the extent that a Fund may be required to sell
securities or invest cash at times when it would not otherwise do so. These
transactions could also have tax consequences if sales of securities result in
gains and could also increase transactions costs or portfolio turnover. The
Manager will monitor such transactions and will attempt to minimize any
adverse effects on the Funds and the Foundation Funds resulting from such
transactions.
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Appendix A--Ratings
Delchester Fund's assets may be invested primarily in bonds rated BBB or
lower by S&P or Baa or lower by Moody's and in unrated corporate bonds.
High-Yield Opportunities Fund's assets may be invested primarily in bonds rated
BB or lower by S&P or Ba or lower by Moody's, and in bonds of comparable
quality. 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 each 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 each Fund's
securities which are not rated. The information contained in the table was
prepared based on a dollar weighted average of each Fund's portfolio
composition based on month end data for the fiscal year ended July 31, 1998.
The paragraphs following the table contain excerpts from Moody's and S&P's
rating descriptions.
Average Weighted
Average Weighted Percentage of
Percentage of Portfolio of
Portfolio High-Yield
Rating Moody's and/or S&P of Delchester Fund Opportunities Fund
- --------------------------- -------------------- -------------------
United States Treasury
Obligations ............. 4.43% --
Aaa/AAA ................... 2.08 5.91%
Aa/AA ..................... -- --
A/A ....................... -- --
Baa/BBB ................... -- --
Ba/BB ..................... 1.46 2.17
B/B ....................... 79.43 80.50
Caa/CCC ................... 4.64 5.74
Not Rated/Other ........... 7.96 5.68
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
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are speculative in a high degree. Such issues are often in default or have
other marked shortcomings; C--the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions; C--reserved for income bonds on
which no interest is being paid; D--in default, and payment of interest and/or
repayment of principal is in arrears.
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the
highest grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
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-----------------------------
For more information, call DELCHESTER FUND INSTITUTIONAL
Delaware Investments at 800-828-5052. HIGH-YIELD OPPORTUNITIES FUND
INSTITUTIONAL
-----------------------------
INVESTMENT MANAGER
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING, PROSPECTUS
ACCOUNTING SERVICES -----------------------------
AND TRANSFER AGENT SEPTEMBER 29, 1998
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 DELAWARE(SM)
Brooklyn, NY 11245 INVESTMENTS
------------
<PAGE>
DELCHESTER FUND INSTITUTIONAL PROSPECTUS
HIGH-YIELD OPPORTUNITIES FUND INSTITUTIONAL SEPTEMBER 29, 1998
--------------------------------------------------------
1818 Market Street, Philadelphia, PA 19103
For more information about Delchester Fund Institutional Class
and High-Yield Opportunities Fund Institutional Class
call Delaware Investments at 800-828-5052.
The Prospectus describes shares of Delchester Fund series and High-Yield
Opportunities Fund series (individually, a "Fund" and collectively, the "Funds")
of Delaware Group Income Funds, Inc. ("Income Funds, Inc."), a
professionally-managed mutual fund of the series type. Delchester Fund's
investment objective is to seek as high a current income as is consistent with
providing reasonable safety. High-Yield Opportunities Fund's investment
objective is to seek to provide investors with total return and, as a secondary
objective, high current income.
Each 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 either Fund. See
Investment Objectives and Policies, Risk Factors, and Appendix A--Ratings.
Delchester Fund offers Delchester Fund Institutional Class and High-Yield
Opportunities Fund offers High-Yield Opportunities Fund Institutional Class
(individually, a "Class" and collectively, the "Classes").
This Prospectus relates only to the Classes and sets forth information that
you should read and consider before you invest. Please retain it for future
reference. The Funds' Statement of Additional Information ("Part B" of Income
Funds, Inc.'s registration statement), dated September 29, 1998, as it may be
amended from time to time, contains additional information about the Funds and
has been filed with the Securities and Exchange Commission ("SEC"). Part B is
incorporated by reference into this Prospectus and is available, without charge,
by writing to Delaware Distributors, L.P. at the above address or by calling the
above number. Each Fund's financial statements appear in its Annual Report for
the fiscal year ended July 31, 1998, which will accompany any response to
requests for Part B. In addition, the SEC maintains a Web site
(http://www.sec.gov) that contains Part B, material we incorporated by
reference, and other information regarding registrants that electronically file
with the SEC.
Each Fund also offers Class A Shares, Class B Shares and Class C Shares.
Shares of these classes are subject to sales charges and other expenses, which
may affect their performance. A prospectus for these classes can be obtained by
writing to Delaware Distributors, L.P. at the above address or by calling
800-523-1918.
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TABLE OF CONTENTS
Cover Page............................................................ 1
Synopsis.............................................................. 2
Summary of Expenses................................................... 3
Financial Highlights.................................................. 4
Investment Objectives and Policies.................................... 6
Suitability......................................................... 6
Investment Strategy................................................. 6
Risk Factors.......................................................... 8
Volatility of the High-Yield Market................................. 8
Redemptions......................................................... 8
Liquidity and Valuation............................................. 9
Classes of Shares..................................................... 9
How to Buy Shares..................................................... 10
Redemption and Exchange............................................... 11
Dividends and Distributions........................................... 13
Taxes................................................................. 13
Calculation of Net Asset Value Per Share.............................. 14
Management of the Funds............................................... 15
Other Investment Policies and
Risk Considerations................................................... 18
Appendix A--Ratings................................................... 23
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 FUNDS 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 FUNDS ARE NOT BANK OR CREDIT UNION DEPOSITS.
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<PAGE>
SYNOPSIS
Investment Objectives and Risk Factors
Delchester Fund--The investment objective of Delchester Fund is to seek as
high a current income as is consistent with providing reasonable safety.
High-Yield Opportunities Fund--The investment objective of High-Yield
Opportunities Fund is to seek to provide investors with total return and, as a
secondary objective, high current income.
Each Fund invests primarily in high-yield securities (junk bonds) and
greater risks may be involved with an investment in a Fund than an investment in
a mutual fund comprised primarily of investment grade bonds.
Delchester Fund seeks to achieve its objective by investing principally in
corporate bonds rated BBB or lower by Standard & Poor's Ratings Group ("S&P") or
Baa or lower by Moody's Investors Service, Inc. ("Moody's") and High-Yield
Opportunities Fund seeks to achieve its objective by investing principally in
corporate bonds rated BB or lower by S&P or Ba or lower by Moody's, or, in each
Fund's case, 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).
Each Fund may also invest in U.S. government securities and commercial paper.
High-Yield Opportunities Fund may also invest in foreign government paper.
For further details, see Investment Objectives and Policies and Other
Investment Policies and Risk Considerations.
Investment Manager, Distributor and Transfer Agent
Delaware Management Company (the "Manager") is the investment manager for
each Fund and, in that capacity, provides investment advice to each 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 Investments family. Delaware Distributors,
L.P. (the "Distributor") is the national distributor for each Fund and for all
of the other mutual funds in the Delaware Investments family. Delaware Service
Company, Inc. (the "Transfer Agent") is the shareholder servicing, dividend
disbursing, accounting services and transfer agent for each Fund and for all of
the other mutual funds in the Delaware Investments family. See Summary of
Expenses and Management of the Funds for further information regarding the
Manager and the fees payable under each Fund's Investment Management Agreement.
Purchase Price
Institutional Class shares 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
Institutional Class shares are redeemed or exchanged at the net asset value
calculated after receipt of the redemption or exchange request. See Redemption
and Exchange.
-4-
<PAGE>
Open-End Investment Company
Income Funds, Inc. is an open-end management investment company. Each Fund
operates as a diversified fund as defined under the Investment Company Act of
1940 (the "1940 Act"). Income Funds, Inc. was first organized as a Delaware
corporation in 1970 and subsequently reorganized as a Maryland corporation on
March 4, 1983. See Shares under Management of the Funds.
SUMMARY OF EXPENSES
High-Yield
Delchester Opportunities
Fund Fund
Institutional Institutional
Shareholder Transaction Expenses Class Class
- -------------------------------------------- --------------- --------------
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)........ None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of
offering price)........................... None None
Exchange Fees............................... None(1) None(1)
- ------------
(1) Exchanges are subject to the requirements of each Fund and a front-end
sales charge may apply.
High-Yield
Delchester Opportunities
Annual Operating Expenses Fund Fund
(as a percentage of Institutional Institutional
average daily net assets) Class Class
- ---------------------------------------------- --------------- -------------
Management Fees (after voluntary waivers in
the case of High-Yield Opportunities Fund).. 0.57% 0.26%(2)
12b-1 Fees ................................... None None
.9Other Operating Expenses ..................... 0.24% 0.69%(2)
---- ----
Total Operating Expenses (after voluntary
waivers in the case of High-Yield
Opportunities Fund) ........................ 0.81% 0.95%(2)
==== ====
- -------------
(2) Beginning January 1, 1998, 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 the Class do not
exceed 0.95% through March 31, 1999. From the commencement of operations
through December 31, 1997, commitments of waiver and payment by the Manager
that were different from that currently in effect for the Fund were in
place. See Management of the Funds. The expense information set forth above
has been restated to reflect the current fees. If the
-5-
<PAGE>
voluntary expense waivers by the Manager were not in effect, it is
estimated that the Total Operating Expenses, as a percentage of average
daily net assets, would be 1.14%, including management fees of 0.65%.
For expense information about each Fund's A Class, B Class and C Class, see
the separate prospectus relating to those classes.
The following example illustrates the expenses that an investor would pay
on a $1,000 investment over various time periods, assuming (1) a 5% annual rate
of return and (2) redemption at the end of each time period. Income Funds, Inc.
charges no redemption fees. The following example for High-Yield Opportunities
Fund assumes the voluntary waiver of the management fee by the Manager as
discussed in this Prospectus.
Delchester Fund 1 year 3 years 5 years 10 years
Institutional Class --------- ---------- ---------- -----------
$ 8 $26 $45 $100
High-Yield Opportunities 1 year 3 years 5 years 10 years
Fund Institutional Class --------- ---------- ---------- -----------
$10 $30 $53 $117
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 these tables is to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly in owning
shares of the Funds.
-6-
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
Delchester Fund and 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 each Fund's performance is
contained in the Funds' Annual Report to shareholders. A copy of the Funds'
Annual Report (including the report of Ernst & Young LLP) may be obtained from
the Funds upon request at no charge.
- --------------------------------------------------------------------------------
-7-
<PAGE>
<TABLE>
<CAPTION>
Delchester Fund
-------------------------------------------------------------------------
Year Ended
7/31/98 7/31/97 7/31/96 7/31/95 7/31/94
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............. $ 6.570 $ 6.140 $ 6.280 $ 6.450 $ 7.070
Income from investment operations
Net investment income ........................ 0.620 0.614 0.644 0.685 0.758
Net realized and unrealized gain (loss) on
investments ................................ 0.075 0.429 (0.142) (0.169) (0.617)
-------- -------- -------- -------- --------
Total from investment operations ........... 0.695 1.043 0.502 0.516 0.141
-------- -------- -------- -------- --------
Less dividends and distributions Dividends
from net investment income ................... (0.615) (0.613) (0.642) (0.686) (0.761)
-------- -------- -------- -------- --------
Total dividends and distributions .......... (0.615) (0.613) (0.642) (0.686) (0.761)
-------- -------- -------- -------- --------
Net asset value, end of year ................... $ 6.650 $ 6.570 $ 6.140 $ 6.280 $ 6.450
======== ======== ======== ======== ========
- -------------------------
Total return ................................... 11.00% 17.82% 8.37% 8.72% 1.82%
- -------------------------
Ratios and supplemental data
Net assets, end of period (000 omitted) ...... $55,673 $44,065 $59,513 $61,742 $71,122
Ratio of expenses to average net assets ...... 0.81% 0.79% 0.77% 0.82% 0.83%
Ratio of net investment income to average
net assets ................................... 9.41% 9.73% 10.36% 11.14% 10.70%
Portfolio turnover ............................. 117% 154% 108% 92% 92%
<CAPTION>
Delchester Fund
----------------------------------------------------------------------------
Year Ended
7/31/93 7/31/92(1)(2) 7/31/91(1) 7/31/90 7/31/89
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............. $ 6.900 $ 6.260 $ 6.300 $ 7.480 $ 7.750
Income from investment operations
Net investment income ........................ 0.787 0.798 0.822 0.900 0.934
Net realized and unrealized gain (loss) on
investments ................................ 0.165 0.640 (0.040) (1.180) (0.270)
-------- -------- -------- ---------- --------
Total from investment operations ........... 0.952 1.438 0.782 (0.280) 0.664
-------- -------- -------- ---------- --------
Less dividends and distributions Dividends
from net investment income ................... (0.782) (0.798) (0.822) (0.900) (0.934)
-------- -------- -------- ---------- --------
Total dividends and distributions .......... (0.782) (0.798) (0.822) (0.900) (0.934)
-------- -------- -------- ---------- --------
Net asset value, end of year ................... $ 7.070 $ 6.900 $ 6.260 $ 6.300 $ 7.480
======== ======== ======== ========== ========
- ------------------------
Total return ................................... 14.67% 24.28% 14.85% (3.58%) 9.10%
- ------------------------
Ratios and supplemental data
Net assets, end of period (000 omitted) ...... $35,909 $18,746 $113,414 $ 96,161 $84,800
Ratio of expenses to average net assets ...... 0.86% 0.86% 0.90% 0.85% 0.85%
Ratio of net investment income to average
net assets ................................... 11.35% 12.17% 14.45% 13.47% 12.30%
Portfolio turnover ............................. 72% 101% 38% 72% 66%
(1) The financial highlights for the periods prior to June 1, 1992 (the date Delchester Fund Institutional Class was first offered
for public sale) are derived from data of the Delchester I class, which like Delchester Fund Institutional Class, was not
subject to Rule 12b-1 distribution expenses. Shares of Delchester I class were converted into shares of
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Delchester II class (now referred to as Delchester Fund A Class) on June 1, 1992, pursuant to a Plan of Recapitalization
approved by shareholders of Delchester I class. Prior to May 2, 1994, Delchester Fund A Class was known as Delchester Fund
class and Delchester Fund Institutional Class was known as Delchester Fund (Institutional) class.
(2) The data for Delchester I class and Delchester Fund Institutional Class have been combined for 1992. For the ten months ended
May 31 1992, the Delchester I class' operating expenses and net investment income per share were $0.047 and $0.666,
respectively. For the two months ended July 31, 1992, the Delchester Fund Institutional Class' operating expenses and net
investment income per share were $0.009 and $0.132, respectively. All net investment income was distributed to shareholders.
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
High-Yield
Opportunities Fund
Institutional Class
-------------------
For the period
Year Ended 12/30/96(1)
7/31/98 through 7/31/97
---------- ---------------
<S> <C> <C>
Net asset value, beginning of period ................................................. $ 5.920 $ 5.500
Income from investment operations
Net investment income(2) ............................................................. 0.537 0.290
Net realized and unrealized gain on investments ...................................... 0.330 0.299
-------- --------
Total from investment operations ................................................... 0.867 0.589
-------- --------
Less dividends and distributions
Dividends from net investment income ................................................. (0.613) (0.169)
Distributions from net realized gain from investment transactions .................... (0.254) none
-------- --------
Total dividends and distributions .................................................. (0.867) (0.169)
-------- --------
Net asset value, end of period ....................................................... $ 5.920 $ 5.920
======== ========
Total return(3) ...................................................................... 15.82% 10.81%
Ratios/supplemental data
Net assets, end of period (000 omitted) .............................................. $ 3,837 $ 3,330
Ratio of expenses to average net assets .............................................. 0.84% 0.75%
Ratio of expenses to average net assets prior to expense limitation .................. 1.14% 1.27%
Ratio of net investment income to average net assets ................................. 9.18% 8.53%
Ratio of net investment income to average net assets prior to expense limitation ..... 8.88% 8.00%
Portfolio turnover ................................................................... 317% 270%
</TABLE>
- -----------
(1) Date of initial public offering of High-Yield Opportunities Fund
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 this Prospectus.
-10-
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
SUITABILITY
Delchester Fund--The Fund may be suitable for investors interested in high
current income flow. The Fund's objective of high current income also may be
suited for longer term investments, such as tax-deferred retirement plans (e.g.,
IRA, 401(k), Profit Sharing, etc.), where the income stream can be left to
compound on a tax-deferred basis.
High-Yield Opportunities Fund--The Fund may be suitable for the investor
interested in total return. High current income is a 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 of each Class may fluctuate in response to the
condition of individual companies and general market and economic conditions
and, as a result, neither Fund is appropriate for a short-term investor. Neither
Fund can 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 each Fund's objective.
The types of securities in which each Fund invests are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as yield,
in making an investment decision. While investments in unrated, lower-rated and
restricted securities have the potential for higher yields, they are more
speculative and increase the credit risk of each 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 Fund's net asset value. Investors
should be willing to accept the risks, including the risk of net asset value
fluctuations, associated with investing in these securities.
Ownership of Fund shares can reduce the bookkeeping and administrative
inconveniences that is typically connected with direct purchases of the types of
securities in which the Funds invests.
Investors should not consider a purchase of Fund shares as equivalent to a
complete investment program. Delaware Investments includes a family of funds,
generally available through registered investment dealers, which may be used in
concert to create a more complete investment program.
INVESTMENT STRATEGY
Delchester Fund
The investment objective of Delchester Fund is to seek as high a current
income as is consistent with providing reasonable safety. The strategy is to
invest primarily in those securities having a liberal and consistent yield and
those tending to reduce the risk of market fluctuations. The Fund will invest at
least 80% of its assets at the time of purchase in:
(1) Corporate Bonds. The Fund will invest in both rated and unrated bonds.
Unrated bonds may be more speculative in nature than rated bonds; or
-11-
<PAGE>
(2) Government Securities. Securities of, or guaranteed by, the U.S.
government, its agencies or instrumentalities; or
(3) Commercial Paper. Commercial paper of companies having, at the time of
purchase, an issue of outstanding debt securities rated as described above or
commercial paper rated A-1 or A-2 by Standard & Poor's Ratings Group ("S&P") or
rated P-1 or P-2 by Moody's Investors Service, Inc. ("Moody's").
The Fund has consistently invested more than 80% of its assets in these
securities. The Fund must invest the remaining assets, if any, in
income-producing securities, including common stocks and preferred stocks, some
of which may have convertible features or attached warrants. Currently, the
Fund's assets are invested primarily in unrated corporate bonds and bonds rated
BB or lower by S&P or Ba or lower by Moody's.
High-Yield Opportunities Fund
The investment objective of High-Yield Opportunities 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.
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 Manager. The Fund generally
will not purchase corporate bonds which, at the time of purchase, are rated
lower than CCC by S&P or Caa by Moody's. If a corporate bond held by the Fund
drops below these levels, including a security that goes into default, the Fund
will commence with an orderly sale of the security in a manner devised to
minimize any adverse affect on the Fund. If a sale of the security is not
practicable for any reason, the Fund will pursue other available measures
reasonably anticipated by the Manager to facilitate repayment of the bond.
The Fund may also invest in securities of, or guaranteed by, the U.S. and
foreign governments, their agencies or instrumentalities and commercial paper of
companies having, at the time of purchase, an issue of outstanding debt
securities rated as described above or commercial paper rated A-1 or A-2 by S&P
or rated P-1 or P-2 by Moody's or, if unrated, judged to be of comparable
quality by the Manager.
* * *
Each 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. High-Yield Opportunities
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 in Part B.
Each 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
-12-
<PAGE>
resale restrictions. A Fund will not purchase illiquid assets, if more than 10%
of Delchester Fund's and 15% of High-Yield Opportunities Fund's net assets would
consist of such illiquid securities. See Restricted/Illiquid Securities under
Other Investment Policies and Risk Considerations.
High-Yield Opportunities 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.
Each 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.
The market values of fixed-income securities generally fall when interest
rates rise and, conversely, rise when interest rates fall. Lower-rated and
unrated fixed-income securities tend to reflect short-term corporate and market
developments to a greater extent than higher-rated fixed-income securities,
which react primarily to fluctuations in the general level of interest rates.
These lower-rated or unrated securities generally have higher yields, but, as a
result of factors such as reduced creditworthiness of issuers, increased risks
of default and a more limited and less liquid secondary market, are subject to
greater volatility and risk of loss of income and principal than are
higher-rated securities. The Manager will attempt to reduce such risk through
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets.
Although each Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained. The objective of Delchester Fund
may not be changed without shareholder approval.
The investment policies of the Funds 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.
For a description of the other investment policies of each Fund, see Other
Investment Policies and Risk Considerations in this Prospectus. Part B provides
more information concerning each Fund's investment policies and sets forth
other investment restrictions.
-13-
<PAGE>
RISK FACTORS
Generally
Each 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.
Delchester Fund's assets may be invested primarily in bonds rated BBB or
lower by S&P or Baa or lower by Moody's and in unrated corporate bonds.
High-Yield Opportunities Fund's assets may be invested 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 either 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:
VOLATILITY OF THE HIGH-YIELD MARKET
Although the market for high-yield bonds has been in existence for many
years, including periods of economic downturns, the high-yield market grew
rapidly during the long economic expansion which took place in the United
States during the 1980s. During that economic expansion, the use of high-yield
debt securities to fund highly leveraged corporate acquisitions and
restructurings increased dramatically. As a result, the high-yield market grew
substantially during that economic expansion. Although experts disagree on the
impact recessionary periods have had and will have on the high-yield market,
some analysts believe a protracted economic downturn would severely disrupt the
market for high-yield bonds, would adversely affect the value of outstanding
bonds and would adversely affect the ability of high-yield issuers to repay
principal and interest. Those analysts cite volatility experienced in the
high-yield market in the past as evidence for their position. It is likely that
protracted periods of economic uncertainty would result in increased volatility
in the market prices of high-yield bonds, an increase in the number of
high-yield bond defaults and corresponding volatility in the Funds' net asset
value. At times in the past, uncertainty and volatility in the high-yield
market resulted in volatility in the Funds' net asset value.
REDEMPTIONS
If, as a result of volatility in the high-yield market or other factors, a
Fund experiences substantial net redemptions of the Fund's shares for a
sustained period of time (i.e., more shares of the Fund are redeemed than are
purchased), the Fund may be required to sell securities without regard to the
investment merits of the securities to be sold. If a Fund sells a substantial
number of securities to generate proceeds for redemptions, the asset base of
the Fund will decrease and the Fund's expense ratio may increase.
-14-
<PAGE>
LIQUIDITY AND VALUATION
The secondary market for high-yield securities is currently dominated by
institutional investors, including mutual funds and certain financial
institutions. There is generally no established retail secondary market for
high-yield securities. As a result, the secondary market for high-yield
securities is more limited and less liquid than other secondary securities
markets. The high-yield secondary market is particularly susceptible to
liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings
and loan crisis. A less liquid secondary market may have an adverse effect on a
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 a 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. A Fund's privately placed high-yield
securities are particularly susceptible to the liquidity and valuation risks
outlined above.
-15-
<PAGE>
CLASSES OF SHARES
The Distributor serves as the national distributor for each Fund. Shares of
each Class may be purchased directly by contacting the respective Fund or its
agent or through authorized investment dealers. All purchases of shares of each
Class are made 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 each 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, 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.
Class A Shares, Class B Shares and Class C Shares
In addition to offering Institutional Class shares, each Fund also offers
Class A Shares, Class B Shares and Class C Shares which are described in a
separate prospectus. Class A Shares, Class B Shares and Class C Shares may be
purchased through authorized investment dealers or directly by contacting a
Fund or the Distributor. Class A Shares, Class B Shares and Class C Shares may
have different sales charges and other expenses which may affect performance.
To obtain a prospectus relating to such classes, contact the Distributor by
writing to the address or by calling the phone number listed on the cover of
this Prospectus.
-16-
<PAGE>
HOW TO BUY SHARES
Each 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 Classes.
Investing Directly by Mail
1. Initial Purchases--An Investment Application, or in the case of a
retirement plan account, an appropriate retirement plan application, must
be completed, signed and sent with a check payable to the specific Fund and
Class selected, to Delaware Investments at 1818 Market Street,
Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to the specific Fund and Class selected. Your check
should be identified with your name(s) and account number.
Investing Directly by Wire
You may purchase shares by requesting your bank to transmit funds by wire
to First Union National Bank.
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
plan account, an appropriate retirement plan application, to the Fund and
Class selected by you, to Delaware Investments at 1818 Market Street,
Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments anytime by wiring
funds to First Union National Bank. Please call your Client Services
Representative by telephone at 800-828-5052 for wiring instructions. You
must advise your Client Services Representative by telephone prior to
sending wires.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware
Investments family and you qualify to purchase shares of the Classes, you may
write and authorize an exchange of part or all of your investment into a Fund.
However, Class B Shares and Class C Shares of each Fund and Class B Shares and
Class C Shares of the other funds in the Delaware Investments family offering
such a class of shares may not be exchanged into the Classes. 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
in which you are investing. They may charge for this service.
Purchase Price and Effective Date
The purchase price (net asset value) of each Class is determined as of the
close of regular trading on the New York Stock Exchange (ordinarily, 4 p.m.,
Eastern time) on days when the Exchange is open.
-17-
<PAGE>
The effective date of a purchase is the date the order is received by the
Fund in which the shares are being purchased, 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
Each 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. A 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 Investments family. Each Fund reserves the right to reject
purchases by third-party checks or checks that are not drawn on a domestic
branch of a United States financial institution. If a check drawn on a foreign
financial institution is accepted, you may be subject to additional bank charges
for clearance and currency conversion.
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under $250 as a result of redemptions.
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REDEMPTION AND EXCHANGE
Redemption and exchange requests made on behalf of participants in an
employer-sponsored retirement plan are made in accordance with directions
provided by the employer. Employees should therefore contact their employer for
details.
Your shares will be redeemed or exchanged based on the net asset value next
determined after the Fund in which you are investing receives your request in
good order. For example, redemption and exchange requests received in good order
after the time the net asset value of shares is determined will be processed on
the next business day. See Purchase Price and Effective Date under How to Buy
Shares. Except as otherwise noted below, for a redemption request to be in "good
order," you must provide your account number, account registration, and the
total number of shares or dollar amount of the transaction. With regard to
exchanges, you must also provide the name of the fund you want to receive the
proceeds. Exchange instructions and redemption requests must be signed by the
record owner(s) exactly as the shares are registered. You may request a
redemption or an exchange by calling a 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.
Each Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. Neither Fund will honor redemption requests as to shares for which a
check was tendered as payment, until the Fund 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. Each
Fund reserves the right to reject a written or telephone redemption request or
delay payment of redemption proceeds if there has been a recent change to the
shareholder's address of record.
Shares of a Class may be exchanged into any other mutual fund in the
Delaware Investments family, 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 either Class may not be
exchanged into Class B Shares or Class C Shares of the funds in the Delaware
Investments family. Each 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 Funds 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 to which the
authorization relates or its agent.
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Written Redemption and Exchange
You can write to a 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 Investments family, 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, each Fund requires a signature by
all owners of the account and may require a signature guarantee. A signature
guarantee can be obtained from a commercial bank, a trust company or a member of
a Securities Transfer Association Medallion Program ("STAMP"). A signature
guarantee cannot be provided by a notary public. A signature guarantee is
designed to protect the shareholders, a Fund and its agent from fraud. Each Fund
reserves the right to reject a signature guarantee supplied by an institution
based on its creditworthiness. A 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 shares are in certificate form, the certificate(s)
must accompany your request and also be in good order. Certificates are issued
for shares only if you submit a specific request.
You also may submit your written request for redemption or exchange by
facsimile transmission at the following number: 215-255-8864.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your shares in certificate form, you may redeem or
exchange only by written request and you must return your certificate(s).
The Telephone Redemption--Check to Your Address of Record service and the
Telephone Exchange service, both of which are described below, are automatically
provided unless you notify the Fund in which you are investing 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 a
Fund by telephone during periods when market or economic conditions lead to an
unusually large volume of telephone requests.
Neither the Funds nor their 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, a Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, such Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. A written confirmation will be provided
for all purchase, exchange and redemption transactions initiated by telephone.
By exchanging shares by telephone, you are acknowledging prior receipt of a
prospectus for the fund into which your shares are being exchanged.
Telephone Redemption--Check to Your Address of Record
You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your record address. Checks will be payable to
the shareholder(s) of record. Payment is normally mailed the next business day
after receipt of the redemption request.
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<PAGE>
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 Investments family under the same registration. As with the
written exchange service, telephone exchanges are subject to the same conditions
and limitations as other exchanges noted above. Telephone exchanges may be
subject to limitations as to amounts or frequency.
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DIVIDENDS AND DISTRIBUTIONS
Each Fund declares a dividend to all shareholders of record at the time the
net asset value per share is determined. See Purchase Price and Effective Date
under How to Buy Shares. Thus, when redeeming shares, dividends continue to be
credited up to and including the date of redemption.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if a Fund is given prior notice of a Federal Funds wire
and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Purchases by check earn dividends upon
conversion to Federal Funds, normally one business day after receipt.
Each class of a Fund will share proportionately in the investment income
and expenses of that Fund, except that the Classes will not incur any
distribution fee under the Rule 12b-1 Plans which apply to Class A Shares, Class
B Shares and Class C Shares.
Each Fund's dividends are declared daily and paid monthly. Distributions
from net realized securities profits, if any, will be distributed twice a year.
The first payment normally would be made during the first quarter of the next
fiscal year. The second payment would be made near the end of the calendar year
to comply with certain requirements of the Internal Revenue Code (the "Code").
Both dividends and distributions, if any, are automatically reinvested in your
account at net asset value.
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TAXES
The tax discussion set forth below is included for general information
only. Investors should contact their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in a Fund.
Each Fund has qualified, and intends to continue to qualify, as a regulated
investment company under Subchapter M of the Code. As such, a 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 and it satisfies certain other
requirements relating to the sources of its income and diversification of its
assets.
On August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997 Act") was
signed into law. This new law made sweeping changes in the Code. Because many of
these changes are complex, and only indirectly affect a Fund and its
distributions to you, they are discussed in Part B. Changes in the treatment of
capital gains, however, are discussed in this section.
Each Fund intends to distribute substantially all of its net investment
income and net capital gains, if any. Dividends from net investment income or
net short-term capital gains will be taxable to those investors who are subject
to income taxes as ordinary income, even though received in additional shares.
No portion of Delchester Fund's distributions will be eligible for the
dividends-received deduction for corporations. Only a nominal portion of
High-Yield Opportunities Fund's dividends will be eligible for the dividends
received deduction for corporations.
Distributions paid by a 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 Funds do 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 a Fund are made shortly before the
record date for a dividend or capital gains distribution, a portion of the
investment will be returned as a taxable distribution.
The Treatment of Capital Gain Distributions under the Taxpayer Relief Act
of 1997
The 1997 Act creates a category of long-term capital gain for individuals
who will be taxed at new lower tax rates. For investors who are in the 28% or
higher federal income tax brackets, these gains will be taxed at a maximum rate
of 20%. For investors who are in the 15% federal income tax bracket, these gains
will be taxed at a maximum rate of 10%. Capital gain distributions will qualify
for these new maximum tax rates, depending on when a Fund's securities were sold
and how long they were held by the Fund before rates, depending on when a Fund's
securities were sold and how long they were held by the Fund before they were
sold. The holding periods for which the new rates apply were revised by the
Internal Revenue Service Restructuring and Reform Act of 1998. Investors who
want more information on holding periods and other qualifying rules relating to
these new rates should review the expanded discussion in Part B, or should
contact their own tax advisers.
Income Funds, Inc. will advise you in its annual information reporting at
calendar year end of the amount of its capital gain distributions which will
qualify for these maximum federal tax rates.
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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 a 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 Investments family. 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.
High-Yield Opportunities Fund may be subject to foreign withholding taxes
on income from certain of its foreign securities.
In addition to federal taxes described above, shareholders may or may not
be subject to various state and local taxes. For example, distributions of
interest income and capital gains realized from certain types of U.S. government
securities may be exempt from state personal income taxes. Because investors'
state and local taxes may be different than the federal taxes described above,
investors should consult their own tax advisers.
Each year, Income Funds, Inc. will mail to you information on the tax
status of a Fund's dividends and distributions. Shareholders will also receive
each year information as to the portion of dividend income, if any, that is
derived from U.S. government securities that are exempt from state income tax.
Of course, shareholders who are not subject to tax on their income would not be
required to pay tax on amounts distributed to them by a Fund.
Each Fund is required to withhold 31% of taxable dividends, capital gains
distributions, and redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this withholding
requirement by certifying on your Investment Application your proper Taxpayer
Identification Number and by certifying that you are not subject to backup
withholding.
See Part B for additional information on tax matters relating to each Fund
and its shareholders.
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CALCULATION OF NET ASSET VALUE PER SHARE
The purchase and redemption price of Class shares is the net asset value
("NAV") per share of a Class next computed after the order is received. The NAV
is computed as of the close of regular trading on the New York Stock Exchange
(ordinarily, 4 p.m., Eastern time) on days when the Exchange is open.
The NAV per share is computed by adding the value of all securities and
other assets in the portfolio, deducting any liabilities (expenses and fees are
accrued daily) and dividing by the number of shares outstanding. Debt securities
are priced on the basis of valuations provided by an independent pricing service
using methods approved by Income Funds, Inc. Board of Directors. Short-term
investments having a maturity of less than 60 days are valued at amortized cost,
which approximates market value. All other securities are valued at their fair
value as determined in good faith and in a method approved by Income Funds,
Inc.'s Board of Directors.
The net asset values of all outstanding shares of each class of a 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 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 a Class will not incur any of the expenses under the respective
Fund's 12b-1 Plans and Class A, B and C Shares alone will bear the 12b-1 Plan
fees payable under their respective Plans. Due to the specific distribution
expenses and other costs that may be allocable to each class, the dividends paid
to each class of a Fund may vary. However, the NAV per share of each class is
expected to be equivalent.
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MANAGEMENT OF THE FUNDS
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 each Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Investments family since 1938. On July 31, 1998, the Manager and its
affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $43 billion in assets in
various institutional or separately managed (approximately $25,873,990,000) and
investment company (approximately $17,929,500,000) accounts.
The Manager is a series of Delaware Management Business Trust. The Manager
changed its form of organization from a corporation to a business trust on March
1, 1998. 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 each Fund's portfolio and makes investment decisions
which are implemented by Income Funds, Inc.'s Trading Department. The Manager
also administers Income Funds, Inc.'s affairs and pays the salaries of all the
directors, officers and employees of Income Funds, Inc. who are affiliated with
the Manager. For these services, Delchester Fund pays the Manager an annual fee
of 0.60% on the first $500 million of average daily net assets of the Fund,
0.575% on the next $250 million and 0.55% on the average daily net assets in
excess of $750 million, less the Fund's proportionate share of all directors'
fees paid to the unaffiliated directors by Income Funds, Inc. Investment
management fees paid by Delchester Fund for the fiscal year ended July 31, 1998
were 0.57% of average daily net assets. For the services noted above, High-Yield
Opportunities Fund pays the Manager 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 High-Yield Opportunities Fund for the fiscal year
ended July 31, 1998 were 0.65% of average daily net assets and 0.26% was paid as
a result of the voluntary waiver of fees by the Manager as described below. The
directors of Income Funds, Inc. annually review fees paid to the Manager.
The Manager elected voluntarily to waive that portion, if any, of the
annual management fees payable by the High-Yield Opportunities Fund and to pay
certain expenses of the Fund to the extent necessary to ensure that the Total
Operating Expenses of the Class did not exceed, on an annual basis, 0.75%, from
the commencement of the public offering of the Class through December 31, 1997.
Beginning January 1, 1998, the Manager has elected voluntarily to waive that
portion, if any, of the annual management fees payable by the High-Yield
Opportunities Fund and to pay certain of the Fund's expenses to the extent
necessary to ensure that the Total Operating Expenses of the Class do not
exceed, on an annual basis, 0.95%. This waiver of fees and payment of expenses
will extend through March 31, 1999.
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<PAGE>
Paul A. Matlack and Gerald T. Nichols have primary responsibility for
making day-to-day investment decisions for each Fund. Mr. Matlack and Mr.
Nichols have been members of Delchester Fund's management team since 1990, and
were named co-managers of the Fund in January 1993. Mr. Matlack and Mr. Nichols
have been members of High-Yield Opportunities Fund since the Fund's inception.
Mr. Matlack is a CFA charterholder and graduate of the University of
Pennsylvania with an MBA in Finance from George Washington University. He began
his career at Mellon Bank as a credit specialist, and later served as a
corporate loan officer for Mellon Bank and then Provident National Bank. Mr.
Nichols is a graduate of the University of Kansas, where he received a BS in
Business Administration and an MS in Finance. Prior to joining Delaware
Investments, 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.
In making investment decisions for the Funds, Mr. Matlack and Mr. Nichols
regularly consult with Paul E. Suckow. Mr. Suckow is Executive Vice
President/Chief Investment Officer, Fixed Income of Income Funds, Inc. Mr.
Suckow 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 Delaware Investments from 1981 to 1985. He returned to Delaware
Investments 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 Funds normally will not invest for short-term trading purposes.
However, a Fund may sell securities without regard to the length of time they
have been held. Given each 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. High portfolio turnover (over 100%) involves correspondingly greater
brokerage commissions and other transaction costs and may affect taxes payable
by the Funds' shareholders that are subject to federal income taxes. The
turnover rate may also be affected by cash requirements from redemptions and
repurchases of Fund shares.
Each 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, each Fund
may consider a broker/dealer's sales of shares of funds in the Delaware
Investments family 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, each Fund may quote yield or total return performance
of its 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.
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<PAGE>
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. Each Fund may also advertise aggregate and average total
return information concerning its 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 Funds
Each fiscal year, you will receive an audited annual report and an
unaudited semi-annual report. These reports provide detailed information about
each Fund's investments and performance. Income Funds, Inc.'s fiscal year ends
on July 31.
Distribution and Service
The Distributor, Delaware Distributors, L.P., serves as the national
distributor for Delchester Fund's shares under a Distribution Agreement with
Income Funds, Inc. dated April 3, 1995, as amended on November 29, 1995. The
Distributor serves as the national distributor for High-Yield Opportunities
Fund's shares under a Distribution Agreement with Income Funds, Inc. dated
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 each Fund
under an amended and restated agreement dated September 14, 1998. The Transfer
Agent also provides accounting services to the Funds 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 by the employer. Fees will be quoted upon request and are
subject to change.
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.
* * *
As with other mutual funds, financial and business organizations and
individuals around the world, each Fund could be adversely affected if the
computer systems used by its service providers do not properly process and
calculate date-related information from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." Income Funds, Inc. is taking steps to
obtain satisfactory assurances that the Funds' major service providers are
taking steps reasonably designed to address the
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Year 2000 Problem with respect to the computer systems that such service
providers use. There can be no assurances that these steps will be sufficient to
avoid any adverse impact on the business of the Funds.
Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro." It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. If High-Yield Opportunities Fund is
invested in securities of participating countries it could be adversely affected
if the computer systems used by its major service providers are not properly
prepared to handle the implementation of this single currency or the adoption of
the Euro by additional countries in the future. Income Funds, Inc. is taking
steps to obtain satisfactory assurances that the major service providers of
High-Yield Opportunities Fund are taking steps reasonably designed to address
these matters with respect to the computer systems that such service providers
use. There can be no assurances that these steps will be sufficient to avoid any
adverse impact on the business of the Fund.
Expenses
Each Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement.
For the fiscal year ended July 31, 1998, the ratio of operating expenses to
average daily net assets for Delchester Fund Institutional Class was 0.81%. For
the fiscal year ended July 31, 1998, the ratio of operating expenses to average
daily net assets for High-Yield Opportunities Fund Institutional Class was
0.84%, reflecting the voluntary waiver of fees and payment of expenses by the
Manager as described above. Without such voluntary waivers and payments, the
ratio of operating expenses to average daily net assets for High-Yield
Opportunities Fund Institutional Class would have been 1.14%.
Shares
Income Funds, Inc. is an open-end management investment company. Each
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 Funds, Income Funds, Inc.
presently offers three other series of shares, the Strategic Income Fund series,
Corporate Bond Fund series and the Extended Duration Bond 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.
All of the 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.
In addition to Institutional Class Shares, the Funds offer Class A Shares,
Class B Shares and Class C Shares. Shares of each class represent proportionate
interests in the assets of the respective Fund and have the same voting and
other rights and preferences as the other classes, except that shares of the
Classes 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
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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 of a Fund may vote on any proposal to increase
materially the fees to be paid by that Fund under the 12b-1 Plan relating to
Class A Shares.
Lincoln National Corporation Employees' Retirement Trust (the "Trust") made
the initial investment in the High-Yield Opportunities Fund, and as August 31,
1998, the Trust held 21% of the outstanding shares of the Fund. 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 discussion in this section supplements the description of the risks of
high-yield securities found earlier in this Prospectus under Risk Factors.
Delchester Fund's assets may be invested primarily in bonds rated BBB or
lower by S&P or Baa or lower by Moody's and in unrated corporate bonds.
High-Yield Opportunities Fund's assets may be invested primarily in bonds rated
BB or lower by S&P or Ba or lower by Moody's, and in bonds of comparable
quality. 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 a 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 a 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 a Fund's net
asset value per share.
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Zero-Coupon Bonds and Pay-In-Kind Bonds
Each 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 a 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 a Fund. For example, with zero coupon
bonds, a Fund accrues, and is required to distribute to shareholders, income on
such bonds, However, the Fund may not receive the cash associated with this
income until the bonds are sold or mature. If the Fund did not have sufficient
cash to make the required distribution of accrued income, the Fund could be
required to sell other securities in its portfolio or to borrow to generate the
cash required.
Restricted/Illiquid Securities
Each 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 Funds.
Delchester Fund may invest no more than 10% of the value of its net assets
in illiquid securities and High-Yield Opportunities 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 a Fund's 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
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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, a Fund's holdings
of illiquid securities exceed the Fund's 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.
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<PAGE>
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.
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, a Fund will only enter into loan arrangements after
a review of all pertinent facts by the Manager, subject to overall supervision
by the Board of Directors, including the creditworthiness of the borrowing
broker, dealer or institution and then only if the consideration to be received
from such loans would justify the risk. Creditworthiness will be monitored on an
ongoing basis by the Manager.
Repurchase Agreements
In order to invest its short-term cash reserves or when in a temporary
defensive posture, each 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., a 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 10% of Delchester Fund's and
15% of High-Yield Opportunities Fund's assets may be invested in illiquid
securities of which, no more than 10% may be invested in repurchase agreements
of over seven days' maturity. 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.
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 102% of the repurchase price, including the portion
representing the Fund's yield under such agreements, which is monitored on a
daily basis.
U.S. Government Securities
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by federal agencies and U.S.
government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, and others. Certain agencies and instrumentalities, such
as the Government National Mortgage Association ("GNMA"), are, in effect, backed
by the full faith and credit of the United States through provisions in their
charters that they may make "indefinite and unlimited" drawings on the Treasury,
if needed to service its debt. Debt from certain other agencies and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority for the U.S. Treasury
to purchase certain amounts of their securities to assist the institutions in
meeting their debt obligations. Finally, other agencies and instrumentalities,
such as the Farm Credit System, Tennessee Valley Authority and the Federal Home
Loan Mortgage Corporation, are federally chartered institutions under U.S.
government supervision, but
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<PAGE>
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.
Foreign Investment Information
High-Yield Opportunities 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
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<PAGE>
Manager does not believe that any current repatriation
restrictions would affect the Fund's decision to invest in such countries.
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<PAGE>
Short-Term Investments
The short-term investments in which the Funds 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
Funds, and time deposits maturing from two business days through seven calendar
days will not exceed 15% of the total assets of a Fund. Certificates of deposit
are negotiable short-term obligations issued by commercial banks against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
The Fund will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion or, in the case of a bank
which does not have total assets of at least $1 billion, the aggregate
investment made in any one such bank is limited to $100,000 and the principal
amount of such investment is insured in full by the Federal Deposit Insurance
Corporation, (ii) it is a member of the Federal Deposit Insurance Corporation,
and (iii) the bank or its securities have received the highest quality rating by
a nationally-recognized statistical rating organization;
(2) Commercial paper with the highest quality rating by a
nationally-recognized statistical rating organization (e.g., A-1 by S&P or
Prime-1 by Moody's) or, if not so rated, of comparable quality as determined by
the Manager;
(3) Short-term corporate obligations with the highest quality rating by a
nationally-recognized statistical rating organization (e.g., AAA by S&P or Aaa
by Moody's) or, if not so rated, of comparable quality as determined by the
Manager;
(4) U.S. government securities (see U.S. Government Securities); and
(5) Repurchase agreements collateralized by securities listed above.
Unseasoned Companies
High-Yield Opportunities Fund may invest in relatively new or unseasoned
companies which are in their early stages of development, or small companies
positioned in new and emerging industries where the opportunity for rapid
growth is expected to be above average. Securities of unseasoned companies
present greater risks than securities of larger, more established companies.
The companies in which the Fund may invest may have relatively small revenues,
limited product lines, and may have a small share of the market for their
products or services. Small companies may lack depth of management, they may be
unable to internally generate funds necessary for growth or potential
development or to generate such funds through external financing or favorable
terms, or they may be developing or marketing new products or services for
which markets are not yet established and may never become established. Due
these and other factors, small companies may suffer significant losses as well
as realize substantial growth, and investments in such companies tend to be
volatile and are therefore speculative.
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<PAGE>
Borrowing from Banks
High-Yield Opportunities 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.
Investments by Fund of Funds
Each Fund accepts investments from the series of Delaware Group Foundation
Funds, a fund of funds (the "Foundation Funds"). From time to time, a Fund may
experience large investments or redemptions due to allocations or rebalancings
by the Foundation Funds. While it is impossible to predict the overall impact
of these transactions over time, there could be adverse effects on portfolio
management to the extent that a Fund may be required to sell securities or
invest cash at times when it would not otherwise do so. These transactions
could also have tax consequences if sales of securities result in gains and
could also increase transactions costs or portfolio turnover. The Manager will
monitor such transactions and will attempt to minimize any adverse effects on
the Funds and the Foundation Funds resulting from such transactions.
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<PAGE>
APPENDIX A--RATINGS
Delchester Fund's assets may be invested primarily in bonds rated BBB or
lower by S&P or Baa or lower by Moody's and in unrated corporate bonds.
High-Yield Opportunities Fund's assets may be invested primarily in bonds rated
BB or lower by S&P or Ba or lower by Moody's, and in bonds of comparable
quality. 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 each 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 each Fund's
securities which are not rated. The information contained in the table was
prepared based on a dollar weighted average of each Fund's portfolio composition
based on month end data for the fiscal year ended July 31, 1998. The paragraphs
following the table contain excerpts from Moody's and S&P's rating descriptions.
Average Weighted Average Weighted
Percentage of Percentage of
Portfolio Portfolio of
of Delchester High-Yield
Rating Moody's and/or S&P Fund Opportunities Fund
- --------------------------- ------------------ -------------------
United States Treasury
Obligations 4.43% --
Aaa/AAA 2.08 5.91%
Aa/AA -- --
A/A -- --
Baa/BBB -- --
Ba/BB 1.46 2.17
B/B 79.43 80.50
Caa/CCC 4.64 5.74
Not Rated/Other 7.96 5.68
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
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<PAGE>
or there may be present elements of danger with respect to principal or
interest; Ca--represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings; C--the lowest
rated class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal
and interest; AA--also qualify as high grade obligations, and in the majority
of instances differ from AAA issues only in a small degree; A--strong ability
to pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest
and repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions;
C--reserved for income bonds on which no interest is being paid; D--in
default, and payment of interest and/or repayment of principal is in arrears.
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
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<PAGE>
Delaware Investments 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 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 Investments at 800-523-1918.
INVESTMENT MANAGER
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
SUB-ADVISER
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
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
- --------------------------------
STRATEGIC INCOME FUND
- --------------------------------
A CLASS
B CLASS
C CLASS
- --------------------------------
PROSPECTUS
- --------------------------------
SEPTEMBER 29, 1998
DELAWARE(SM)
INVESTMENTS
==========
<PAGE>
STRATEGIC INCOME FUND A CLASS SHARES
STRATEGIC INCOME FUND B CLASS SHARES PROSPECTUS
STRATEGIC INCOME FUND C CLASS SHARES SEPTEMBER 29, 1998
------------------------------
1818 Market Street, Philadelphia, PA 19103
For Prospectus and Performance:
Nationwide 800-523-1918
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 Strategic Income Fund series (the
"Fund") of Delaware Group Income Funds, Inc. ("Income Funds, Inc."), a
professionally-managed mutual fund of the series type. The Fund's objective is
to seek to provide investors with high current income and total return.
This Fund may invest up to 60% of its assets in high-yielding, lower-rated
or unrated fixed-income securities issued by U.S. companies, commonly known as
"junk bonds." In addition, the Fund may invest a portion of its assets in
fixed-income securities of issuers in foreign countries and denominated in
foreign currencies and in U.S. equity securities, which may be unrated or rated
below investment grade. Junk bonds and lower rated securities involve greater
risks, including default risks, than higher rated securities. Purchasers should
carefully assess these risks before investing in this Fund. See Investment
Objective and Policies, Special Risk Considerations and Appendix A--Ratings.
The Fund offers Strategic Income Fund A Class ("Class A Shares"),
Strategic Income Fund B Class ("Class B Shares") and Strategic Income 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, 1998,
as it may be amended from time to time, contains additional information about
the Fund and has been filed with the Securities and Exchange Commission
("SEC"). Part B is incorporated by reference into this Prospectus and is
available, without charge, by writing to Delaware Distributors, L.P. at the
above address or by calling the above numbers. In addition, the SEC maintains
a Web site (http://www.sec.gov) that contains Part B, material
<PAGE>
we incorporated by reference and other information regarding registrants that
electronically file with the SEC.
The Fund's financial statements appear in its Annual Report, which will
accompany any response to requests for Part B.
The Fund also offers Strategic Income Fund Institutional Class, which is
available for purchase only by certain investors. A prospectus for Strategic
Income Fund Institutional Class can be obtained by writing to Delaware
Distributors, L.P. at the above address or by calling the above numbers.
TABLE OF CONTENTS
Cover Page
Synopsis
Summary of Expenses
Financial Highlights
Investment Objective and Policies
Suitability
Investment Strategy
Special Risks Considerations
High-Yield Securities
Foreign Securities
The Delaware Difference
Plans and services
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 -- 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.
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<PAGE>
Synopsis
Investment Objective
The investment objective of the Fund is to seek to provide investors with
high current income and total return. The Fund seeks to achieve its objective
by using a multi-sector investment approach, investing principally in three
sectors of the fixed-income securities markets: high-yield, higher risk
securities; investment grade fixed-income securities; and foreign government
and other foreign fixed-income securities. In addition, the Fund may invest in
U.S. equity securities. For further details, see Investment Objective and
Policies, Special Risk Considerations and Other Investment Policies and
Risk Considerations.
Risk Factors and Special Considerations
Prospective investors should consider the following:
1. The Fund may invest up to 60% of its assets in high-yield, higher risk
fixed-income securities issued by U.S. companies ("junk bonds"). In addition,
a portion of the Fund's foreign fixed-income securities and U.S. equity
securities may be rated below investment grade. Such securities may increase
the risks of an investment in this Fund. See High-Yield Securities under
Special Risk Considerations.
2. Investing in securities of non-United States companies which are
generally denominated in foreign currencies and the utilization of forward
foreign currency exchange contracts involve certain risk and opportunity
considerations not typically associated with investing in United States
companies. See Special Risk Considerations and Other Investment Policies and
Risk Considerations.
3. The Fund has the ability to engage in options transactions for hedging
purposes to counterbalance portfolio volatility. While the Fund does not engage
in options transactions for speculative purposes, there are risks which result
from the use of options, and an investor should carefully review the
descriptions of these risks in this Prospectus. Certain options may be
considered to be derivative securities. See Options under Other Investment
Policies and Risk Considerations.
4. The Fund may invest up to 15% of its net assets in issuers located or
operating in markets of emerging countries. The securities in these countries
may be subject to a greater degree of economic, political and social
instability than is the case in the United States, Western European and other
developed markets. See Special Risk Considerations.
Investment Manager, Sub-Adviser, Distributor and Transfer Agent
Delaware Management Company (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 has entered into a
sub-advisory agreement with Delaware International Advisers Ltd. (the
"Sub-Adviser"), an affiliate of the Manager, with respect to the management of
the Fund's investments in foreign government and other foreign fixed-income
securities. The Manager and the Sub-Adviser also provide investment management
services to certain of the other funds in the Delaware Investments family.
Delaware Distributors, L.P. (the "Distributor") is the national distributor for
the Fund and for all of the other mutual funds in the Delaware Investments
family. 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
Investments family. See Summary of Expenses and Management of the Fund for
further information regarding the Manager and the Sub-Adviser and the fees
payable under the Fund's Investment Management and Sub-Advisory Agreements.
-3-
<PAGE>
Sales Charges
The price of Class A Shares includes a maximum front-end sales charge of
4.75% of the offering price. 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; if a dealer's
commission is paid in connection with those purchases, a contingent deferred
sales charge ("Limited CDSC") of 1% will be imposed if shares are redeemed
during the first year after the purchase and 0.50% will be imposed if shares
are redeemed during the second year after the purchase. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange. Class A Shares are also 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 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 B Shares are subject to
annual 12b-1 Plan expenses which are assessed against such shares 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
which are assessed against such shares for the life of
the investment.
See Classes of Shares, and Distribution (12b-1) and Service under
Management of the Fund.
Purchase Amounts
Generally, the minimum initial investment in any Class is $1,000.
Subsequent investments 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
-4-
<PAGE>
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 subsequently reorganized as a Maryland
corporation on March 4, 1983. See Shares under Management of the Fund.
-5-
<PAGE>
Summary of
Expenses
A general comparison of the sales arrangements and other expenses
applicable to Class A, Class B and Class C
Shares follows:
<TABLE>
<CAPTION>
Class A Class B Class C
Shareholder Transaction Expenses Shares Shares Shares
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price). 4.75% None None
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price) ........................................................... None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable) ................................ None(1) 4.00%(2) 1.00%(3)
Redemption Fees .............................................................. None(4) None(4) None(4)
</TABLE>
<TABLE>
<CAPTION>
Class A Class B Class C
Annual Operating Expenses (as a percentage of average daily net assets) Shares Shares Shares
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management Fees (after voluntary waiver)6 .................................... 0.00% 0.00% 0.00%
12b-1 Expenses (including service fees) ...................................... 0.25%(5) 1.00%(5) 1.00%(5)
Other Operating Expenses (after voluntary payments)6 ......................... 0.75% 0.75% 0.75%
------- ------- -------
Total Operating Expenses (after voluntary waivers)6 ........................ 1.00% 1.75% 1.75%
======= ======= =======
</TABLE>
(1) 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
Limited CDSC of 1% will be imposed on certain redemptions made during the
first year after purchase and 0.50% will be imposed on certain
redemptions made during the second year after the purchase. Additional
Class A purchase options involving the imposition of a CDSC may be
permitted as described in this Prospectus from time to time. See
Contingent Deferred Sales Charge for Certain Redemptions of Class A
Shares Purchased at Net Asset Value under Redemption and Exchange.
-6-
<PAGE>
(2) 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. See
Deferred Sales Charge Alternative -- Class B Shares and Contingent
Deferred Sales Charge -- Class B Shares and Class C Shares under Classes
of Shares.
(3) Class C Shares are subject to a CDSC of 1% if the shares are redeemed
within 12 months of purchase. See Level Sales Charge Alternative -- Class
C Shares and Contingent Deferred Sales Charge -- Class B Shares and Class
C Shares under Classes of Shares.
(4) First Union National Bank currently charges $7.50 per redemption for
redemptions payable by wire.
(5) Class A Shares, Class B Shares and Class C Shares are subject to separate
12b-1 Plans. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by rules of
the National Association of Securities Dealers, Inc. (the "NASD"). The
annual 12b-1 Plan expenses for Class A Shares have been set by the Board
of Directors at 0.25% of the average daily net assets of such Class. The
maximum annual 12b-1 Plan expenses permitted under the 12b-1 Plan for
Class A Shares are 0.30% of the average daily net assets of such Class.
See Distribution (12b-1) and Service under Management of the Fund.
(6) The Manager has elected voluntarily to waive that portion, if any, of the
annual management fees payable by the Strategic Income Fund and to pay
certain expenses of the Fund to the extent necessary to ensure that the
Total Operating Expenses of each Class do not exceed on an annualized
basis (exclusive of 12b-1 Plan expenses, taxes, interest, brokerage
commissions and extraordinary expenses) 0.75% from the commencement of
operations through December 31, 1998. In the absence of voluntary
waivers, "Total Operating Expenses" for the Strategic Income Fund would
be 1.73%, 2.48% and 2.48% for Class A, Class B and Class C Shares,
respectively, reflecting management fees of 0.65%.
Investors utilizing the 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 Asset Planner in Part B.
For expense information about the Strategic Income Fund Institutional
Class of shares, see the separate prospectus relating to that class.
-7-
<PAGE>
The following example illustrates the expenses that an investor would pay
on a $1,000 investment over various time periods, assuming (1) a 5% annual
rate of return, (2) redemption and no redemption at the end of each time
period and (3) for Class B Shares and Class C Shares, payment of a CDSC at the
time of redemption, if applicable. The following example assumes the voluntary
waiver of the management fee and/or other payments of expenses by the Manager
as discussed in this Prospectus.
<TABLE>
<CAPTION>
Assuming Redemption Assuming No Redemption
1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years
-------- --------- --------- ---------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares ......... $571 $78 $100 $ 164 $57 $78 $100 $ 164
Class B Shares ......... $ 58 $85 $115 $ 186(2) $18 $55 $ 95 $ 186(2)
Class C Shares ......... $ 28 $55 $ 95 $ 206 $18 $55 $ 95 $ 206
</TABLE>
(1) Generally, no redemption charge is assessed upon redemption of Class A
Shares. Under certain circumstances, however, a Limited CDSC, which has
not been reflected in this calculation, may be imposed on certain
redemptions within two years after a purchase. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net
Asset Value under Redemption and Exchange.
(2) At the end of approximately eight years after purchase, Class B Shares
will be automatically converted into Class A Shares. The example above
assumes conversion of Class B Shares at the end of the eighth year.
However, the conversion may occur as late as three months after the
eighth anniversary of purchase, during which time the higher 12b-1 Plan
fees payable by Class B Shares will continue to be assessed. The ten-year
expense numbers for Class B Shares reflect the expenses of Class B Shares
for years one through eight and the expenses for Class A Shares for years
nine and ten. 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 these tables is to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly in
owning shares of the Fund.
-8-
<PAGE>
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements
of Delaware Group Income Funds, Inc.-- Strategic Income Fund and have been
audited by Ernst & Young LLP, independent auditors. The data for the most
recent fiscal year 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 the Fund's Annual Report to shareholders. A
copy of the Fund's Annual Report (including the report of Ernst & Young LLP)
may be obtained from the Fund upon request at no charge.
- ------------------------------------------------------------------------------
-9-
<PAGE>
<TABLE>
<CAPTION>
Strategic Income Fund A Class
----------------------------------
Period
Year 10/1/96(1)
Ended through
7/31/98 7/31/97
---------------- ----------------
<S> <C> <C>
Net asset value, beginning of period ......... $ 5.700 $ 5.500
Income from investment operations
Net investment income(2)...................... 0.444 0.337
Net realized and unrealized gain (loss) on
investments and foreign currencies .......... (0.104) 0.204
---------- ----------
Total from investment operations ............. 0.340 0.541
---------- ----------
Less dividends and distributions
Dividends from net investment income ......... (0.440) (0.341)
Distributions from net realized gain on
investment transactions ..................... (0.120) none
---------- ----------
Total dividends and distributions ............ (0.560) (0.341)
---------- ----------
Net asset value, end of period ............... $ 5.480 $ 5.700
========== ==========
- --------------------
Total return ................................. 6.23%(3,6) 10.11%(3,6)
- --------------------
Ratios and Supplemental Data
Net assets, end of period (000 omitted) ...... $ 17,871 $ 9,144
Ratio of expenses to average net assets ...... 1.00% 1.00%
Ratio of expenses to average net assets
prior to expense limitation ................. 1.73% 2.12%
Ratio of net investment income to
average net assets .......................... 7.93% 7.76%
Ratio of net investment income to
average net assets prior to expense
limitation .................................. 7.20% 6.64%
Portfolio turnover ........................... 175% 183%
<CAPTION>
Strategic Income Fund B Class Strategic Income Fund C Class
---------------------------------- --------------------------------
Period Period
Year 10/1/96(1) Year 10/1/96(1)
Ended through Ended through
7/31/98 7/31/97 7/31/98 7/31/97
---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ......... $ 5.700 $ 5.500 $ 5.700 $ 5.500
Income from investment operations
Net investment income(2)...................... 0.402 0.308 0.402 0.313
Net realized and unrealized gain (loss) on
investments and foreign currencies .......... (0.100) 0.203 (0.100) 0.198
---------- ---------- ---------- ----------
Total from investment operations ............. 0.302 0.511 0.302 0.511
---------- ---------- ---------- ----------
Less dividends and distributions
Dividends from net investment income ......... (0.402) (0.311) (0.402) (0.311)
Distributions from net realized gain on
investment transactions ..................... (0.120) none (0.120) none
---------- ---------- ---------- ----------
Total dividends and distributions ............ (0.522) (0.311) (0.522) (0.311)
---------- ---------- ---------- ----------
Net asset value, end of period ............... $ 5.480 $ 5.700 $ 5.480 $ 5.700
========== ========== ========== ==========
- --------------------
Total return ................................. 5.32%(4,6) 9.53%(4,6) 5.32(5,6) 9.53%(5,6)
- --------------------
Ratios and Supplemental Data
Net assets, end of period (000 omitted) ...... $ 15,602 $ 6,878 $ 5,276 $ 1,944
Ratio of expenses to average net assets ...... 1.75% 1.75% 1.75% 1.75%
Ratio of expenses to average net assets
prior to expense limitation ................. 2.48% 2.87% 2.48% 2.87%
Ratio of net investment income to
average net assets .......................... 7.18% 7.01% 7.18% 7.01%
Ratio of net investment income to
average net assets prior to expense
limitation .................................. 6.45% 5.89% 6.45% 5.89%
Portfolio turnover ........................... 175% 183% 175% 183%
</TABLE>
<PAGE>
- -----------
(1) Date of initial public offering; ratios have been annualized but total
return has not been annualized. Total return for this short of a time
period may not be representative of longer term results.
(2) Per share information for the year ended July 31, 1998 was based on the
average shares outstanding method.
(3) Does not reflect any maximum front-end sales charge that is or was in
effect, nor the Limited CDSC that varies from 0.50% - 1%, depending on
the holding period for Strategic Income Fund A Class, that would apply in
the event of certain redemptions within 2 years of purchase. See
Contingent Deferred Sales Charge for Certain Redemptions of Class A
Shares Made at Net Asset Value.
(4) Does not reflect any CDSC that varies from 1% - 4%, depending on the
holding period for Strategic Income Fund B Class. See Contingent Deferred
Sales Charge--Class B and Class C Shares.
(5) Does not reflect the CDSC of 1% for Strategic Income Fund C Class for 12
months from the date of purchase. See Contingent Deferred Sales Charge--
Class B and Class C Shares.
(6) Total return reflects expense limitations in effect for the Fund.
-10-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
SUITABILITY
The Fund may be suitable for the investor interested in high current
income and total return which, in part, is derived from such income. The net
asset value per share of each Class may fluctuate in response to the condition
of individual companies and general market and economic conditions and, as a
result, the Fund is not appropriate for a short-term investor. The Fund cannot
assure a specific rate of return or that principal will be protected. However,
through the cautious selection and supervision of its portfolio, the Manager
and the Sub-Adviser will strive to achieve the Fund's objective.
The types of securities in which the Fund may invest are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as
yield, in making an investment decision. While investments in unrated,
lower-rated and certain restricted securities have the potential for higher
yields, they are more speculative and increase the credit risk of the Fund's
portfolio. Changes in the market value of portfolio securities will not affect
interest income from such securities, but will be reflected in a Class' net
asset value. In addition, investments in foreign fixed-income securities
involve special risks, including those related to currency fluctuations, as
well as to political, economic and social situations different from and
potentially more volatile than those in the United States. Investors should be
willing to accept the risks, including the risk of net asset value
fluctuations, associated with investing in these types of securities. See
Special Risk Considerations and Other Investment Policies and Risk
Considerations for a complete discussion of the risk factors affecting the
Fund's portfolio securities.
Ownership of Strategic Income Fund shares can reduce the bookkeeping and
administrative inconveniences that is typically connected with direct purchases
of the types of securities in which the Fund invests. Delaware Investments
includes a family of funds, generally available through registered investment
dealers, which may be used together to create a more complete investment
program.
INVESTMENT STRATEGY
The objective of the Fund is to seek to provide investors with high
current income and total return. The Manager will seek to achieve this
objective by allocating the Fund's investments principally among the following
three sectors of the fixed-income securities markets:
o a High-Yield Sector, consisting of high-yielding, lower-rated or
unrated fixed-income securities issued by U.S. companies;
o an Investment Grade Sector, consisting of investment grade debt
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, or by U.S. companies; and
o an International Sector, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other
fixed-income securities of issuers in foreign countries and
denominated in foreign currencies.
The Manager will determine the amount of assets of the Fund that will be
allocated to each of the three sectors in which the Fund will invest, based on
its analysis of economic and market conditions and its assessment of the
returns and potential for appreciation that can be achieved from investment in
each of
-11-
<PAGE>
the three sectors. The Manager will periodically reallocate the Fund's assets
as it deems necessary, and as little as 20% and as much as 60% of the Fund's
assets among sectors may be invested in each fixed-income sector. In addition,
the Fund may invest up to 10% of its assets in U.S. equity securities.
Domestic High-Yield Sector
The Manager will invest the Fund's assets that are allocated to the
domestic high-yield sector primarily in those securities having a liberal and
consistent yield and those tending to reduce the risk of market fluctuations.
The Fund may invest in domestic corporate debt obligations, including,
corporate notes (including convertible notes), units consisting of bonds with
stock or warrants to buy stock attached, debentures, convertible debentures,
zero coupon bonds and pay-in-kind securities ("PIKs"). See Zero Coupon Bonds
and Pay-In-Kind Bonds under Other Investment Policies and Risk Considerations.
The Fund may also purchase preferred stock and convertible preferred stock.
The Fund will invest in both rated and unrated bonds. The rated bonds that
the Fund may purchase in this sector of its portfolio will generally be rated
BB or lower by Standard & Poor's Ratings Group ("S&P") or Fitch Investors
Service, Inc. ("Fitch"), Ba or lower by Moody's Investors Service, Inc.
("Moody's"), or similarly rated by another nationally recognized statistical
rating organization. See Appendix C -- Ratings in this Prospectus for more
rating information and High-Yield Securities under Special Risk Considerations
for a description of the risks associated with investing in lower-rated
fixed-income securities. Unrated bonds may be more speculative in nature than
rated bonds.
Investment Grade Sector
In managing the Fund's assets allocated to the investment grade sector,
the Manager will invest primarily in debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities and by U.S.
corporations. The corporate debt obligations in which the Fund may invest
include bonds, notes, debentures and commercial paper of U.S. companies.
The U.S. government securities in which the Fund may invest include a
variety of securities which are issued or guaranteed as to the payment of
principal and interest by the U.S. government, and by various agencies or
instrumentalities which have been established or sponsored by the U.S.
government. See U.S. Government Securities under Other Investment Policies and
Risk Considerations for a discussion of these types of securities.
The investment grade sector of the Fund's portfolio may also be invested
in mortgage-backed securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by government sponsored corporations. See
Mortgage-Backed Securities under Other Investment Policies and Risk
Considerations for a discussion of these types of securities. Other
mortgage-backed securities in which the Fund may invest are issued by certain
private, non-government entities. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). See CMOs and REMICs under Other
Investment Polices and Risk Considerations for a discussion of these types of
mortgage-backed securities.
Subject to the quality limitations set forth in this Prospectus, the Fund
may also invest in securities which are backed by assets such as receivables on
home equity and credit card loans, and receivables regarding automobile, mobile
home, recreational vehicle and other loans, wholesale dealer floor plans and
leases. See Asset-Backed Securities under Other Investment Policies and Risk
Considerations. The Fund
-12-
<PAGE>
may also invest in futures contracts and options on futures contracts subject
to certain limitations. See Futures under Other Investment Policies and Risk
Considerations.
Securities purchased by the Fund within the investment grade sector will
be rated in one of the four highest rating categories or will be unrated
securities that are of comparable quality as determined by the Manager. The
four highest rating categories are AAA, AA, A or BBB by S&P and Fitch, or Aaa,
Aa, A or Baa by Moody's. Debt securities within the top three categories
comprise what are known as high-grade bonds and are regarded as having a strong
capacity to pay principal and interest. Securities in the fourth category,
known as medium-grade bonds, are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and speculative characteristics. See Appendix C -- Ratings in this
Prospectus for more rating information.
International Sector
The Sub-Adviser will invest the assets of the Fund that are allocated to
the international sector primarily in fixed-income securities of issuers
organized or having a majority of their assets or deriving a majority of their
operating income in foreign countries. These fixed-income securities include
foreign government securities, debt obligations of foreign companies, and
securities issued by supranational entities.
A supranational entity is an entity established or financially supported
by the national governments of one or more countries to promote reconstruction
or development. Examples of supranational entities include, among others, the
International Bank for Reconstruction and Development (more commonly known as
the World Bank), the European Economic Community, the European Coal and Steel
Community, the European Investment Bank, the Inter-Development Bank, the
Export-Import Bank and the Asian Development Bank.
The Fund may invest in sponsored and unsponsored American Depositary
Receipts, European Depositary Receipts, or Global Depositary Receipts
("Depositary Receipts"). Depositary Receipts are receipts typically issued by a
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. "Sponsored" Depositary Receipts are issued jointly by
the issuer of the underlying security and a depository, and "unsponsored"
Depositary Receipts are issued without the participation of the issuer of the
deposited security. The Fund may also invest in Brady Bonds, which are
described more fully under Foreign Securities in the Special Risk
Considerations section of this Prospectus. The Fund may also invest in zero
coupon bonds and may purchase shares of other investment companies. See Zero
Coupon Bonds and Pay-In-Kind Bonds and Investment Company Securities under
Other Investment Polices and Risk Considerations.
The Fund may invest in securities issued in any currency and may hold
foreign currencies. Securities of issuers within a given country may be
denominated in the currency of another country or in multinational currency
units, such as the European Currency Unit. The Fund will, from time to time,
purchase or sell foreign currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of Fund transactions and to
minimize currency value fluctuations. See Other Investment Policies and Risk
Considerations for a further description of the Fund's foreign currency
transactions.
While the Fund may purchase securities of issuers in any foreign country,
developed and underdeveloped, no more than 15% of the Fund's assets may be
invested in direct obligations of issuers located in emerging market countries.
See Emerging Market Securities under Special Risk Considerations.
The Fund will invest in both rated and unrated foreign securities. The
rated securities that the Fund may purchase in the international sector of its
portfolio may include those rated BBB or lower by S&P or Fitch, Baa or lower
by Moody's, or similarly rated by another nationally recognized statistical
rating organization. See
-13-
<PAGE>
Appendix C -- Ratings in this Prospectus for more rating information and
Foreign Securities and High-Yield Securities under Special Risk Considerations
for a description of the risks associated with investing in foreign securities
and lower-rated fixed-income securities.
Equity Sector
Up to 10% of the Fund's assets may be invested in U.S. equity securities.
Such investments may include common stocks, preferred stocks (including
adjustable rate preferred stocks) and other equity securities, such as
convertible securities and warrants, which may be used to create other
permissible investments. Such investments must be consistent with the Fund's
objective of high current income and total return. In addition, the Fund may
invest in shares or convertible bonds of real estate investment trusts
("REITs"). See REITs under Special Risk Considerations for a discussion of
these types of securities.
In managing the Fund's assets allocated to the U.S. equity sector, the
Manager may invest in securities that are rated and unrated. The securities may
include those rated BBB or lower by S&P or Fitch, Baa or lower by Moody's or
similarly rated by another nationally recognized statistical rating
organization. See Appendix C -- Ratings in this Prospectus for more rating
information and High-Yield Securities under Special Risk Considerations for a
description of the risks associated with investing in lower-rated securities.
* * *
For a description of the Fund's other investment policies and for a
further description of some of the policies described above, see Other
Investment Policies and Risk Considerations.
In unusual market conditions, in order to meet redemption requests, for
temporary defensive purposes, and pending investment, the Fund may hold a
substantial portion of its assets in cash or short-term fixed-income
obligations. The Fund may invest in repurchase agreements, but it normally
does so only to invest cash balances. The Fund is permitted to borrow money.
Although the Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained.
The Fund's investment objective, and its designation as an open-end
investment company and as a diversified fund, may not be changed unless
authorized by the vote of a majority of the Fund's outstanding voting
securities. A "majority vote of the outstanding voting securities" is the vote
by the holders of the lesser of a) 67% or more of the Fund's voting securities
present in person or represented by proxy if the holders of more than 50% of
the outstanding voting securities of the Fund are present or represented by
proxy; or b) more than 50% of the outstanding voting securities. Part B lists
other more specific investment restrictions of the Fund which may not be
changed without a majority shareholder vote.
The remaining investment policies of the Fund not identified above or in
Part B as fundamental are not fundamental and may be changed by the Board of
Directors of Income Funds, Inc. without a shareholder vote.
-14-
<PAGE>
SPECIAL RISK CONSIDERATIONS
Generally
The Fund invests a substantial portion of its assets in fixed-income
securities. The market values of fixed-income securities generally fall when
interest rates rise and, conversely, rise when interest rates fall.
Lower-rated and unrated fixed-income securities tend to reflect short-term
corporate and market developments to a greater extent than higher-rated
fixed-income securities, which react primarily to fluctuations in the general
level of interest rates. These lower-rated or unrated securities generally
have higher yields, but, as a result of factors such as reduced
creditworthiness of issuers, increased risk of default and a more limited and
less liquid secondary market, are subject to greater volatility and risk of
loss of income and principal than are higher-rated securities. The Manager
will attempt to reduce such risk through sector allocation, portfolio
diversification, credit analysis, and attention to trends in the economy,
industries and financial markets.
High-Yield Securities
The Fund may invest a significant portion of its assets in bonds and other
securities rated BBB or lower by S&P or Fitch, Baa or lower by Moody's, or
similarly rated by another rating organization, and in unrated corporate bonds.
See Appendix C--Ratings in this Prospectus for more rating information.
Investing in these so-called "junk" bonds or "high-yield" securities entails
certain risks, including the risk of loss of principal, which may be greater
than the risks involved in investment grade securities, and which should be
considered by investors contemplating an investment in the Fund. High-yield
bonds are sometimes issued by companies whose earnings at the time of issuance
are less than the projected debt service on the junk bonds. In addition to the
considerations discussed elsewhere in this Prospectus, those risks include the
following:
Volatility of the High-Yield Market. Although the market for high-yield
bonds has been in existence for many years, including periods of economic
downturns, the high-yield market grew rapidly during the long economic
expansion which took place in the United States during the 1980s. During that
economic expansion, the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings increased dramatically. As
a result, the high-yield market grew substantially during that economic
expansion. Although experts disagree on the impact recessionary periods have
had and will have on the high-yield market, some analysts believe a protracted
economic downturn would severely disrupt the market for high-yield bonds, would
adversely affect the value of outstanding bonds and would adversely affect the
ability of high-yield issuers to repay principal and interest. Those analysts
cite volatility experienced in the high-yield market in the past as evidence
for their position. It is likely that protracted periods of economic
uncertainty would result in increased volatility in the market prices of
high-yield bonds, an increase in the number of high-yield bond defaults and
corresponding volatility in a Class' net asset value.
Redemptions. If, as a result of volatility in the high-yield market or
other factors, the Fund experiences substantial net redemptions of the Fund's
shares for a sustained period of time (i.e., more shares of the Fund are
redeemed than are purchased), the Fund may be required to sell certain of its
high-yield securities without regard to the investment merits of the securities
to be sold. If the Fund sells a substantial number of securities to generate
proceeds for redemptions, the asset base of the Fund will decrease and the
Fund's expense ratios may increase.
Liquidity and Valuation. The secondary market for high-yield securities is
currently dominated by institutional investors, including mutual funds, and
certain financial institutions. There is generally no established retail
secondary market for high-yield securities. As a result, the secondary market
for high-yield securities is more limited and less liquid than other secondary
securities markets. The high-yield secondary market is particularly susceptible
to liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings
and loan crisis. A less liquid
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secondary market may have an adverse effect on the Fund's ability to dispose
of particular issues, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of the issuer. In addition, a less liquid secondary market
makes it more difficult for the Fund to obtain precise valuations of the
high-yield securities in its portfolio. During periods involving such
liquidity problems, judgment plays a greater role in valuing high-yield
securities than is normally the case. The secondary market for high-yield
securities is also generally considered to be more likely to be disrupted by
adverse publicity and investor perceptions than the more established secondary
securities markets. The privately placed high-yield securities that the Fund
may purchase are particularly susceptible to the liquidity and valuation risks
outlined above.
Foreign Securities
The Fund has the ability to purchase debt securities in any foreign
country. Investors should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations.
These risks are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in
securities of issuers in those nations.
In addition, in many countries, there is substantially less publicly
available information about issuers than is available in reports about
companies in the United States. Foreign companies are not subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. Consequently, financial data about foreign companies may not
accurately reflect the real condition of those issuers and securities markets.
Further, the Fund may encounter difficulty or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates on
securities transactions in foreign countries, which are sometimes fixed rather
than subject to negotiation as in the United States, are likely to be higher.
Further, the settlement period of securities transactions in foreign markets
may be longer than in domestic markets, and may be subject to administrative
uncertainties. In many foreign countries, there is less government supervision
and regulation of business and industry practices, stock exchanges, brokers
and listed companies than in the United States, and capital requirements for
brokerage firms are generally lower. The foreign securities markets of many of
the countries in which the Fund may invest may also be smaller, less liquid
and subject to greater price volatility than those in the United States.
Emerging Market Securities. The Fund may invest up to 15% of its assets in
the debt securities of issuers located in emerging market nations. Compared to
the United States and other developed countries, emerging countries may have
volatile social conditions, relatively unstable governments and political
systems, economies based on only a few industries and economic structures that
are less diverse and mature, and securities markets that trade a small number
of securities, which can result in a low or nonexistent volume of trading.
Prices in these securities markets tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries. Until
recently, there has been an absence of a capital market structure or
market-oriented economy in certain emerging countries. Further, investments and
opportunities for investments by foreign investors are subject to a variety of
national policies and restrictions in many emerging countries. Also, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including, in
some cases, the need for certain governmental consents. Countries such as those
in which the Fund may invest have historically experienced and may continue to
experience, substantial, and in some periods extremely high rates of inflation
for many years, high interest rates, exchange rate fluctuations or
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<PAGE>
currency depreciation, large amounts of external debt, balance of payments and
trade difficulties and extreme poverty and unemployment. Other factors which
may influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, its government's policy towards the
International Monetary Fund, the World Bank and other international agencies
and the political constraints to which a government debtor may be subject.
Brady Bonds. Among the foreign fixed-income securities in which the Fund
may invest are Brady Bonds. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally commercial bank
debt). In so restructuring its external debt, a debtor nation negotiates with
its existing bank lenders, as well as multilateral institutions such as the
World Bank and the International Monetary Fund, to exchange its commercial bank
debt for newly issued bonds (Brady Bonds). The Sub-Adviser believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced
plans to issue Brady Bonds an attractive opportunity for investment. Investors,
however, should recognize that the Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that solutions
must be negotiated on a case-by-case basis between debtor nations and their
creditors. In addition, Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history.
Foreign Government Securities. With respect to investment in debt issues
of foreign governments, including Brady Bonds, the ability of a foreign
government or government-related issuer to make timely and ultimate payments on
its external debt obligations will also be strongly influenced by the issuer's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. If
foreign government or government-related issuers cannot generate sufficient
earnings from foreign trade to service its external debt, they may need to
depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
curtail the willingness of such third parties to lend funds, which may further
impair the issuer's ability or willingness to service its debts in a timely
manner. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. The ability to service external debt will also depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
government issuer to obtain sufficient foreign exchange to service its external
debt. If a foreign governmental issuer defaults on its obligations, the Fund
may have limited legal recourse against the issuer and/or guarantor.
See Other Investment Policies and Risk Considerations for a further
description of certain risks associated with certain of the Fund's investments,
including the risks associated with engaging in foreign currency transactions
and options.
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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 funds in the
Delaware Investments family.
SHAREHOLDER PHONE DIRECTORY
Shareholder Service Center and Investor Information Center
800-523-1918
Information on Existing Regular Investment Accounts and Retirement Plan
Accounts; Wire Investments; Wire Liquidations; Telephone Liquidations and
Telephone Exchanges; Fund Information; Literature Price; Yield and
Performance Figures
Delaphone
800-362-FUND
(800-362-3863)
Performance Information
During business hours, you can call the Investor Information Center 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 Delaware Investments' Shareholder
Service Center. Our representatives can answer any questions about your
account, the Fund, various service features and other funds in the Delaware
Investments family.
Delaphone Service
Delaphone is an account inquiry service for investors with Touch-Tone(R)
phone service. It enables you to get information on your account faster than
the mailed statements and confirmations. Delaphone also provides current
performance information on the Fund, as well as other funds in the Delaware
Investments family. 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.
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<PAGE>
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, unless you elect to receive them in cash. You may
also elect to have the dividends earned in one fund automatically invested in
another Delaware Investments 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.
Retirement Planning
An investment in the Fund may be a suitable investment option for
tax-deferred retirement plans. Delaware Investments offers a full spectrum of
qualified and non-qualified retirement plans, including the popular 401(k)
deferred compensation plan, IRA, and the new Roth IRA. Please call Delaware
Investments at 800-523-1918 for more information.
MoneyLine(SM) Services
Delaware Investments offers the following services for fast and
convenient transfer of funds between your personal bank account and your Fund
account.
1. MoneyLine(SM) Direct Deposit Service
If you elect to have your dividends and distributions paid in cash and
such dividends and distributions are in an amount of $25 or more, you may
choose the MoneyLine(SM) Direct Deposit Service and have such payments
transferred from your Fund account to your predesignated bank account. See
Dividends and Distributions. In addition, you may elect to have your
Systematic Withdrawal Plan payments transferred from your Fund account to your
predesignated bank account through this service. See Systematic Withdrawal
Plans under Redemption and Exchange. This service is not available for certain
retirement plans.
2. MoneyLine(SM) On Demand
You or your investment dealer may request purchases and redemptions of
Fund shares by phone using MoneyLine(SM) On Demand. When you authorize the
Fund to accept such requests from you or your investment dealer, funds will be
withdrawn from (for share purchases) or deposited to (for share redemptions)
your predesignated bank account. Your request will be processed the same day
if you call prior to 4 p.m., Eastern time. There is a $25 minimum and $50,000
maximum limit for MoneyLine(SM) On Demand transactions. This service is not
available for retirement plans, except for purchases of shares by IRAs.
For each MoneyLine(SM) Service, it may take up to four business days for
the transactions to be completed. You can initiate either service by
completing an Account Services form. If your name and address are not
identical to the name and address on your Fund account, you must have your
signature guaranteed. The Fund does not charge a fee for any MoneyLine(SM)
Service; however, your bank may charge a fee. Please call the Shareholder
Service Center for additional information about these services.
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<PAGE>
Right of Accumulation
With respect to Class A Shares, the Right of Accumulation feature allows
you to combine the value of your current holdings of Class A Shares, Class B
Shares and Class C Shares of the Fund with the dollar amount of new purchases
of Class A Shares of the Fund to qualify for a reduced front-end sales charge
on such purchases of Class A Shares. Under the Combined Purchases Privilege,
you may also include certain shares that you own in other funds in the Delaware
Investments family. 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 shares of funds in the Delaware Investments family 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 the other mutual funds in the Delaware Investments family,
subject to certain exceptions and limitations. For additional information on
exchanges, see Investing by Exchange under How to Buy Shares, and Redemption
and Exchange.
Wealth Builder Option
You may elect to invest in the Fund through regular liquidations of shares
in your accounts in other mutual funds in the Delaware Investments family.
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.
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<PAGE>
CLASSES OF SHARES
Alternative Purchase Arrangements
Shares may be purchased at a price equal to the next determined net asset
value per share, subject to a sales charge which may be imposed, at the
election of the purchaser, at the time of the purchase for Class A Shares
("front-end sales charge alternative"), or on a contingent deferred basis for
Class B Shares ("deferred sales charge alternative") or Class C Shares ("level
sales charge alternative").
Class A Shares. An investor who elects the front-end sales charge
alternative acquires Class A Shares, which incur a sales charge when they are
purchased, but generally are not subject to any sales charge when they are
redeemed. Class A Shares are subject to annual 12b-1 Plan expenses of up to a
maximum of 0.30% (currently, no more than 0.25% pursuant to Board action) of
average daily net assets of such shares. Certain purchases of Class A Shares
qualify for reduced front-end sales charges. See Front-End Sales Charge
Alternative--Class A Shares, 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. 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. 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.
Class C Shares. An investor who elects the level sales charge alternative
acquires Class C Shares, which do not incur a front-end sales charge when they
are purchased, but are subject to a contingent deferred sales charge if they
are redeemed within 12 months of purchase. Class C Shares are subject to annual
12b-1 Plan expenses of up to a maximum of 1% (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. 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. 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 purchase of
such shares. However, there can be no assurance as to the return, if any, that
will be realized on such additional money. In addition the effect of any return
earned on such additional money will diminish over time.
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<PAGE>
In comparing Class B Shares to Class C Shares, investors should also consider
the duration of the annual 12b-1 Plan expenses to which each Class is subject
to and the desirability of an automatic conversion feature, which is available
only for Class B Shares.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Fund, the Distributor and others will be paid, in the
case of 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, if any, paid on Class A, Class B and Class C Shares will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount, except that the additional amount of 12b-1 Plan expenses
relating to Class B Shares and Class C Shares will be borne exclusively by such
shares. See Calculation of Offering Price and Net Asset Value Per Share.
The NASD has adopted certain rules relating to investment company sales
charges. Income Funds, Inc. and the Distributor intend to operate in
compliance with these rules.
Front-End Sales Charge Alternative--Class A Shares
Class A Shares may be purchased at the offering price, which reflects a
maximum front-end sales charge of 4.75%. See Calculation of Offering Price and
Net Asset Value Per Share.
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<PAGE>
Purchases of $100,000 or more carry a reduced front-end sales charge as
shown in the following table.
Strategic Income Fund A Class
- --------------------------------------------------------------------------------
Dealer's
Front-End Sales Charge Commission(3)
as % of as % of
Offering Amount Offering
Amount of Purchase Price Invested(2) Price
- --------------------------------------------------------------------------------
Less than $100,000 4.75% 4.93% 4.00%
$100,000 but under
$250,000 3.75 3.83 3.00
$250,000 but under
$500,000 2.50 2.55 2.00
$500,000 but under
$1,000,000(1) 2.00 2.01 1.60
(1) 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 Limited
CDSC of 1% may apply upon redemption of such shares made during the first
year after purchase and 0.50% may apply upon redemption of such shares
made during the second year after the purchase.
(2) Based upon the net asset value per share of Class A Shares as of the end
of Income Funds, Inc.'s most recent fiscal year.
(3) 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 Investments products and
services and who increase sales of shares of the funds in the Delaware
Investments family may receive an additional commission of up to 0.15% of the
offering price. Dealers who receive 90% or more of the sales charge may be
deemed to be underwriters under the Securities Act of 1933.
- --------------------------------------------------------------------------------
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<PAGE>
Beginning July 1, 1998, 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 of purchase)
- ------------------------------------ --------------------
Up to $5 million 1.00%
Next $20 million up to $25 million 0.50
Amount over $25 million 0.25
Such Class A Shares are subject to a Limited CDSC of 1% if shares are
redeemed during the first year after purchase and 0.50% if shares are redeemed
during the second year after the purchase.
For accounts with assets over $1 million, the dealer commission resets
annually to the highest incremental commission rate on the anniversary of the
first purchase. In determining a financial adviser's eligibility for the
dealer's commission, purchases of Class A Shares of other funds in the Delaware
Investments family 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 funds in the Delaware Investments family will not
qualify for payment of the dealer's commission, unless a dealer's commission or
similar payment has not been previously paid on the assets being exchanged. The
schedule and program for payment of the dealer's commission are subject to
change or termination at any time by the Distributor at its discretion.
Redemptions of Class A Shares purchased at net asset value may result in
the imposition of a Limited CDSC if the dealer's commission described above was
paid in connection with the purchase of those shares. See Contingent Deferred
Sales Charge for Certain Redemptions of Class A Shares Purchased at Net Asset
Value under Redemption and Exchange.
Combined Purchases Privilege
By combining your holdings of Class A Shares with your holdings of Class B
Shares and/or Class C Shares of the Fund and shares of the other funds in the
Delaware Investments family, 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
Investments fund holdings. In addition, assets held by investment advisory
clients of the Manager or its affiliates in a stable value account may be
combined with other fund holdings in the Delaware Investments family. 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 fund in the
Delaware Investments family 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.
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<PAGE>
This privilege also permits you to use these combinations under a Letter
of Intention. A Letter of Intention allows you to make purchases over a
13-month period and qualify the entire purchase for a reduction in front-end
sales charges on Class A Shares.
Combined purchases of $1,000,000 or more, including certain purchases made
at net asset value pursuant to a Right of Accumulation or under a Letter of
Intention, may result in the payment of a dealer's commission and the
applicability of a Limited CDSC. Investors should consult their financial
advisers or the Shareholder Service Center about the operation of these
features. See Front-End Sales Charge--Alternative Class A Shares, above.
Allied Plans
Class A Shares are available for purchase by participants in certain
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 Investments funds ("eligible Delaware Investments fund
shares"), as well as shares of designated classes of non-Delaware Investments
funds ("eligible non-Delaware Investments 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 Investments and eligible non-Delaware Investments
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 Investments fund shares.
Participants in Allied Plans may exchange all or part of their eligible
Delaware Investments fund shares for other eligible Delaware Investments fund
shares or for eligible non-Delaware Investments fund shares at net asset value
without payment of a front-end sales charge. However, exchanges of eligible
fund shares, both Delaware Investments and non-Delaware Investments, which
were not subject to a front end sales charge, will be subject to the
applicable sales charge if exchanged for eligible Delaware Investments 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
Investments 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 Investments fund shares in connection with Allied Plans,
all participant holdings in the Allied Plan will be aggregated.
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 Investments and non-Delaware Investments fund shares.
When eligible Delaware Investments fund shares are exchanged into eligible
non-Delaware Investments 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.
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Buying Class A Shares at Net Asset Value
Class A Shares may be purchased at net asset value under the Delaware
Investments 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 Investments
family, 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 funds
in the Delaware Investments family. 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. Investors may be charged a fee when effecting transactions in Class
A Shares through a broker or agent that offers these special investment
products.
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 Retirement Financial Services, Inc.'s (formerly
named Delaware Investment & Retirement Services, Inc.) proprietary record
keeping system that (i) has in excess of $500,000 of plan assets invested in
Class A Shares of funds in the Delaware Investments family and any stable
value product available through Delaware Investments, 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 fund in the Delaware
Investments family and such employer has properly represented to Retirement
Financial Services, Inc. in writing that it has the requisite number of
employees and has received written confirmation back from Retirement Financial
Services, Inc. See Group Investment Plans for information regarding the
applicability of the Limited CDSC.
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 Investments account in connection with loans originated from accounts
previously maintained by another investment firm will also be invested at net
asset value.
Investors in Delaware Investments 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 Investments family at net asset
value.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
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Group Investment Plans
Group Investment Plans (e.g., SEP/IRA, SAR/SEP, SIMPLE IRA, SIMPLE
401(k), Profit Sharing, Money Purchase Pension, 401(k) Defined Contribution
Plans, and 403(b)(7) and 457 Deferred Compensation 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 funds in the
Delaware Investments family, 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 investment accounts in Delaware
Investments 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.
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 a fund in the Delaware Investments family.
See Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value under Redemption and Exchange.
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, call the Shareholder
Service Center.
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 compensates
dealers or brokers for selling Class B Shares at the time of purchase from its
own assets in an amount equal to no more than 4% of the dollar amount
purchased. In addition, from time to time, upon written notice to all of its
dealers, the Distributor may hold special promotions for specified periods
during which the Distributor may pay additional compensation to dealers or
brokers for selling Class B Shares at the time of purchase. As discussed
below, however, Class B Shares are subject to annual 12b-1 Plan expenses and,
if redeemed within six years of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares. These
payments support the compensation paid to dealers or brokers for selling Class
B Shares. Payments to the Distributor and others under the Class B 12b-1 Plan
may be in an amount equal to no more than 1% annually. The combination of the
CDSC and the proceeds of the 12b-1 Plan fees makes it possible for the Fund to
sell Class B Shares without deducting a front-end sales charge at the time of
purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for 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
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eighth anniversary occurs between Conversion Dates, an investor's Class B
Shares will be converted on the next Conversion Date after such anniversary.
Consequently, if a shareholder's eighth anniversary falls on the day after a
Conversion Date, that shareholder will have to hold Class B Shares for as long
as three additional months after the eighth anniversary of purchase before the
shares will automatically convert into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute tax-free
exchanges for federal income tax purposes. See Taxes.
Level Sales Charge Alternative--Class C Shares
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount
purchased. As discussed below, however, Class C Shares are subject to annual
12b-1 Plan expenses and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class
C Shares. Payments to the Distributor and others under the Class C 12b-1 Plan
may be in an amount equal to no more than 1% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for 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 fund in
the Delaware Investments family. In the event of an exchange of the shares, the
"net asset value of such shares at the time of redemption" will be the net
asset value of the shares that were acquired in the exchange.
The following table sets forth the rates of the CDSC for Class B Shares of
the Fund:
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Contingent Deferred
Sales Charge (as a
Percentage of
Year After Dollar Amount
Purchase Made Subject to Charge)
- --------------------------- --------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. See Automatic Conversion of Class B Shares, above. Investors are
reminded that the Class A Shares into which Class B Shares will convert are
subject to ongoing annual 12b-1 Plan expenses of up to a maximum of 0.30%
(currently, no more than 0.25% pursuant to Board action) of average daily net
assets of such shares.
In determining whether a CDSC applies to a redemption of Class B Shares,
it will be assumed that shares held for more than six years are redeemed first,
followed by shares acquired through the reinvestment of dividends or
distributions, and finally by shares held longest during the six-year period.
With respect to Class C Shares, it will be assumed that shares held for more
than 12 months are redeemed first followed by shares acquired through the
reinvestment of dividends or distributions, and finally by shares held for 12
months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
The CDSC is waived on certain redemptions of Class B Shares and Class C
Shares. See Waiver of Contingent Deferred Sales Charge--Class B Shares and
Class C Shares under Redemption and Exchange.
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 funds in the Delaware Investments family. 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 shares of the funds in the Delaware Investments family,
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 SEC. 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 described above will be restricted in some fashion.
The Distributor intends to comply with the NASD's Conduct Rules as they may be
amended.
Institutional Class
In addition to offering Class A, Class B and Class C Shares, the Fund also
offers Strategic Income Fund Institutional Class, which is described in a
separate prospectus and is available for purchase only by certain investors.
Strategic Income Fund Institutional Class shares generally are distributed
directly by the Distributor and do not have a front-end sales charge, a CDSC or
a Limited CDSC, and are not subject to 12b-1 Plan distribution expenses. To
obtain the prospectus that describes Strategic Income Fund Institutional Class,
contact
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the Distributor by writing to the address or by calling the telephone number
listed on the back cover 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.
The Fund makes it easy to invest through your investment dealer, by mail,
by wire and by exchange.
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 Investments can refer you to one.
Investing by Mail
1. Initial Purchases--An Investment Application or, in the case of a
retirement plan account, an appropriate retirement plan application, must be
completed, signed and sent with a check payable to Strategic Income Fund A
Class, Strategic Income Fund B Class or Strategic Income Fund C Class, to
Delaware Investments at 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to the specific Fund and Class selected. Your check
should be identified with your name(s) and account number. An investment slip
(similar to a deposit slip) is provided at the bottom of transaction
confirmations and dividend statements that you will receive from Income Funds,
Inc. Use of this investment slip can help expedite processing of your check
when making additional purchases. Your investment may be delayed if you send
additional purchases by certified mail.
Investing by Wire
You may purchase shares by requesting your bank to transmit funds by wire
to First Union National Bank.
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 plan account, an appropriate
retirement plan
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application, for the specific Fund and Class selected, to Delaware Investments
at 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments anytime by wiring
funds to First Union National Bank.
If you want to wire investments to your account, call the Shareholder
Service Center for special wiring instructions. You should advise the
Shareholder Service Center by telephone of each wire you send.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware
Investments family, 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 Investments family,
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 Investments family. 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 funds in the Delaware Investments family. 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 funds in the Delaware Investments
family. 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 Classes of Shares for information on exchanges by
participants in an Allied Plan.
Additional Methods of Adding to Your Investment
Call the Shareholder Service Center for more information if you wish to
use the following services:
1. Automatic Investing Plan
The Automatic Investing Plan enables you to make regular monthly
investments without writing or mailing checks. You may authorize Income Funds,
Inc. to transfer a designated amount monthly from your checking account to your
Fund account. Many shareholders use this as an automatic savings plan.
Shareholders should allow a reasonable amount of time for initial purchases
and changes to these plans to become effective.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, SIMPLE IRA, SIMPLE 401(k), Profit Sharing and Money Purchase
Pension Plans, 401(k) Defined Contribution Plans, 403(b)(7) Deferred
Compensation Plans or 457 Deferred Compensation Plans.
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<PAGE>
2. Direct Deposit
You may have your employer or bank make regular investments directly to
your 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. MoneyLine(SM) On Demand
Through the MoneyLine(SM) On Demand service, you or your investment
dealer may call the Fund to request a transfer of funds from your
predesignated bank account to your Fund account. See MoneyLine(SM) Services
under The Delaware Difference for additional information about this service.
4. 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
Investments family. You may also elect to invest in other mutual funds in the
Delaware Investments family 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 Investments family and invested automatically into
any other account in a fund in the Delaware Investments family 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.
5. Dividend Reinvestment Plan
You can elect to have your distributions (capital gains and/or dividend
income) paid to you by check or reinvested in your Fund account. Or, you may
invest your distributions in certain other funds in the Delaware Investments
family, subject to the exceptions noted below as well as the eligibility and
minimum purchase requirements set forth in each fund's prospectus.
Reinvestments of distributions into Class A Shares of the Fund or of other
funds in the Delaware Investments family are made without a front-end sales
charge. Reinvestments of distributions into Class B Shares of the Fund or of
other funds in the Delaware Investments family or into Class C Shares of the
Fund or of other funds in the Delaware Investments family are also made without
any sales charge and will not be subject to a CDSC if later redeemed. See
Automatic Conversion of Class B Shares under Classes of Shares for information
concerning the automatic conversion of Class B Shares acquired by reinvesting
dividends.
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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 Investments
family, 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
Investments family 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. 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 Investments family. 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.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
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REDEMPTION AND EXCHANGE
You can redeem or exchange your shares in a number of different ways. The
exchange service is useful if your investment requirements change and you want
an easy way to invest in other bond funds, equity funds, tax-advantaged funds
or money market funds. This service is also useful if you are anticipating a
major expenditure and want to move a portion of your investment into a fund
that has the checkwriting feature. Exchanges are subject to the requirements of
each fund and all exchanges of shares constitute taxable events. See Taxes.
Further, in order for an exchange to be processed, shares of the fund being
acquired must be registered in the state where the acquiring shareholder
resides. You may want to consult your financial adviser or investment dealer to
discuss which funds in the Delaware Investments family will best meet your
changing objectives, and the consequences of any exchange transaction. You may
also call Delaware Investments 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, as noted
above, will be processed on the next business day. See Purchase Price and
Effective Date under How to Buy Shares. A shareholder submitting a redemption
request may indicate that he or she wishes to receive redemption proceeds of a
specific dollar amount. In the case of such a request, and in the case of
certain redemptions from retirement plan accounts, the Fund will redeem the
number of shares necessary to deduct the applicable CDSC in the case of Class B
and Class C Shares, and, if applicable, the Limited CDSC in the case of Class A
Shares and tender to the shareholder the requested amount, assuming the
shareholder holds enough shares in his or her account for the redemption to be
processed in this manner. Otherwise, the amount tendered to the shareholder
upon redemption will be reduced by the amount of the applicable CDSC or Limited
CDSC. Redemption proceeds will be distributed promptly, as described below, but
not later than seven days after receipt of a redemption request.
Except as noted below, for a redemption request to be in "good order," you
must provide your account number, account registration, and the total number of
shares or dollar amount of the transaction. For exchange requests, you must
also provide the name of the fund 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 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
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<PAGE>
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 Investments
family (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 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. A signature guarantee can be obtained from
a commercial bank, a trust company or a member of a Securities Transfer
Association Medallion Program ("Stamp"). A signature guarantee cannot be
provided by a notary public. A signature guarantee is designed to protect the
shareholders, the Fund and its agent from fraud. The Fund reserves the right to
reject a signature guarantee supplied by an 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.
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 Investments family, subject to the same conditions and
limitations as other exchanges noted above.
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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
certificate(s).
The Telephone Redemption--Check to Your Address of Record service and the
Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in writing that you do not
wish to have such services available with respect to your account. The Fund
reserves the right to modify, terminate or suspend these procedures upon 60
days' written notice to shareholders. It may be difficult to reach the Fund by
telephone during periods when market or economic conditions lead to an
unusually large volume of telephone requests.
Neither the Fund nor its Transfer Agent is responsible for any shareholder
loss incurred in acting upon written or telephone instructions for redemption
or exchange of Fund shares which are reasonably believed to be genuine. With
respect to such telephone transactions, the Fund will follow reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including verification of a form of personal identification) as, if it does
not, 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. First
Union National Bank'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 fees for this redemption method, but
the mail time may delay getting funds into your bank account. Simply call the
Shareholder Service Center prior to the time the offering price and net asset
value are determined, as noted above.
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MoneyLine(SM) On Demand
Through the MoneyLine(SM) On Demand service, you or your investment dealer
may call the Fund to request a transfer of funds from your Fund account to your
predesignated bank account. See MoneyLine(SM) Services under The Delaware
Difference for additional information about this service.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to adjust
your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in the Delaware Investments family under the same
registration, subject to the same conditions and limitations as other exchanges
noted above. As with the written exchange service, telephone exchanges are
subject to the requirements of each fund, as described above. Telephone
exchanges may be subject to limitations as to amounts or frequency.
Systematic Withdrawal Plans
1. Regular Plans
This plan provides shareholders with a consistent monthly (or quarterly)
payment. This is particularly useful to shareholders living on fixed incomes,
since it can provide them with a stable supplemental amount. With accounts of
at least $5,000, you may elect monthly withdrawals of $25 (quarterly $75) or
more. The Fund does not recommend any particular monthly amount, as each
shareholder's situation and needs vary. Payments are normally made by check.
In the alternative, you may elect to have your payments transferred from your
Fund account to your predesignated bank account through the MoneyLine(SM)
Direct Deposit Service. Your funds will normally be credited to your bank
account up to four business days after the payment date. There are no fees for
this redemption method. See MoneyLine(SM) Services under The Delaware
Difference for more information about this service.
2. Retirement Plans
For shareholders eligible under the applicable retirement plan to receive
benefits in periodic payments, the Systematic Withdrawal Plan provides you
with maximum flexibility. A number of formulas are available for calculating
your withdrawals depending upon whether the distributions are required or
optional. Withdrawals must be for $25 or more; however, no minimum account
balance is required. The MoneyLine(SM) Direct Deposit Service described above
is not available for certain retirement plans.
* * *
Shareholders should not purchase additional shares while participating in
a Systematic Withdrawal Plan.
Redemptions of Class A Shares via a Systematic Withdrawal Plan may be
subject to a Limited CDSC if the original purchase was made at net asset value
within the 12 months prior to the withdrawal and a dealer's commission was paid
on that purchase. See Contingent Deferred Sales Charge for Certain Redemptions
of Class A Shares Purchased at Net Asset Value, below.
The applicable CDSC for Class B Shares and Class C Shares redeemed via a
Systematic Withdrawal Plan will be waived if, on the date that the Plan is
established, the annual amount selected to be withdrawn is less than 12% of the
account balance. If the annual amount selected to be withdrawn exceeds 12% of
the account balance on the date that the Systematic Withdrawal Plan is
established, all redemptions under the Plan will be subject to the applicable
CDSC. Whether a waiver of the CDSC is available or not, the first shares to be
redeemed for each Systematic Withdrawal Plan payment will be those not subject
to a CDSC because they have either satisfied the required holding period or
were acquired through the reinvestment of distributions. The 12%
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annual limit will be reset on the date that any Systematic Withdrawal Plan is
modified (for example, a change in the amount selected to be withdrawn or the
frequency or date of withdrawals), based on the balance in the account on that
date. See Waiver of Contingent Deferred Sales Charge - Class B and Class C
Shares, below.
For more information on Systematic Withdrawal Plans, call the Shareholder
Service Center.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
For purchases of $1,000,000 or more made on or after July 1, 1998, a
Limited CDSC will be imposed on certain redemptions of Class A Shares (or
shares into which such Class A Shares are exchanged) according to the following
schedule: (1) 1% if shares are redeemed during the first year after the
purchase; and (2) 0.50% if shares are redeemed during the second year after the
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 assessed on
an amount equal to the lesser of (1) the net asset value at the time of
purchase of 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 fund in the Delaware Investments family 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 two years will not
be subjected to the Limited CDSC and an exchange of such Class A Shares into
another fund in the Delaware Investments family 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 two-year holding period. The Limited CDSC is assessed if such two-year
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; (vii) distributions described in (ii), (iv), and (vi) above
pursuant to a systematic withdrawal plan; and (viii) redemptions by the
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classes of shareholders who are permitted to purchase shares at net asset
value, regardless of the size of the purchase (see Buying Class A Shares at
Net Asset Value under Classes of Shares).
Waiver of Contingent Deferred Sales Charge--Class B and Class C Shares
The CDSC is waived on certain redemptions of Class B Shares in connection
with the following redemptions: (i) redemptions that result from the Fund's
right to liquidate a shareholder's account if the aggregate net asset value of
the shares held in the account is less than the then-effective minimum account
size; (ii) returns of excess contributions to an IRA, SIMPLE IRA, SEP/IRA, or
403(b)(7) or 457 Deferred Compensation Plans; (iii) periodic distributions from
an IRA, SIMPLE IRA, SEP/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; 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 1/2; and (vii)
distributions from an account if the redemption results from the death of all
registered owners of the account (in the case of accounts established under the
Uniform Gifts to Minors or Uniform Transfers to Minors Acts or trust accounts,
the waiver applies upon the death of all beneficial owners) or a total and
permanent disability (as defined in Section 72 of the Code) of all registered
owners occurring after the purchase of the shares being redeemed.
In addition, the CDSC will be waived on Class B and Class C Shares
redeemed in accordance with a Systematic Withdrawal Plan if the annual amount
selected to be withdrawn under the Plan does not exceed 12% of the value of the
account on the date that the Systematic Withdrawal Plan was established or
modified.
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DIVIDENDS AND DISTRIBUTIONS
The Fund expects to declare a dividend each day and to pay such dividends
once each month. Payment by check of cash dividends will ordinarily be mailed
within three business days after the payable date. Distributions from net
realized securities profits, if any, will be distributed twice a year. The
first payment normally would be made during the first quarter of the next
fiscal year. The second payment would be made near the end of the calendar year
to comply with certain requirements of the Code.
Purchases of shares 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 Fund is given prior notice of Federal Funds wire
and an acceptable guarantee of timely receipt from an investor meeting the
Fund's credit policies, the purchase will start earning dividends on the day
the wire is received. Purchases by check earn dividends upon conversion to
Federal Funds, normally one business day after receipt.
Dividends will be declared each day to all shareholders of record as of
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.
Each class of the Fund will share proportionately in the investment income
and expenses of the Fund, except that the per share dividends from net
investment income on Class A 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.
Both dividends and distributions, if any, are automatically reinvested in
your account at net asset value unless you elect otherwise. Any check in
payment of dividends or other distributions which cannot be delivered by the
United States Post Office or which remains uncashed for a period of more than
one year may be reinvested in your account at the then-current net asset value
and the dividend option may be changed from cash to reinvest. If you elect to
take your dividends and distributions in cash and such dividends and
distributions are in an amount of $25 or more, you may choose the MoneyLine(SM)
Direct Deposit Service and have such payments transferred from your Fund
account to your predesignated bank account. This service is not available for
certain retirement plans. See MoneyLine(SM) Services under The Delaware
Difference for more information about this service.
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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 has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. As such, the Fund will not
be subject to federal income tax, or to any excise tax, to the extent its
earnings are distributed as provided in the Code, and it satisfies certain
other requirements relating to the sources of its income and diversification
of its assets.
On August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997 Act") was
signed into law. This new law made sweeping changes in the Code. Because many
of these changes are complex, and only indirectly affect a Fund and its
distributions to you, they are discussed in Part B. Changes in the treatment
of capital gains, however, are discussed in this section.
The Fund intends to 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.
The Treatment of Capital Gain Distributions under the Taxpayer Relief Act of
1997
The 1997 Act creates a category of long-term capital gain for individuals
who will be taxed at new lower tax rates. For investors who are in the 28% or
higher federal income tax brackets, these gains will be taxed at a maximum rate
of 20%. For investors who are in the 15% federal income tax bracket, these
gains will be taxed at a maximum rate of 10%. Capital gain distributions will
qualify for these new maximum tax rates, depending on when a Fund's securities
were sold and how long they were held by the Fund before they were sold. The
holding periods for which the new rates apply were revised by the Internal
Revenue Service Restructuring and Reform Act of 1998. Investors who want more
information on holding periods and other qualifying rules relating to these new
rates should review the expanded discussion in Part B, or should contact their
own tax advisers.
Income Funds, Inc. will advise you in its annual information reporting at
calendar year end of the amount of its capital gain distributions which will
qualify for these maximum federal tax rates.
Although dividends generally will be treated as distributed when paid,
dividends which are declared in October, November or December to shareholders
of record on a specified date in one of those months, but 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.
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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 Investments family. 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 Investments family and a sales charge that would otherwise apply
to the reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment.
The automatic conversion of Class B Shares into Class A Shares at the end
of approximately eight years after purchase will be tax-free for federal tax
purposes. See Automatic Conversion of Class B Shares under Classes of Shares.
The Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% in value of the total
assets of the Fund at the end of its fiscal year are invested in securities of
foreign corporations, the Fund may elect to pass-through to its shareholders a
pro-rata share of foreign income taxes paid by the Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro-rata share of foreign source income (including any foreign taxes paid by
the Fund), and (ii) entitled to either deduct (as an itemized deduction in the
case of individuals) their share of such foreign taxes in computing their
taxable income or to claim a credit for such taxes against their U.S. income
tax, subject to certain limitations under the Code. Shareholders will be
informed by the Fund at the end of each calendar year of the availability of
any credits on, and the amount of foreign source income to be included in,
their income tax returns.
In addition to the federal taxes described above, shareholders may or may
not be subject to various state and local taxes. For example, distributions of
interest income and capital gains realized from certain types of U.S.
government securities may be exempt from state personal income taxes. Because
investors' state and local taxes may be different than the federal taxes
described above, investors should consult their own tax advisers.
Each year, 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, if any,
that is derived from U.S. government securities that are exempt from state
income tax. Of course, shareholders who are not subject to tax on their income
would not be required to pay tax on amounts distributed to them by the Fund.
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
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shares outstanding. Debt securities are priced on the basis of valuations
provided by an independent pricing service using methods approved by Income
Funds, Inc.'s Board of Directors. Equity securities for which market
quotations are available are priced at market value. Short-term investments
having a maturity of less than 60 days are valued at amortized cost, which
approximates market value. All other securities are valued at their fair value
as determined in good faith and in a method approved by Income Funds, Inc.'s
Board of Directors.
Class A Shares are purchased at the offering price per share, while Class
B Shares and Class C Shares are purchased at the NAV per share. The offering
price per share of Class A Shares consists of the NAV per share next computed
after the order is received, plus any applicable front-end sales charges.
The offering price and NAV are computed as of the close of regular trading
on the New York Stock Exchange (ordinarily, 4 p.m., Eastern time) on days when
the Exchange is open.
The net asset values of all outstanding shares of each class of the Fund
will be computed on a pro-rata basis for each outstanding share based on the
proportionate participation in the Fund represented by the value of shares of
that class. All income earned and expenses incurred by the Fund will be borne
on a pro-rata basis by each outstanding share of a class, based on each class'
percentage in the Fund represented by the value of shares of such classes,
except that Strategic Income 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. Due to the specific distribution expenses and other
costs that may be allocable to each class, the NAV of each class is expected
to vary.
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MANAGEMENT OF THE FUND
Directors
The business and affairs of Income Funds, Inc. are managed under the
direction of its Board of Directors. Part B contains additional information
regarding Income Funds, Inc.'s directors and officers.
Investment Manager and Sub-Adviser
The Manager furnishes investment management services to the Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Investments since 1938. On July 31, 1998, the Manager and its
affiliates in Delaware Investments, including the Sub-Adviser, were managing in
the aggregate more than $43 billion in assets in the various institutional or
separately managed (approximately $25,873,990,000) and investment company
(approximately $17,929,500,000) accounts. The directors of Income Funds, Inc.
annually review fees paid to the Manager.
The Manager is a series of Delaware Management Business Trust. The Manager
changed its form of organization from a corporation to a business trust on
March 1, 1998. The Manager is an indirect, wholly owned subsidiary of Delaware
Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between DMH and a
wholly owned subsidiary of Lincoln National Corporation ("Lincoln National")
was completed. DMH and the Manager are now indirect, wholly owned subsidiaries,
and subject to the ultimate control, of Lincoln National. Lincoln National,
with headquarters in Fort Wayne, Indiana, is a diversified organization with
operations in many aspects of the financial services industry, including
insurance and investment management.
The Manager manages the Fund's portfolio and makes investment decisions
for the Fund. The Manager also administers Income Funds, Inc.'s affairs and
pays the salaries of all the directors, officers and employees of Income Funds,
Inc. who are affiliated with the Manager. For these services, the Manager is
paid an annual fee equal to 0.65% on the first $500 million of average daily
net assets, 0.625% on the next $500 million and 0.60% on the average daily net
assets in excess of $1 billion. For the fiscal year ended July 31, 1998, no
investment management fees were paid by the Fund as a result of the voluntary
waiver of fees by the Manager.
Subject to the overall supervision of the Manager, the Sub-Adviser manages
the international sector of the Fund's portfolio and furnishes the Manager with
investment recommendations, asset allocation advice, research and other
investment services with respect to foreign securities. For the services
provided to the Manager, the Manager pays the Sub-Adviser a fee equal to
one-third of the fee paid to the Manager under the terms of the Investment
Management Agreement.
Paul A. Matlack has primary responsibility for allocating the Fund's
assets among the fixed-income and equity sectors and for making day-to-day
investment decisions for the Fund regarding its investments in the high-yield
sector. Mr. Matlack, a Vice President/Senior Portfolio Manager of Income Funds,
Inc., has been a member of the Fund's management team since its inception. A
CFA charterholder, Mr. Matlack is a graduate of the University of Pennsylvania
with an MBA in Finance from George Washington University. He began his career
at Mellon Bank as a credit specialist, and later served as a corporate loan
officer for Mellon Bank and then Provident National Bank.
Paul Grillo has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in investment grade
securities. Mr. Grillo has been a member of the Fund's management team since
its inception. Mr. Grillo, a Vice President and Portfolio Manager of Income
Funds, Inc., holds a BA in Business Management from North Carolina State
University and an MBA in Finance from
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Pace University. Prior to joining the Manager in 1993, he served as mortgage
strategist and trader at the Dreyfus Corporation. He also served as a mortgage
strategist and portfolio manager for the Chemical Investment Group and as
financial analyst at the Chemical Bank. Mr. Grillo is a CFA charterholder.
Ian G. Sims, a Director and Senior Portfolio Manager with the
Sub-Adviser, has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in foreign securities. Mr.
Sims has been a member of the Fund's management team since its inception. Mr.
Sims is a graduate of the University of Leicester and holds a postgraduate
degree in statistics from the University of Newcastle-Upon-Tyne. He joined the
Sub-Adviser in 1990 as a senior international fixed-income and currency
manager. Mr. Sims began his investment career with the Standard Life Assurance
Co., and subsequently moved to the Royal Bank of Canada Investment Management
International Company, where he was an international fixed-income manager.
Prior to joining the Sub-Adviser, he was a senior fixed-income and currency
portfolio manager with Hill Samuel Investment Advisers Ltd.
Babak Zenouzi has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in U.S. equity securities.
Mr. Zenouzi, a Vice President/Portfolio Manager of Income Funds, Inc., has
been a member of the Fund's management team since its inception. Mr. Zenouzi
holds a BS in Finance and Economics from Babson College in Wellesley,
Massachusetts, and an MS in Finance from Boston College. Prior to joining the
Manager in 1992, he was with The Boston Company where he held the positions of
assistant vice president, senior financial analyst, financial analyst and
portfolio accountant.
The portfolio management team will from time to time consult with Paul E.
Suckow, Executive Vice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc., with respect to security selection, evaluation of market
and economic trends, and sector allocation. A CFA charterholder, he is a
graduate of Bradley University with an MBA from Western Illinois University.
Mr. Suckow was a fixed-income portfolio manager at the Delaware Group from
1981 to 1985. He returned to Delaware Investments 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.
The Manager and Sub-Adviser use their best efforts to obtain the best
available price and most favorable execution for portfolio transactions.
Orders may be placed with brokers or dealers who provide brokerage and
research services to the Manager or to the Sub-Adviser, or to their advisory
clients. These services may be used by the Manager or Sub-Adviser in servicing
any of their respective accounts. Subject to best price and execution, the
Manager and the Sub-Adviser may consider a broker/dealer's sales of the shares
of funds in the Delaware Investments family 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.
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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 September 30, 1996.
Income Funds, Inc. has adopted a separate distribution plan under Rule
12b-1 for each of the Class A Shares, Class B Shares and Class C Shares (the
"Plans"). The Plans permit the Fund to pay the Distributor from the assets of
the respective Classes a monthly fee for the Distributor's services and
expenses in distributing and promoting sales of shares.
These expenses include, among other things, preparing and distributing
advertisements, sales literature, and prospectuses and reports used for sales
purposes, compensating sales and marketing personnel, holding special
promotions for specified periods of time, and paying distribution and
maintenance fees to brokers, dealers and others. In connection with the
promotion of 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 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.
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
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(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 Fund's Class A, Class B and Class C Shares will not
incur any distribution expenses beyond these limits, which may not be increased
without shareholder approval.
Although the maximum fee payable under the Plan relating to Class A Shares
is 0.30% of average daily net assets, the Board of Directors has currently set
the annual fee for the Class at 0.25% of the average daily net assets. The Board
of Directors may increase the fee to the full 0.30% on all Class A Shares'
assets at any time. See Shares.
While payments 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
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 Strategic Income 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 Strategic Income Fund
Institutional Class.
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 September 14, 1998.
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 fees paid to the
Distributor and the Transfer Agent. The Distributor and the Transfer Agent are
also indirect, wholly owned subsidiaries of DMH.
* * *
As with other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by its service providers do not properly process and
calculate date-related information from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." Income Funds, Inc. is taking steps
to obtain satisfactory assurances that the Fund's major service providers are
taking steps reasonably designed to address the Year 2000 Problem with respect
to the computer systems that such service providers use. There can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the business of the Fund.
Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro." It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. If the Fund is invested in securities of
participating countries it could be adversely affected if the computer systems
used by its major service providers are not properly prepared to handle the
implementation of this single currency or the adoption of the Euro by
additional countries in the future. Income Funds, Inc. is taking steps to
obtain satisfactory assurances that the major service providers of the Fund are
taking steps reasonably designed to address these matters with respect to the
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computer systems that such service providers use. There can be no assurances
that these steps will be sufficient to avoid any adverse impact on the business
of the Fund.
Expenses
The Fund is responsible for all of its own expenses to other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement.
For the fiscal year ended July 31, 1998, the ratios of expenses average
daily net assets for Class A Shares, Class B Shares and Class C Shares were
1.00%, 1.75% and 1.75%, respectively, reflecting the impact of 12b-1 Plan
payments and the voluntary waivers and payments of fees by the Manager. Without
the voluntary waivers and payments of fees by the Manager, the ratios of
expenses to average daily net assets for Class A Shares, Class B Shares and
Class C Shares were 1.73%, 2.48% and 2.48%, respectively, reflecting 12b-1 Plan
payments.
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 four other series of shares, Corporate Bond Fund series,
Delchester Fund series, Extended Duration Bond Fund series and High-Yield
Opportunities 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.
In addition to Class A Shares, Class B Shares and Class C Shares, the Fund
also offers the Strategic Income Fund Institutional Class shares. Shares of
each class represent proportionate interests in the assets of the Fund and have
the same voting and other rights and preferences as the other classes of the
Fund, except that shares of the Strategic Income Fund Institutional Class are
not subject to, and may not vote on matters affecting, the Distribution Plans
under Rule 12b-1 relating to 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.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
U.S. Government Securities
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by federal agencies and U.S.
government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment. Agencies which are
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backed by the full faith and credit of the United States include the
Export-Import Bank, Farmers Home Administration, Federal Financing Bank, the
Federal Housing Administration, the Maritime Administration, the Small Business
Administration, and others. Certain agencies and instrumentalities, such as the
Government National Mortgage Association ("GNMA"), are, in effect, backed by the
full faith and credit of the United States through provisions in their charters
that they may make "indefinite and unlimited" drawings on the Treasury, if
needed to service its debt. Debt from certain other agencies and
instrumentalities, including the Federal Home Loan Bank and Federal National
Mortgage Association, are not guaranteed by the United States, but those
institutions are protected by the discretionary authority for the U.S. Treasury
to purchase certain amounts of their securities to assist the institutions in
meeting their debt obligations. Finally, other agencies and instrumentalities,
such as the Farm Credit System, the Tennessee Valley Authority and the Federal
Home Loan Mortgage Corporation, are federally chartered institutions under U.S.
government supervision, but their debt securities are backed only by the
creditworthiness of those institutions, not the U.S. government.
An instrumentality of a U.S. government agency is a government agency
organized under Federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal National Mortgage Association.
The maturities of such securities usually range from three months to
thirty years. While such securities are guaranteed as to principal and interest
by the U.S. government or its instrumentalities, their market values may
fluctuate and are not guaranteed, which may, along with the other securities in
the Fund's portfolio, cause a Class' daily net asset value to fluctuate.
Zero Coupon Bonds and Pay-In-Kind Bonds
Although the Fund does not intend to purchase a substantial amount of zero
coupon bonds or PIK bonds, from time to time, the Fund may acquire zero coupon
bonds and, to a lesser extent, PIK bonds. Zero coupon bonds are debt
obligations which do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the securities begin paying
current interest, and therefore are issued and traded at a discount from their
face amounts or par value. PIK bonds pay interest through the issuance to
holders of additional securities. Zero coupon bonds and PIK bonds are generally
considered to be more interest-sensitive than income bearing bonds, to be more
speculative than interest-bearing bonds, and to have certain tax consequences
which could, under certain circumstances, be adverse to the Fund. For example,
with zero coupon bonds, the Fund accrues, and is required to distribute to
shareholders, income on such bonds. However, the Fund may not receive the cash
associated with this income until the bonds are sold or mature. If the Fund did
not have sufficient cash to make the required distribution of accrued income,
the Fund could be required to sell other securities in its portfolio or to
borrow to generate the cash required.
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Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, including GNMA
certificates. Such securities differ from other fixed-income securities in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. When prevailing interest rates rise, the
value of a GNMA security may decrease as do other debt securities. When
prevailing interest rates decline, however, the value of GNMA securities may
not rise on a comparable basis with other debt securities because of the
prepayment feature of GNMA securities. Additionally, if a GNMA certificate is
purchased at a premium above its principal value because its fixed rate of
interest exceeds the prevailing level of yields, the decline in price to par
may result in a loss of the premium in the event of prepayment. Funds received
from prepayments may be reinvested at the prevailing interest rates which may
be lower than the rate of interest that had previously been earned.
The mortgages backing these securities include conventional 30-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages.
These mortgages may be supported by various types of insurance, may be backed
by GNMA certificates or other mortgage pass-throughs issued or guaranteed by
the U.S. government, its agencies or instrumentalities. However, the guarantees
do not extend to the mortgage-backed securities' value, which is likely to vary
inversely with fluctuations in interest rates. These certificates are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the
certificate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the average life or realized
yield of a particular issue of pass-through certificates. During periods of
declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Fund may reinvest the prepaid amounts in securities, the yield of
which reflects interest rates prevailing at the time. Moreover, prepayments of
mortgages which underlie securities purchased at a premium could result in
capital losses.
CMOs and REMICs
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities. To the extent any privately-issued
CMOs or REMICs in which the Fund may invest are considered by the Securities
and Exchange Commission to be investment companies, the Fund will limit its
investment in such securities in a manner consistent with the provisions of the
1940 Act.
Certain CMOs and REMICs may have variable or floating interest rates and
others may be stripped. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which the Fund
may invest.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and
the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the "interest-only" class), while the other class
will receive all of the principal (the "principal-only" class). The yield to
maturity on an interest-only class is extremely sensitive not only to changes
in prevailing interest rates but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a
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material adverse effect on the Fund's yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities
even if the securities are rated in the highest rating categories.
Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed and, accordingly,
these securities are generally illiquid and to such extent, together with any
other illiquid investments, will not exceed 15% of the Fund's net assets.
The Fund may invest in CMOs and REMICs issued by private entities which
are not collateralized by securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, so-called non-agency
mortgage-backed securities. Investments in these securities may be made only if
the securities (i) are rated at the time of purchase in the four top rating
categories by a nationally-recognized statistical rating organization (e.g.,
BBB or better by S&P or Fitch, or Baa or better by Moody's) and (ii) represent
interests in whole-loan mortgages, multi-family mortgages, commercial mortgages
and other mortgage collateral supported by a first mortgage lien on real
estate. Non-agency mortgage-backed securities are subject to the interest rate
and prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non-agency mortgage-backed securities may also be
subject to a greater risk of loss of interest and principal because they are
not collateralized by securities issued or guaranteed by the U.S. government.
In addition, timely information concerning the loans underlying these
securities may not be as readily available and the market for these securities
may be less liquid than other CMOs
and REMICs.
Asset-Backed Securities
The asset-backed securities in which the Fund may invest must be rated in
the four top rating categories by a nationally recognized statistical rating
organization (e.g., BBB or better by S&P and Fitch, or Baa or better by
Moody's). The receivables underlying asset-backed securities are typically
securitized in either a pass-through or a pay-through structure. Pass-through
securities provide investors with an income stream consisting of both principal
and interest payments in respect of the receivables in the underlying pool.
Pay-through asset-backed securities are debt obligations issued usually by a
special purpose entity, which are collateralized by the various receivables and
in which the payments on the underlying receivables provide the funds to pay
the debt service on the debt obligations issued. The Fund may invest in these
and other types of asset-backed securities structured in this way that may be
developed in the future.
The rate of principal payment on asset-backed securities generally depends
upon the rate of principal payments received on the underlying assets. Such
rate of payments may be affected by economic and various other factors such as
changes in interest rates. Therefore, the yield may be difficult to predict and
actual yield to maturity may be more or less than the anticipated yield to
maturity. Due to the shorter maturity of the collateral backing such
securities, there is less of a risk of substantial prepayment than with
mortgage-backed securities. Such asset-backed securities do, however, involve
certain risks not associated with mortgage-backed securities, including the
risk that security interests cannot be adequately or in many cases, ever,
established. In addition, with respect to credit card receivables, a number of
state and federal consumer credit laws give debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the outstanding
balance. In the case of automobile receivables, there is a risk that the
holders may not have either a proper or first security interest in all of the
obligations backing such receivables due to the large number of vehicles
involved in a typical issuance and technical requirements under state laws.
Therefore, recoveries on repossessed collateral may not always be available to
support payments on the securities.
Borrowings
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The Fund may borrow money as a temporary measure or to facilitate
redemptions. The Fund will not borrow money in excess of one-third of the value
of its net assets. The Fund has no intention of increasing its net income
through borrowing. Any borrowing will be done from a bank and, to the extent
that such borrowing exceeds 5% of the value of the Fund's net assets, asset
coverage of at least 300% is required. In the event that such asset coverage
shall at any time fall below 300%, the Fund shall, within three days thereafter
(not including Sundays or holidays, or such longer period as the Securities and
Exchange Commission may prescribe by rules and regulations), reduce the amount
of its borrowings to such an extent that the asset coverage of such borrowings
shall be at least 300%. The Fund will not pledge more than 10% of its net
assets, or issue senior securities as defined in the 1940 Act, except for notes
to banks. Investment securities will not be purchased while the Fund has an
outstanding borrowing.
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are purchased with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The Fund will maintain with its custodian bank a
separate account with a segregated portfolio of securities in an amount at
least equal to these commitments. The payment obligation and the interest rates
that will be received are each fixed at the time the Fund enters into the
commitment and no interest accrues to the Fund until settlement. Thus, it is
possible that the market value at the time of settlement could be higher or
lower than the purchase price if the general level of interest rates has
changed.
Portfolio Loan Transactions
The Fund may loan up to 25% of its assets to qualified broker/dealers or
institutional investors.
The major risk to which the Fund would be exposed on a loan transaction is
the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, the Fund will only enter into loan arrangements
after a review of all pertinent facts by the Manager, subject to overall
supervision by the Board of Directors, including the creditworthiness of the
borrowing broker, dealer or institution and then only if the consideration to
be received from such loans would justify the risk. Creditworthiness will be
monitored on an ongoing basis by the Manager.
Rule 144A Securities
The Fund may invest in restricted securities, including privately placed
securities, some of which may be eligible for resale without registration
pursuant to Rule 144A ("Rule 144A Securities") under the Securities Act of
1933. Rule 144A permits many privately placed and legally restricted securities
to be freely traded among certain institutional buyers such as the Fund. The
Fund may invest no more than 15% of the value of its net assets in illiquid
securities.
While maintaining oversight, the Board of Directors has delegated to the
Manager the day-to-day function of determining whether or not individual Rule
144A Securities are liquid for purposes of the Fund's 15% limitation on
investments in illiquid assets. The Board has instructed the Manager to
consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; (iv) the nature of the security and the nature
of the marketplace trades (e.g., the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of transfer).
If the Manager or Sub-Adviser determines that a Rule 144A Security which
was previously determined to be liquid is no longer liquid and, as a result,
the Fund's holdings of illiquid securities exceed the Fund's 15%
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limit on investments in such securities, the Manager will determine what action
to take to ensure that the Fund continues to adhere to such limitation.
Investment Company Securities
Any investments that the Fund makes in either closed-end or open-end
investment companies will be limited by the 1940 Act, and would involve an
indirect payment of a portion of the expenses, including advisory fees, of such
other investment companies. Under the 1940 Act's current limitations, the Fund
may not (1) own more than 3% of the voting stock of another investment company;
(2) invest more than 5% of the Fund's total assets in the shares of any one
investment company; nor (3) invest more than 10% of the Fund's total assets in
shares of other investment companies. If the Fund elects to limit its investment
in other investment companies to closed-end investment companies, the 3%
limitation described above is increased to 10%. These percentage limitations
also apply to the Fund's investments in unregistered investment companies.
Repurchase Agreements
In order to invest its short-term cash reserves or when in a temporary
defensive posture, the Fund may enter into repurchase agreements with banks or
broker/dealers deemed to be creditworthy by the Manager, under guidelines
approved by the Board of Directors. A repurchase agreement is a short-term
investment in which the purchaser (i.e. the Fund) acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time
and set price, thereby determining the yield during the purchaser's holding
period. Generally, repurchase agreements are of short duration, often less than
one week but on occasion for longer periods. Not more than 15% of the Fund's
assets may be invested in illiquid assets of which no more than 10% may be
invested in repurchase agreements of over seven-days' maturity. 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 102% of
the repurchase price, including the portion representing the Fund's yield under
such agreements, which is monitored on a daily basis.
Foreign Currency Transactions
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will, however, from time to time, purchase or sell
foreign currencies and/or engage in forward foreign currency transactions in
order to expedite settlement of portfolio transactions and to minimize currency
value fluctuations. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date (i.e., a "forward foreign currency"
contract or "forward" contract). A forward contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract, agreed upon by the parties, at a
price set at the time of the contract. The Fund will convert currency on a spot
basis from time to time, and investors should be aware of the costs of currency
conversion.
The Fund may enter into forward contracts to "lock in" the price of a
security it has agreed to purchase or sell, in terms of U.S. dollars or other
currencies in which the transaction will be consummated. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars
or foreign currency, of the amount of foreign currency involved in the
underlying security transaction, the Fund will be able to protect itself
against a possible loss resulting from an adverse change in currency exchange
rates during the period between the date the security is purchased or sold and
the date on which payment is made or received.
-53-
<PAGE>
When the Sub-Adviser believes that the currency of a particular country
may suffer a significant decline against the U.S. dollar or against another
currency, the Fund may enter into a forward foreign currency contract to sell,
for a fixed amount of U.S. dollars or other appropriate currency, the amount of
foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency.
The Fund will not enter into forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's securities or other assets denominated in that currency.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions. With respect to forward foreign currency contracts, the precise
matching of forward contract amounts and the value of the securities involved
is generally not possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency strategy is highly
uncertain.
It is impossible to forecast the market value of Fund securities at the
expiration of the contract. Accordingly, it may be necessary for the Fund to
purchase additional foreign currency on the spot market (and bear the expense
of such purchase) if the market value of the security is less than the amount
of foreign currency the Fund is obligated to deliver and if a decision is made
to sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of a security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
Options
The Manager and the Sub-Adviser may employ options techniques in an
attempt to protect appreciation attained and to take advantage of the liquidity
available in the options market. The Fund may purchase call options on foreign
or U.S. securities and indices and enter into related closing transactions and
the Fund may write covered call options on such securities. The Fund may also
purchase put options on such securities and indices and enter into related
closing transactions.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price up to an
agreed date. A covered call option obligates the writer, in return for the
premium received, to sell the securities subject to the option to the purchaser
of the option for an agreed upon price up to an agreed date. The advantage is
that the purchaser may hedge against an increase in the price of securities it
ultimately wishes to buy or take advantage of a rise in a particular index. The
Fund will only purchase call options to the extent that premiums paid on all
outstanding call options do not exceed 2% of its total assets.
A put option enables the purchaser of the option, in return for the
premium paid, to sell the security underlying the option to the writer at the
exercise price during the option period, and the writer of the option has the
obligation to purchase the security from the purchaser of the option. The Fund
will only purchase put options to the extent that the premiums on all
outstanding put options do not exceed 2% of its total assets. The advantage is
that the purchaser can be protected should the market value of the security
decline or should a particular index decline.
-54-
<PAGE>
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions essentially let the Fund offset put options or call
options prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
In purchasing put and call options, the premium paid by the Fund plus any
transaction costs will reduce any benefit realized by the Fund upon exercise of
the option. With respect to writing covered call options, the Fund may lose the
potential market appreciation of the securities subject to the option, if the
Manager's or the Sub-Adviser's judgment is wrong and the price of the security
moves in the opposite direction from what was anticipated.
The Fund may use both Exchange-traded and over-the-counter options.
Certain over-the-counter options may be illiquid. The Fund will only invest in
such options to the extent consistent with its 15% limitation on investment in
illiquid securities. The Fund will comply with U.S. Securities and Exchange
Commission asset segregation and coverage requirements when engaging in these
types of transactions.
Futures
Futures contracts are agreements for the purchase or sale for future
delivery of securities. When a futures contract is sold, the Fund incurs a
contractual obligation to deliver the securities underlying the contract at a
specified price on a specified date during a specified future month. A purchase
of a futures contract means the acquisition of a contractual right to obtain
delivery to the Fund of the securities called for by the contract at a
specified price during a specified future month.
While futures contracts provide for the delivery of securities, deliveries
usually do not occur. Contracts are generally terminated by entering into an
offsetting transaction. When the Fund enters into a futures transaction, it
must deliver to the futures commission merchant selected by the Fund an amount
referred to as "initial margin." This amount is maintained by the futures
commission merchant in an account at the Fund's custodian bank. Thereafter, a
"variation margin" may be paid by the Fund to, or drawn by the Fund from, such
account in accordance with controls set for such account, depending upon
changes in the price of the underlying securities subject to the futures
contract.
The Fund may also purchase and write options to buy or sell futures
contracts. Options on futures are similar to options on securities except that
options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract, rather than actually to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option.
The purpose of the purchase or sale of futures contracts consisting of
U.S. government securities is to protect the Fund against the adverse effects
of fluctuations in interest rates without actually buying or selling such
securities. Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of U.S. government securities at higher prices.
REITs
REITs are pooled investment vehicles which invest primarily in
income-producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real
-55-
<PAGE>
estate mortgages and derive income from the collection of interest payments.
Like investment companies such as Income Funds, Inc., REITs are not taxed on
income distributed to shareholders provided they comply with several
requirements in the Code. REITs are subject to substantial cash flow dependency,
defaults by borrowers, self-liquidation, and the risk of failing to qualify for
tax-free pass-through of income under the Code, and/or to maintain exemptions
from the 1940 Act.
Appendix A - Ratings
The Fund's assets may be invested in securities rated BBB or lower by S&P
or Fitch, Baa or lower by Moody's, in securities similarly rated by another
nationally recognized statistical rating organization, and in unrated corporate
bonds. These credit ratings evaluate only the safety of principal and interest
and do not consider the market value risk associated with high-yield
securities.
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 the fiscal year ended July 31, 1998. 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
- --------------------------- ------------------------
U.S. Treasury Obligations 5.86%
Aaa/AAA 29.63
Aa/AA 7.69
A/A 5.68
Baa/BBB 7.07
Ba/BB 1.04
B/B 43.03
Caa/CCC --
Not Rated/Other --
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
-56-
<PAGE>
future. Uncertainty of position characterizes bonds in this class; B--generally
lack characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small; Caa--are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest; Ca--represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings; C--the
lowest rated class of bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC-- regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; C--reserved
for income bonds on which no interest is being paid; D--in default, and payment
of interest and/or repayment of principal is in arrears.
Excerpts from Fitch's description of its bond ratings: AAA--Bonds
considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events;
AA-- Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+;
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings; BBB--Bonds considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings; BB--Bonds are considered
speculative. The obligor's ability to pay interest and repay principal may be
affected over time by adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in satisfying its
debt service requirements; B--Bond are considered highly speculative. While
bonds in this class are currently meeting debt service requirements, the
probability of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable business and
economic activity throughout the life of the issue; CCC--Bonds have certain
identifiable characteristics which, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous business and economic
environment; CC--Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time; C--Bonds are in imminent default in
payment of interest or principal; and DDD, DD and D--Bonds are in default on
interest and/or principal payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate recovery value in liquidation
or reorganization of the obligor. "DDD" represents the highest potential for
recovery on these bonds, and "D" represents the lowest potential for recovery.
Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
-57-
<PAGE>
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
-58-
<PAGE>
For more information, contact
Delaware Investments at 800-828-5052.
INVESTMENT MANAGER
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
SUB-ADVISER
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
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
<PAGE>
- ----------------------------------------
STRATEGIC INCOME FUND
- ----------------------------------------
INSTITUTIONAL
- ----------------------------------------
P R O S P E C T U S
- -----------------------------------------
SEPTEMBER 29, 1998
DELAWARE(SM)
INVESTMENTS
- -----------
<PAGE>
STRATEGIC INCOME FUND PROSPECTUS
INSTITUTIONAL CLASS SHARES SEPTEMBER 29, 1998
-------------------------------------------------------------
1818 Market Street, Philadelphia, PA 19103
For more information about
Strategic Income Fund Institutional Class
call Delaware Investments at 800-828-5052.
This Prospectus describes shares of Strategic Income Fund series (the
"Fund") of Delaware Group Income Funds, Inc. ("Income Funds, Inc."), a
professionally-managed mutual fund of the series type. The investment objective
of the Fund is to seek to provide investors with high current income and total
return.
This Fund may invest up to 60% of its assets in high-yielding, lower-rated
or unrated fixed-income securities issued by U.S. companies, commonly known as
"junk bonds." In addition, the Fund may invest a portion of its assets in
fixed-income securities of issuers in foreign countries and denominated in
foreign currencies and in U.S. equity securities, which may be unrated or rated
below investment grade. Junk bonds and lower rated securities involve greater
risks, including default risks, than higher rated securities. Purchasers should
carefully assess these risks before investing in this Fund. See Investment
Objective and Policies, Special Risk Considerations and Appendix A -- Ratings.
The Fund offers Strategic Income Fund Institutional Class (the "Class") of
shares.
This Prospectus relates only to the Class and sets forth information that
you should read and consider before you invest. Please retain it for future
reference. The Fund's Statement of Additional Information ("Part B" of Income
Funds, Inc.'s registration statement), dated September 29, 1998, as it may be
amended from time to time, contains additional information about the Fund and
has been filed with the Securities and Exchange Commission ("SEC"). Part B is
incorporated by reference into this Prospectus and is available, without
charge, by writing to Delaware Distributors, L.P. at the above address or by
calling the above number. In addition, the SEC maintains a Web site
(http://www.sec.gov) that contains Part B, material we incorporated by
reference, and other information regarding registrants that electronically file
with the SEC. The Fund's financial statements appear in its Annual Report,
which will accompany any response to requests for Part B.
The Fund also offers Strategic Income Fund A Class, Strategic Income Fund
B Class and Strategic Income Fund C Class. Shares of these classes are subject
to sales charges and other expenses, which may affect their performance. A
prospectus for these classes can be obtained by writing to Delaware
Distributors, L.P. at the above address or by calling 800-523-1918.
-1-
<PAGE>
TABLE OF CONTENTS
Cover Page.....................................................
Synopsis.......................................................
Summary of Expenses............................................
Financial Highlights...........................................
Investment Objective and Policies..............................
Suitability...................................................
Investment Strategy...........................................
Special Risks Considerations...................................
High-Yield Securities.........................................
Foreign Securities............................................
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
Special 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
FUNDS 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 FUNDS ARE NOT BANK OR CREDIT UNION DEPOSITS.
-2-
<PAGE>
SYNOPSIS
Investment Objective
The investment objective of the Fund is to seek to provide investors with
high current income and total return. The Fund seeks to achieve its objective
by using a multi-sector investment approach, investing principally in three
sectors of the fixed-income securities markets: high-yield, higher risk
securities; investment grade fixed-income securities; and foreign government
and other foreign fixed-income securities. In addition, the Fund may invest in
U.S. equity securities. For further details, see Investment Objective and
Policies, Special Risk Considerations and Other Investment Policies and
Risk Considerations.
Risk Factors and Special Considerations
Prospective investors should consider the following:
1. The Fund may invest up to 60% of its assets in high-yield, higher risk
fixed-income securities issued by U.S. companies ("junk bonds"). In addition, a
portion of the Fund's foreign fixed-income securities and U.S. equity
securities may be rated below investment grade. Such securities may increase
the risks of an investment in this Fund. See High-Yield Securities under
Special Risk Considerations.
2. Investing in securities of non-United States companies which are
generally denominated in foreign currencies and the utilization of forward
foreign currency exchange contracts involve certain risk and opportunity
considerations not typically associated with investing in United States
companies. See Special Risk Considerations and Other Investment Policies and
Risk Considerations.
3. The Fund has the ability to engage in options transactions for hedging
purposes to counterbalance portfolio volatility. While the Fund does not engage
in options transactions for speculative purposes, there are risks which result
from the use of options, and an investor should carefully review the
descriptions of these risks in this Prospectus. Certain options may be
considered to be derivative securities. See Options under Other Investment
Policies and Risk Considerations.
4. The Fund may invest up to 15% of its net assets in issuers located or
operating in markets of emerging countries. The securities markets in these
countries may be subject to a greater degree of economic, political and social
instability than is the case in the United States, Western European and other
developed markets. See Special Risk Considerations.
Investment Manager, Sub-Adviser, Distributor and Transfer Agent
Delaware Management Company (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 has entered into a
sub-advisory agreement with Delaware International Advisers Ltd. (the
"Sub-Adviser"), an affiliate of the Manager, with respect to the management of
the Fund's investments in foreign government and other foreign fixed-income
securities. The Manager and the Sub-Adviser also provide investment management
services to certain other funds in the Delaware Investments family. Delaware
Distributors, L.P. (the "Distributor") is the national distributor for the Fund
and for all of the other mutual funds in the Delaware Investments family.
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 Investments family.
See Summary of Expenses and Management of the Fund for further information
regarding the Manager and the Sub-Adviser and the fees payable under the Fund's
Investment Management and Sub-Advisory Agreements.
-3-
<PAGE>
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.
-4-
<PAGE>
SUMMARY OF EXPENSES
Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases (as a percentage
of offering price) ..................................... None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) .......................... None
Exchange Fees ............................................ None(1)
Annual Operating Expenses
(as a percentage of average daily net assets)
- --------------------------------------------------------------------------------
Management Fees (after voluntary waivers) ................. 0.00%(2)
12b-1 Fees ................................................ None
Other Operating Expenses (after voluntary payments) ....... 0.75%(2)
------
Total Operating Expenses (after voluntary waivers and
payments) ............................................ 0.75%(2)
======
- -----------
(1) Exchanges are subject to the requirements of each fund and a front-end
sales charge may apply.
(2) The Manager has elected voluntarily to waive that portion, if any, of the
annual management fees payable by the Strategic Income Fund and to pay
certain expenses of the Fund to the extent necessary to ensure that the
Total Operating Expenses of Strategic Income Fund Institutional Class, do
not exceed 0.75% during the commencement of the public offering of the
Class through December 31, 1998. If the voluntary expense waivers were not
in effect, the Total Operating Expenses, as a percentage of average daily
net assets, would have been 1.48% for Strategic Income Fund Institutional
Class, reflecting management fees of 0.65%.
For expense information about Strategic Income Fund A Class, Strategic
Income Fund B Class and Strategic Income Fund C Class, see the separate
prospectus relating to those classes.
-5-
<PAGE>
The following example illustrates the expenses that an investor would pay
on a $1,000 investment over various time periods, assuming (1) a 5% annual rate
of return, and (2) redemption at the end of each time period. The Fund charges
no redemption fees. The following example assumes the voluntary waivers of the
management fee and/or other payments of expenses by the Manager as discussed in
this Prospectus.
1 Year 3 years 5 years 10 years
------ ------- ------- --------
$8 $24 $42 $93
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 these tables is to assist investors in understanding the
various costs and expenses that they will bear directly or indirectly in owning
shares of the Fund.
-6-
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from the financial statements of
Delaware Group Income Funds, Inc. -- Strategic Income Fund 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 the Fund's
Annual Report to shareholders. A copy of the Fund's Annual Report (including
the report of Ernst & Young LLP) may be obtained from the Fund upon request at
no charge.
- --------------------------------------------------------------------------------
-7-
<PAGE>
<TABLE>
<CAPTION>
Strategic Income Fund
Institutional Class
----------------------------
Period
Year 10/1/96(1)
Ended through
7/31/98 7/31/97
------- --------
<S> <C> <C>
Net asset value, beginning of period ................................................. $5.700 $5.500
Income from investment operations
Net investment income(2) ............................................................. 0.458 0.367
Net realized and unrealized gain (loss) on investments and foreign currencies ........ (0.111) 0.187
------ ------
Total from investment operations ................................................... 0.347 0.554
------ ------
Less dividends and distributions
Dividends from net investment income ................................................. (0.457) (0.354)
Distributions from net realized gain on investment transactions ...................... (0.120) none
------ ------
Total dividends and distributions .................................................. (0.577) (0.354)
------ ------
Net asset value, end of period ....................................................... $5.470 $5.700
====== ======
- -------------------
Total return ......................................................................... 6.36%(3) 10.36%(3)
- -------------------
Ratios and supplemental data
Net assets, end of period (000 omitted) .............................................. $3,764 $3,405
Ratio of expenses to average net assets .............................................. 0.75% 0.75%
Ratio of expenses to average net assets prior to expense limitation .................. 1.48% 1.87%
Ratio of net investment income to average net assets ................................. 8.18% 7.90%
Ratio of net investment income to average net assets prior to expense limitation ..... 7.45% 6.78%
Portfolio turnover ................................................................... 175% 183%
</TABLE>
- -----------
(1) Date of initial public offering of Strategic Income Fund 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) Per share information for the year ended July 31, 1998 was based on the
average shares outstanding method.
(3) Total return reflects the expense limitations referenced under Summary of
Expenses.
-8-
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
SUITABILITY
The Fund may be suitable for the investor interested in high current
income and total return which, in part, is derived from such income. The net
asset value per share of the Class may fluctuate in response to the condition
of individual companies and general market and economic conditions and, as a
result, the Fund is not appropriate for a short-term investor. The Fund cannot
assure a specific rate of return or that principal will be protected. However,
through the cautious selection and supervision of its portfolio, the Manager
and the Sub-Adviser will strive to achieve the Fund's objective.
The types of securities in which the Fund may invest are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. Investors should consider asset value fluctuation, as well as
yield, in making an investment decision. While investments in unrated,
lower-rated and certain restricted securities have the potential for higher
yields, they are more speculative and increase the credit risk of the Fund's
portfolio. Changes in the market value of portfolio securities will not affect
interest income from such securities, but will be reflected in the Class' net
asset value. In addition, investments in foreign fixed-income securities
involve special risks, including those related to currency fluctuations, as
well as to political, economic and social situations different from and
potentially more volatile than those in the United States. Investors should be
willing to accept the risks, including the risk of net asset value
fluctuations, associated with investing in these types of securities. See
Special Risk Considerations and Other Investment Policies and Risk
Considerations for a complete discussion of the risk factors affecting the
Fund's portfolio securities.
Ownership of Strategic Income Fund shares can reduce the bookkeeping and
administrative inconveniences that is typically connected with direct purchases
of the types of securities in which the Fund invests. Delaware Investments
includes a family of funds, generally available through registered investment
dealers, which may be used together to create a more complete investment
program.
INVESTMENT STRATEGY
The objective of the Fund is to seek to provide investors with high
current income and total return. The Manager will seek to achieve this
objective by allocating the Fund's investments principally among the following
three sectors of the fixed-income securities markets:
o a High-Yield Sector, consisting of high-yielding, lower-rated or unrated
fixed-income securities issued by U.S. companies;
o an Investment Grade Sector, consisting of investment grade debt
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or by U.S. companies; and
o an International Sector, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other
fixed-income securities of issuers in foreign countries and denominated
in foreign currencies.
The Manager will determine the amount of assets of the Fund that will be
allocated to each of the three sectors in which the Fund will invest, based on
its analysis of economic and market conditions and its
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assessment of the returns and potential for appreciation that can be achieved
from investment in each of the three sectors. The Manager will periodically
reallocate the Fund's assets among sectors as it deems necessary, and as
little as 20% and as much as 60% of the Fund's assets may be invested in each
fixed-income sector. In addition, the Fund may invest up to 10% of its assets
in U.S. equity securities.
Domestic High-Yield Sector
The Manager will invest the Fund's assets that are allocated to the
domestic high-yield sector primarily in those securities having a liberal and
consistent yield and those tending to reduce the risk of market fluctuations.
The Fund may invest in domestic corporate debt obligations, including corporate
notes (including convertible notes), units consisting of bonds with stock or
warrants to buy stock attached, debentures, convertible debentures, zero coupon
bonds and pay-in-kind securities ("PIKs"). See Zero Coupon Bonds and
Pay-In-Kind Bonds under Other Investment Policies and Risk Considerations. The
Fund may also purchase preferred stock and convertible preferred stock.
The Fund will invest in both rated and unrated bonds. The rated bonds that
the Fund may purchase in this sector of its portfolio will generally be rated
BB or lower by Standard & Poor's Ratings Group ("S&P") or Fitch Investors
Service, Inc. ("Fitch"), Ba or lower by Moody's Investors Service, Inc.
("Moody's"), or similarly rated by another nationally recognized statistical
rating organization. See Appendix A -- Ratings in this Prospectus for more
rating information and High-Yield Securities under Special Risk Considerations
for a description of the risks associated with investing in lower-rated
fixed-income securities. Unrated bonds may be more speculative in nature than
rated bonds.
Investment Grade Sector
In managing the Fund's assets allocated to the investment grade sector,
the Manager will invest primarily in debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities and by U.S.
corporations. The corporate debt obligations in which the Fund may invest
include bonds, notes, debentures and commercial paper of U.S. companies.
The U.S. government securities in which the Fund may invest include a
variety of securities which are issued or guaranteed as to the payment of
principal and interest by the U.S. government, and by various agencies or
instrumentalities which have been established or sponsored by the U.S.
government. See U.S. Government Securities under Other Investment Policies and
Risk Considerations for a discussion of these types of securities.
The investment grade sector of the Fund's portfolio may also be invested
in mortgage-backed securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by government sponsored corporations. See
Mortgage-Backed Securities under Other Investment Policies and Risk
Considerations for a discussion of these types of securities. Other
mortgage-backed securities in which the Fund may invest are issued by certain
private, non-government entities. Two principal types of mortgage-backed
securities are collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). See CMOs and REMICs under Other
Investment Polices and Risk Considerations for a discussion of these types of
mortgage-backed securities.
Subject to the quality limitations set forth in this Prospectus, the Fund
may also invest in securities which are backed by assets such as receivables on
home equity and credit card loans, and receivables regarding automobile, mobile
home, recreational vehicle and other loans, wholesale dealer floor plans and
leases. See Asset-Backed Securities under Other Investment Policies and Risk
Considerations. The Fund may also invest in
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futures contracts and options on futures contracts subject to certain
limitations. See Futures under Other Investment Policies and Risk
Considerations.
Securities purchased by the Fund within the investment grade sector will
be rated in one of the four highest rating categories or will be unrated
securities that are of comparable quality as determined by the Manager. The
four highest rating categories are AAA, AA, A or BBB by S&P and Fitch, or Aaa,
Aa, A or Baa by Moody's. Debt securities within the top three categories
comprise what are known as high-grade bonds and are regarded as having a strong
capacity to pay principal and interest. Securities in the fourth category,
known as medium-grade bonds, are regarded as having an adequate capacity to pay
principal and interest but with greater vulnerability to adverse economic
conditions and speculative characteristics. See Appendix A -- Ratings in this
Prospectus for more rating information.
International Sector
The Sub-Adviser will invest the assets of the Fund that are allocated to
the international sector primarily in fixed-income securities of issuers
organized or having a majority of their assets or deriving a majority of their
operating income in foreign countries. These fixed-income securities include
foreign government securities, debt obligations of foreign companies, and
securities issued by supranational entities.
A supranational entity is an entity established or financially supported
by the national governments of one or more countries to promote reconstruction
or development. Examples of supranational entities include, among others, the
International Bank for Reconstruction and Development (more commonly known as
the World Bank), the European Economic Community, the European Coal and Steel
Community, the European Investment Bank, the Inter-Development Bank, the
Export-Import Bank and the Asian Development Bank.
The Fund may invest in sponsored and unsponsored American Depositary
Receipts, European Depositary Receipts, or Global Depositary Receipts
("Depositary Receipts"). Depositary Receipts are receipts typically issued by a
bank or trust company which evidence ownership of underlying securities issued
by a foreign corporation. "Sponsored" Depositary Receipts are issued jointly by
the issuer of the underlying security and a depository, and "unsponsored"
Depositary Receipts are issued without the participation of the issuer of the
deposited security. The Fund may also invest in Brady Bonds, which are
described more fully under Foreign Securities in the Special Risk
Considerations section of this Prospectus. The Fund may also invest in zero
coupon bonds and may purchase shares of other investment companies. See Zero
Coupon Bonds and Pay-In-Kind Bonds and Investment Company Securities under
Other Investment Polices and Risk Considerations.
The Fund may invest in securities issued in any currency and may hold
foreign currencies. Securities of issuers within a given country may be
denominated in the currency of another country or in multinational currency
units, such as the European Currency Unit. The Fund will, from time to time,
purchase or sell foreign currencies and/or engage in forward foreign currency
transactions in order to expedite settlement of Fund transactions and to
minimize currency value fluctuations. See Other Investment Policies and Risk
Considerations for a further description of the Fund's foreign currency
transactions.
While the Fund may purchase securities of issuers in any foreign country,
developed and underdeveloped, no more than 15% of the Fund's assets may be
invested in direct obligations of issuers located in emerging market
countries. See Emerging Market Securities under Special Risk Considerations.
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The Fund will invest in both rated and unrated foreign securities. The
rated securities that the Fund may purchase in the international sector of its
portfolio may include those rated BBB or lower by S&P or Fitch, Baa or lower by
Moody's, or similarly rated by another nationally recognized statistical rating
organization. See Appendix A -- Ratings in this Prospectus for more rating
information and Foreign Securities and High-Yield Securities under Special Risk
Considerations for a description of the risks associated with investing in
foreign securities and lower-rated fixed-income securities.
Equity Sector
Up to 10% of the Fund's assets may be invested in U.S. equity securities.
Such investments may include common stocks, preferred stocks (including
adjustable rate preferred stocks) and other equity securities, such as
convertible securities and warrants, which may be used to create other
permissible investments. Such investments must be consistent with the Fund's
objective of high current income and total return. In addition, the Fund may
invest in shares or convertible bonds of real estate investment trusts
("REITs"). See REITs under Other Investment Policies and Risk Considerations
for a discussion of these types of securities.
In managing the Fund's assets allocated to the U.S. equity sector, the
Manager may invest in securities that are rated and unrated. The securities may
include those rated BBB or lower by S&P or Fitch, Baa or lower by Moody's, or
similarly rated by another nationally recognized statistical rating
organization. See Appendix A -- Ratings in this Prospectus for more rating
information and High-Yield Securities under Special Risk Considerations for a
description of the risks associated with investing in lower-rated securities.
* * *
For a description of the Fund's other investment policies and for a
further description of some of the policies described above, see Other
Investment Policies and Risk Considerations.
In unusual market conditions, in order to meet redemption requests, for
temporary defensive purposes, and pending investment, the Fund may hold a
substantial portion of its assets in cash or short-term fixed-income
obligations. The Fund may invest in repurchase agreements, but it normally does
so only to invest cash balances. The Fund is permitted to borrow money.
Although the Fund will constantly strive to attain its objective, there
can be no assurance that it will be attained.
The Fund's investment objective, and its designation as an open-end
investment company and as a diversified fund, may not be changed unless
authorized by the vote of a majority of the Fund's outstanding voting
securities. A "majority vote of the outstanding voting securities" is the vote
by the holders of the lesser of a) 67% or more of the Fund's voting securities
present in person or represented by proxy if the holders of more than 50% of
the outstanding voting securities of the Fund are present or represented by
proxy; or b) more than 50% of the outstanding voting securities. Part B lists
other more specific investment restrictions of the Fund which may not be
changed without a majority shareholder vote.
The remaining investment policies of the Fund not identified above or in
Part B as fundamental are not fundamental and may be changed by the Board of
Directors of Income Funds, Inc. without a shareholder vote.
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SPECIAL RISK CONSIDERATIONS
Generally
The Fund invests a substantial portion of its assets in fixed-income
securities. The market values of fixed-income securities generally fall when
interest rates rise and, conversely, rise when interest rates fall. Lower-rated
and unrated fixed-income securities tend to reflect short-term corporate and
market developments to a greater extent than higher-rated fixed-income
securities, which react primarily to fluctuations in the general level of
interest rates. These lower-rated or unrated securities generally have higher
yields, but, as a result of factors such as reduced creditworthiness of
issuers, increased risk of default and a more limited and less liquid secondary
market, are subject to greater volatility and risk of loss of income and
principal than are higher-rated securities. The Manager will attempt to reduce
such risk through sector allocation, portfolio diversification, credit
analysis, and attention to trends in the economy, industries and financial
markets.
High-Yield Securities
The Fund may invest a significant portion of its assets in bonds and other
securities rated BBB or lower by S&P or Fitch, Baa or lower by Moody's or
similarly rated by another rating organization, and in unrated corporate bonds.
See Appendix A -- Ratings in this Prospectus for more rating information.
Investing in these so-called "junk" bonds or "high-yield" securities entails
certain risks, including the risk of loss of principal, which may be greater
than the risks involved in investment grade securities, and which should be
considered by investors contemplating an investment in the Fund. High-yield
bonds are sometimes issued by companies whose earnings at the time of issuance
are less than the projected debt service on the junk bonds. In addition to the
considerations discussed elsewhere in this Prospectus, those risks include the
following:
Volatility of the High-Yield Market. Although the market for high-yield
bonds has been in existence for many years, including periods of economic
downturns, the high-yield market grew rapidly during the long economic
expansion which took place in the United States during the 1980s. During that
economic expansion, the use of high-yield debt securities to fund highly
leveraged corporate acquisitions and restructurings increased dramatically. As
a result, the high-yield market grew substantially during that economic
expansion. Although experts disagree on the impact recessionary periods have
had and will have on the high-yield market, some analysts believe a protracted
economic downturn would severely disrupt the market for high-yield bonds, would
adversely affect the value of outstanding bonds and would adversely affect the
ability of high-yield issuers to repay principal and interest. Those analysts
cite volatility experienced in the high-yield market in the past as evidence
for their position. It is likely that protracted periods of economic
uncertainty would result in increased volatility in the market prices of
high-yield bonds, an increase in the number of high-yield bond defaults and
corresponding volatility in the Class' net asset value.
Redemptions. If, as a result of volatility in the high-yield market or
other factors, the Fund experiences substantial net redemptions of the Fund's
shares for a sustained period of time (i.e., more shares of the Fund are
redeemed than are purchased), the Fund may be required to sell certain of its
high-yield securities without regard to the investment merits of the securities
to be sold. If the Fund sells a substantial number of securities to generate
proceeds for redemptions, the asset base of the Fund will decrease and the
Fund's expense ratios may increase.
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
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securities is more limited and less liquid than other secondary securities
markets. The high-yield secondary market is particularly susceptible to
liquidity problems when the institutions that dominate it temporarily cease
buying bonds for regulatory, financial or other reasons, such as the savings
and loan crisis. A less liquid secondary market may have an adverse effect on
the Fund's ability to dispose of particular issues, when necessary, to meet
the Fund's liquidity needs or in response to a specific economic event, such
as the deterioration in the creditworthiness of the issuer. In addition, a
less liquid secondary market makes it more difficult for the Fund to obtain
precise valuations of the high-yield securities in its portfolio. During
periods involving such liquidity problems, judgment plays a greater role in
valuing high-yield securities than is normally the case. The secondary market
for high-yield securities is also generally considered to be more likely to be
disrupted by adverse publicity and investor perceptions than the more
established secondary securities markets. The privately placed high-yield
securities that the Fund may purchase are particularly susceptible to the
liquidity and valuation risks outlined above.
Foreign Securities
The Fund has the ability to purchase debt securities in any foreign
country. Investors should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations.
These risks are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability or diplomatic developments which could affect investments in
securities of issuers in those nations.
In addition, in many countries, there is substantially less publicly
available information about issuers than is available in reports about
companies in the United States. Foreign companies are not subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements may not be comparable to those applicable to United States
companies. Consequently, financial data about foreign companies may not
accurately reflect the real condition of those issuers and securities markets.
Further, the Fund may encounter difficulty or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates on securities
transactions in foreign countries, which are sometimes fixed rather than
subject to negotiation as in the United States, are likely to be higher.
Further, the settlement period of securities transactions in foreign markets
may be longer than in domestic markets, and may be subject to administrative
uncertainties. In many foreign countries, there is less government supervision
and regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the United States, and capital requirements for
brokerage firms are generally lower. The foreign securities markets of many of
the countries in which the Fund may invest may also be smaller, less liquid and
subject to greater price volatility than those in the
United States.
Emerging Market Securities. The Fund may invest up to 15% of its assets in
the debt securities of issuers located in emerging market nations. Compared to
the United States and other developed countries, emerging countries may have
volatile social conditions, relatively unstable governments and political
systems, economies based on only a few industries and economic structures that
are less diverse and mature, and securities markets that trade a small number
of securities, which can result in a low or nonexistent volume of trading.
Prices in these securities markets tend to be volatile and, in the past,
securities in these countries have offered greater potential for gain (as well
as loss) than securities of companies located in developed countries. Until
recently, there has been an absence of a capital market structure or
market-oriented economy in certain
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emerging countries. Further, investments and opportunities for investments by
foreign investors are subject to a variety of national policies and
restrictions in many emerging countries. Also, the repatriation of both
investment income and capital from several foreign countries is restricted and
controlled under certain regulations, including, in some cases, the need for
certain governmental consents. Countries such as those in which the Fund may
invest have historically experienced and may continue to experience,
substantial, and in some periods extremely high rates of inflation for many
years, high interest rates, exchange rate fluctuations or currency
depreciation, large amounts of external debt, balance of payments and trade
difficulties and extreme poverty and unemployment. Other factors which may
influence the ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, its government's policy towards the
International Monetary Fund, the World Bank and other international agencies
and the political constraints to which a government debtor may be subject.
Brady Bonds. Among the foreign fixed-income securities in which the Fund
may invest are Brady Bonds. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness (generally commercial bank
debt). In so restructuring its external debt, a debtor nation negotiates with
its existing bank lenders, as well as multilateral institutions such as the
World Bank and the International Monetary Fund, to exchange its commercial bank
debt for newly issued bonds (Brady Bonds). The Sub-Adviser believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced
plans to issue Brady Bonds an attractive opportunity for investment. Investors,
however, should recognize that the Brady Plan only sets forth general guiding
principles for economic reform and debt reduction, emphasizing that solutions
must be negotiated on a case-by-case basis between debtor nations and their
creditors. In addition, Brady Bonds have been issued only recently and,
accordingly, do not have a long payment history.
Foreign Government Securities. With respect to investment in debt issues
of foreign governments, including Brady Bonds, the ability of a foreign
government or government-related issuer to make timely and ultimate payments on
its external debt obligations will also be strongly influenced by the issuer's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. If
foreign government or government-related issuers cannot generate sufficient
earnings from foreign trade to service its external debt, they may need to
depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
curtail the willingness of such third parties to lend funds, which may further
impair the issuer's ability or willingness to service its debts in a timely
manner. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. The ability to service external debt will also depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
government issuer to obtain sufficient foreign exchange to service its external
debt. If a foreign governmental issuer defaults on its obligations, the Fund
may have limited legal recourse against the issuer and/or guarantor.
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<PAGE>
See Other Investment Policies and Risk Considerations for a further
description of certain risks associated with certain of the Fund's investments,
including the risks associated with engaging in foreign currency transactions
and options.
CLASSES OF SHARES
The Distributor serves as the national distributor for Income Funds, Inc.
Shares of the Class may be purchased directly by contacting the Fund or its
agent or through authorized investment dealers. All purchases of shares of the
Class are at net asset value. There is no front-end or contingent deferred
sales charge.
Investment instructions given on behalf of participants in an
employer-sponsored retirement plan are made in accordance with directions
provided by the employer. Employees considering purchasing shares of the Class
as part of their retirement program should contact their employer for details.
Shares of the Class are available for purchase only by: (a) retirement
plans introduced by persons not associated with brokers or dealers that are
primarily engaged in the retail securities business and rollover individual
retirement 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, 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.
Class A Shares, Class B Shares and Class C Shares
In addition to offering the Institutional Class shares, the Fund also
offers Class A Shares, Class B Shares and Class C Shares, which are described
in a separate prospectus. Class A Shares, Class B Shares and Class C Shares may
be purchased through authorized investment dealers or directly by contacting
the Fund or the Distributor. Class A Shares, Class B Shares and Class C Shares
may have different sales charges and other expenses which may affect
performance. To obtain a prospectus relating to such classes, contact the
Distributor by writing to the address or by calling the phone numbers listed on
page 1 of this Prospectus.
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HOW TO BUY SHARES
The Fund makes it easy to invest by mail, by wire, by exchange and by
arrangement with your investment dealer. In all instances, investors must
qualify to purchase shares of the Class.
Investing Directly by Mail
1. Initial Purchases--An Investment Application, or in the case of a retirement
plan account, an appropriate retirement plan application, must be completed,
signed and sent with a check payable to Strategic Income Fund Institutional
Class, to Delaware Investments at 1818 Market Street, Philadelphia, PA 19103.
2. Subsequent Purchases--Additional purchases may be made at any time by
mailing a check payable to Strategic Income Fund Institutional Class. Your
check should be identified with your name(s) and account number.
Investing Directly by Wire
You may purchase shares by requesting your bank to transmit funds by wire
to First Union National Bank.
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 plan account, an
appropriate retirement plan application, for Strategic Income Fund
Institutional Class, to Delaware Investments at 1818 Market Street,
Philadelphia, PA 19103.
2. Subsequent Purchases--You may make additional investments anytime by wiring
funds to First Union National Bank. Please call your Client Services
Representative by telephone at 800-828-5052 for wiring instructions. You must
advise your Client Services Representative by telephone prior to wiring
investments.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware
Investments family 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 Strategic Income Fund B Class and Strategic Income
Fund C Class and Class B Shares and Class C Shares of the other funds in the
Delaware Investments family offering such a class of shares may not be
exchanged into the Class. If you wish to open an account by exchange, call your
Client Services Representative at 800-828-5052 for more information. See
Redemption and Exchange for more complete information concerning your exchange
privileges.
Investing through Your Investment Dealer
You can make a purchase of Fund shares through most investment dealers
who, as part of the service they provide, must transmit orders promptly to the
Fund. They may charge for this service.
Purchase Price and Effective Date
The purchase price (net asset value) is determined as of the close of
regular trading on the New York Stock Exchange (ordinarily, 4 p.m., Eastern
time) on days when the Exchange is open.
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<PAGE>
The effective date of a purchase 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 Investments family. The Fund reserves the
right to reject purchase orders paid by third-party checks or checks that are
not drawn on a domestic branch of a United States financial institution. If a
check drawn on a foreign financial institution is accepted, you may be subject
to additional bank charges for clearance and currency conversion.
The Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under $250 as a result of
redemptions.
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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 will be processed on the next
business day. See Purchase Price and Effective Date under How to Buy Shares.
Except as otherwise noted below, for a redemption request to be in "good
order," you must provide your Class account number, account registration, and
the total number of shares or dollar amount of the transaction. With regard to
exchanges, you must also provide the name of the fund you want to receive the
proceeds. Exchange instructions and redemption requests must be signed by the
record owner(s) exactly as the shares are registered. You may request a
redemption or an exchange by calling the Fund at 800-828-5052. Redemption
proceeds will be distributed promptly, as described below, but not later than
seven days after receipt of a redemption request.
All exchanges involve a purchase of shares of the fund into which the
exchange is made. As with any purchase, an investor should obtain and carefully
read that fund's prospectus before buying shares in an exchange. The prospectus
contains more complete information about the fund, including charges and
expenses.
The Fund will process written and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor redemption requests as to shares for which a check
was tendered as payment, but the Fund will not mail or wire the proceeds until
it is reasonably satisfied that the check has cleared, which may take up to 15
days from the purchase date. You can avoid this potential delay if you purchase
shares by wiring Federal Funds. The Fund reserves the right to reject a written
or telephone redemption request or delay payment of redemption proceeds if
there has been a recent change to the shareholder's address of record.
Shares of the Class may be exchanged into any other mutual fund in the
Delaware Investments family 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 Investments family. The Fund may suspend, terminate or amend the
terms of the exchange privilege upon 60 days' written notice to shareholders.
Various redemption and exchange methods are outlined below. No fee is
charged by the Fund or the Distributor for redeeming or exchanging your shares
although in the case of an exchange, a sales charge may apply. You may also
have your investment dealer arrange to have your shares redeemed or exchanged.
Your investment dealer may charge for this service.
All authorizations given by shareholders, including selection of any of
the features described below, shall continue in effect until such time as a
written revocation or modification has been received by the Fund or its agent.
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Written Redemption and Exchange
You can write to the Fund at 1818 Market Street, Philadelphia, PA 19103 to
redeem some or all of your shares or to request an exchange of any or all of
your shares into another mutual fund in the Delaware Investments family,
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. A signature
guarantee can be obtained from a commercial bank, a trust company or a member
of a Securities Transfer Association Medallion Program ("STAMP"). A signature
guarantee cannot be provided by a notary public. A signature guarantee is
designed to protect the shareholders, the Fund and its agent from fraud. The
Fund reserves the right to reject a signature guarantee supplied by an
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
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 certificate(s).
The Telephone Redemption--Check to Your Address of Record service and the
Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in writing that you do not
wish to have such services available with respect to your account. The Fund
reserves the right to modify, terminate or suspend these procedures upon 60
days' written notice to shareholders. It may be difficult to reach the Fund by
telephone during periods when market or economic conditions lead to an
unusually large volume of telephone requests.
Neither the Fund nor its Transfer Agent is responsible for any shareholder
loss incurred in acting upon written or telephone instructions for redemption
or exchange of Fund shares which are reasonably believed to be genuine. With
respect to such telephone transactions, the Fund will follow reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including verification of a form of personal identification) as, if it does
not, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. A written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone. By exchanging shares by telephone, you are acknowledging prior
receipt of a prospectus for the fund into which your shares are being
exchanged.
Telephone Redemption--Check to Your Address of Record
You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your record address. Checks will be payable to
the shareholder(s) of record. Payment is normally mailed the next business day
after receipt of the redemption request.
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Telephone Redemption--Proceeds to Your Bank
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must submit a written authorization and you may need to have your
signature guaranteed. For your protection, your authorization must be on file.
If you request a wire, your funds will normally be sent the next business day.
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 Investments family under the same registration. As with the
written exchange service, telephone exchanges are subject to the same
conditions and limitations as other exchanges noted above. Telephone exchanges
may be subject to limitations as to amounts or frequency.
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DIVIDENDS AND DISTRIBUTIONS
The Fund expects to declare a dividend each day and to pay such dividends
once each month. Distributions from net realized securities profits, if any,
will be distributed twice a year. The first payment normally would be made
during the first quarter of the next fiscal year. The second payment would be
made near the end of the calendar year to comply with certain requirements of
the Internal Revenue Code (the "Code"). Both dividends and distributions, if
any, are automatically reinvested in your account at net asset value.
Purchases of Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if the Fund is given prior notice of a Federal Funds
wire and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning
dividends on the date the wire is received. Purchases by check earn dividends
upon conversion to Federal Funds, normally one business day after receipt.
Dividends will be declared each day to all shareholders of record as of
the time the net asset value per share is determined. See Purchase Price and
Effective Date under How to Buy Shares. Thus, when redeeming shares,
dividends continue to be credited up to and including the date of redemption.
Each class of the Fund will share proportionately in the investment income
and expenses of the Fund, except that the Class will not incur distribution
fees under the Rule 12b-1 Plans which apply to Strategic Income Fund A Class,
Strategic Income Fund B Class and Strategic Income Fund C Class.
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TAXES
The tax discussion set forth below is included for general information
only. Investors should contact their own tax advisers concerning the federal,
state, local or foreign tax consequences of an investment in the Fund.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. As such, the Fund will not
be subject to federal income tax, or to any excise tax, to the extent its
earnings are distributed as provided in the Code and it satisfies certain other
requirements relating to the sources of its income and diversification of its
assets.
On August 5, 1997, the Taxpayer Relief Act of 1997 (the "1997 Act") was
signed into law. This new law made sweeping changes in the Code. Because many
of these changes are complex, and only indirectly affect the Fund and its
distributions to you, they are discussed in Part B. Changes in the treatment of
capital gains, however, are discussed in this section.
The Fund intends to distribute substantially all of its net investment
income and net capital gains, if any. Dividends from net investment income or
net short-term capital gains will be taxable to those investors who are subject
to income taxes as ordinary income even though such dividends are received in
additional shares. It is expected that either none or only a nominal portion of
the Fund's dividends will be eligible for the dividends-received deduction for
corporations.
Distributions paid by the Fund from long-term capital gains, 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.
The Treatment of Capital Gain Distributions under the Taxpayer Relief Act
of 1997
The 1997 Act creates a category of long-term capital gain for individuals
who will be taxed at new lower tax rates. For investors who are in the 28% or
higher federal income tax brackets, these gains will be taxed at a maximum rate
of 20%. For investors who are in the 15% federal income tax bracket, these
gains will be taxed at a maximum rate of 10%. Capital gain distributions will
qualify for these new maximum tax rates, depending on when a Fund's securities
were sold and how long they were held by the Fund before they were sold. The
holding periods for which the new rates apply were revised by the Internal
Revenue Service Restructuring and Reform Act of 1998. Investors who want more
information on holding periods and other qualifying rules relating to these new
rates should review the expanded discussion in Part B, or should contact their
own tax advisers.
Income Funds, Inc. will advise you in its annual information reporting at
calendar year end of the amount of its capital gain distributions which will
qualify for these maximum federal tax rates.
Although dividends generally will be treated as distributed when paid,
dividends which are declared in October, November or December to shareholders
of record on a specified date in one of those months, but which, for
operational reasons, may not be paid to the shareholder until the following
January, will be treated
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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 Investments family. 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. If more than 50% in value of the total
assets of the Fund at the end of its fiscal year are invested in securities of
foreign corporations, the Fund may elect to pass-through to its shareholders a
pro-rata share of foreign income taxes paid by the Fund. If this election is
made, shareholders will be (i) required to include in their gross income their
pro-rata share of foreign source income (including any foreign taxes paid by
the Fund), and (ii) entitled to either deduct (as an itemized deduction in the
case of individuals) their share of such foreign taxes in computing their
taxable income or to claim a credit for such taxes against their U.S. income
tax, subject to certain limitations under the Code. Shareholders will be
informed by the Fund at the end of each calendar year of the availability of
any credits on, and the amount of foreign source income to be included in,
their income tax returns.
In addition to the federal taxes described above, shareholders may or may
not be subject to various state and local taxes. For example, distributions of
interest income and capital gains realized from certain types of U.S.
government securities may be exempt from state personal income taxes. Because
investors' state and local taxes may be different than the federal taxes
described above, investors should consult their own tax advisers.
Each year, 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, if any,
that is derived from U.S. government securities that are exempt from state
income tax. Of course, shareholders who are not subject to tax on their income
would not be required to pay tax on amounts distributed to them by the Fund.
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.
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CALCULATION OF NET ASSET VALUE PER SHARE
The purchase and redemption price of the Class is the net asset value
("NAV") per share of the Class next computed after the order is received. The
NAV is computed as of the close of regular trading on the New York Stock
Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is open.
The NAV is computed by adding the value of all securities and other assets
in the portfolio, deducting any liabilities (expenses and fees are accrued
daily) and dividing by the number of shares outstanding. Debt securities are
priced on the basis of valuations provided by an independent pricing service
using methods approved by Income Funds, Inc.'s Board of Directors. Equity
securities for which market quotations are available are priced at market
value. Short-term investments having a maturity of less than 60 days are valued
at amortized cost, which approximates market value. All other securities are
valued at their fair value as determined in good faith and in a method approved
by Income Funds, Inc.'s Board of Directors.
The net asset values of all outstanding shares of each class of the Fund
will be computed on a pro-rata basis for each outstanding share based on the
proportionate participation in the Fund represented by the value of shares of
that class. All income earned and expenses incurred by the Fund will be borne
on a pro-rata basis by each outstanding share of a class, based on each class'
percentage in the Fund represented by the value of shares of such classes,
except that the Class will not incur any of the expenses under Income Funds,
Inc.'s 12b-1 Plans and Strategic Income Fund A, B and C Classes alone will bear
the 12b-1 Plan fees payable under their respective Plans. Due to the specific
distribution expenses and other costs that may be allocable to each class, the
NAV of each class is expected to vary.
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MANAGEMENT OF THE FUND
Directors
The business and affairs of Income Funds, Inc. are managed under the
direction of its Board of Directors. Part B contains additional information
regarding Income Funds, Inc.'s directors and officers.
Investment Manager and Sub-Adviser
The Manager furnishes investment management services to the Fund.
The Manager and its predecessors have been managing the funds in the
Delaware Investments family since 1938. On July 31, 1998, the Manager and its
affiliates in Delaware Investments, including the Sub-Adviser, were supervising
in the aggregate more than $43 billion in assets in the various institutional
or separately managed (approximately $25,873,990,000) and investment company
(approximately $17,929,500,000) accounts.
The Manager is a series of Delaware Management Business Trust. The Manager
changed its form of organization from a corporation to a business trust on
March 1, 1998. The Manager is an indirect, wholly owned subsidiary of Delaware
Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between DMH and a
wholly owned subsidiary of Lincoln National Corporation ("Lincoln National")
was completed. DMH and the Manager are now indirect, wholly owned subsidiaries,
and subject to the ultimate control, of Lincoln National. Lincoln National,
with headquarters in Fort Wayne, Indiana, is a diversified organization with
operations in many aspects of the financial services industry, including
insurance and investment management.
The Manager manages the Fund's portfolio and makes investment decisions
for the Fund. The Manager also administers Income Funds, Inc.'s affairs and
pays the salaries of all the directors, officers and employees of Income Funds,
Inc. who are affiliated with the Manager. For these services, the Manager is
paid an annual fee equal to 0.65% on the first $500 million of average daily
net assets, 0.625% on the next $500 million and 0.60% on the average daily net
assets in excess of $1 billion. For the fiscal year ended July 31, 1998, no
investment management fees were paid by the Fund as a result of the voluntary
waiver of fees by the Manager.
Subject to the overall supervision of the Manager, the Sub-Adviser manages
the international sector of the Fund's portfolio and furnishes the Manager with
investment recommendations, asset allocation advice, research and other
investment services with respect to foreign securities. For the services
provided to the Manager, the Manager pays the Sub-Adviser a fee equal to
one-third of the fee paid to the Manager under the terms of the Investment
Management Agreement.
Paul A. Matlack has primary responsibility for allocating the Fund's
assets among the fixed-income and equity sectors and for making day-to-day
investment decisions for the Fund regarding its investments in the high-yield
sector. Mr. Matlack, a Vice President/Senior Portfolio Manager of Income Funds,
Inc., has been a member of the Fund's management team since its inception. A
CFA charterholder, Mr. Matlack is a graduate of the University of Pennsylvania
with an MBA in Finance from George Washington University. He began his career
at Mellon Bank as a credit specialist, and later served as a corporate loan
officer for Mellon Bank and then Provident National Bank.
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<PAGE>
Paul Grillo has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in investment grade
securities. Mr. Grillo has been a member of the Fund's management team since
its inception. Mr. Grillo, a Vice President and Portfolio Manager of Income
Funds, Inc., holds a BA in Business Management from North Carolina State
University and an MBA in Finance from Pace University. Prior to joining the
Manager in 1993, he served as mortgage strategist and trader at the Dreyfus
Corporation. He also served as a mortgage strategist and portfolio manager for
the Chemical Investment Group and as financial analyst at the Chemical Bank.
Mr. Grillo is a CFA charterholder.
Ian G. Sims, a Director and Senior Portfolio Manager with the Sub-Adviser,
has primary responsibility for making day-to-day investment decisions for the
Fund regarding its investments in foreign securities. Mr. Sims has been a
member of the Fund's management team since its inception. Mr. Sims is a
graduate of the University of Leicester and holds a postgraduate degree in
statistics from the University of Newcastle-Upon- Tyne. He joined the
Sub-Adviser in 1990 as a senior international fixed-income and currency
manager. Mr. Sims began his investment career with the Standard Life Assurance
Co., and subsequently moved to the Royal Bank of Canada Investment Management
International Company, where he was an international fixed-income manager.
Prior to joining the Sub-Adviser, he was a senior fixed-income and currency
portfolio manager with Hill Samuel Investment Advisers Ltd.
Babak Zenouzi has primary responsibility for making day-to-day investment
decisions for the Fund regarding its investments in U.S. equity securities. Mr.
Zenouzi, a Vice President/Portfolio Manager of Income Funds, Inc., has been a
member of the Fund's management team since its inception. Mr. Zenouzi holds a
BS in Finance and Economics from Babson College in Wellesley, Massachusetts,
and an MS in Finance from Boston College. Prior to joining the Manager in 1992,
he was with The Boston Company where he held the positions of assistant vice
president, senior financial analyst, financial analyst and portfolio
accountant.
The portfolio management team will from time to time consult with Paul E.
Suckow, Executive Vice President/Chief Investment Officer, Fixed Income of
Income Funds, Inc., with respect to security selection, evaluation of market
and economic trends, and sector allocation. A CFA charterholder, he is a
graduate of Bradley University with an MBA from Western Illinois University.
Mr. Suckow was a fixed-income portfolio manager at the Delaware Group from
1981 to 1985. He returned to the Delaware Group in 1993 after eight years with
Oppenheimer Management Corporation where he served as Executive Vice President
and Director of Fixed Income.
Portfolio Trading Practices
The Fund normally will not invest for short-term trading purposes.
However, the Fund may sell securities without regard to the length of time they
have been held. The degree of portfolio activity will affect brokerage costs of
the Fund and may affect taxes payable by the Fund's shareholders.
The Manager and the Sub-Adviser use their best efforts to obtain the best
available price and most favorable execution for portfolio transactions. Orders
may be placed with brokers or dealers who provide brokerage and research
services to the Manager or the Sub-Adviser, or to their advisory clients. These
services may be used by the Manager or the Sub-Adviser in servicing any of
their respective accounts. Subject to best price and execution, the Manager and
the Sub-Adviser may consider a broker/dealer's sales of shares of funds in the
Delaware Investments family 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.
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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 (and 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 dated
as of September 30, 1996. The Distributor bears all of the costs of promotion
and distribution.
The Transfer Agent, Delaware Service Company, Inc., serves as the
shareholder servicing, dividend disbursing and transfer agent for Income
Funds, Inc. under an amended and restated agreement dated as of September 14,
1998. 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.
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.
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* * *
As with other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by its service providers do not properly process and
calculate date-related information from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." Income Funds, Inc. is taking steps
to obtain satisfactory assurances that the Fund's major service providers are
taking steps reasonably designed to address the Year 2000 Problem with respect
to the computer systems that such service providers use. There can be no
assurances that these steps will be sufficient to avoid any adverse impact on
the business of the Fund.
Several European countries are participating in the European Economic and
Monetary Union, which will establish a common European currency for
participating countries. This currency will commonly be known as the "Euro." It
is anticipated that each such participating country will replace its existing
currency with the Euro on January 1, 1999. Additional European countries may
elect to participate after that date. If the Fund is invested in securities of
participating countries it could be adversely affected if the computer systems
used by its major service providers are not properly prepared to handle the
implementation of this single currency or the adoption of the Euro by
additional countries in the future. Income Funds, Inc. is taking steps to
obtain satisfactory assurances that the major service providers of the Fund are
taking steps reasonably designed to address these matters with respect to the
computer systems that such service providers use. There can be no assurances
that these steps will be sufficient to avoid any adverse impact on the business
of the Fund.
Expenses
The Fund is responsible for all of its own expenses other than those borne
by the Manager under the Investment Management Agreement and those borne by the
Distributor under the Distribution Agreement. For the fiscal year ended July
31, 1998, the ratio of operating expenses to average daily net assets for the
Class was 0.75%, assuming the voluntary waiver and payment of fees and was
1.48%, without assuming the voluntary waiver and payment of fees.
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 four other series of shares, the Corporate Bond Fund series,
the Delchester Fund series, the Extended Duration Bond Fund series and the
High-Yield Opportunities 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.
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In addition to the Class, the Fund also offers Strategic Income Fund A
Class, Strategic Income Fund B Class and Strategic Income 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 Strategic Income Fund A Class,
Strategic Income Fund B Class and Strategic Income Fund C Class.
OTHER INVESTMENT POLICIES AND RISK CONSIDERATIONS
U.S. Government Securities
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by federal agencies and U.S.
government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment. Agencies which are backed by the full faith and
credit of the United States include the Export-Import Bank, Farmers Home
Administration, Federal Financing Bank, the Federal Housing Administration,
the Maritime Administration, the Small Business Administration, and others.
Certain agencies and instrumentalities, such as the Government National
Mortgage Association ("GNMA"), are, in effect, backed by the full faith and
credit of the United States through provisions in their charters that they may
make "indefinite and unlimited" drawings on the Treasury, if needed to service
its debt. Debt from certain other agencies and instrumentalities, including
the Federal Home Loan Bank and Federal National Mortgage Association, are not
guaranteed by the United States, but those institutions are protected by the
discretionary authority for the U.S. Treasury to purchase certain amounts of
their securities to assist the institutions in meeting their debt obligations.
Finally, other agencies and instrumentalities, such as the Farm Credit System,
the Tennessee Valley Authority and the Federal Home Loan Mortgage Corporation,
are federally chartered institutions under U.S. government supervision, but
their debt securities are backed only by the creditworthiness of those
institutions, not the U.S. government.
An instrumentality of a U.S. government agency is a government agency
organized under Federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal National Mortgage Association.
The maturities of such securities usually range from three months to
thirty years. While such securities are guaranteed as to principal and interest
by the U.S. government or its instrumentalities, their market values may
fluctuate and are not guaranteed, which may, along with the other securities
in the Fund's portfolio, cause a Class' daily net asset value to fluctuate.
Zero Coupon Bonds and Pay-In-Kind Bonds
Although the Fund does not intend to purchase a substantial amount of zero
coupon bonds or PIK bonds, from time to time, the Fund may acquire zero coupon
bonds and, to a lesser extent, PIK bonds. Zero coupon bonds are debt
obligations which do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the securities begin paying
current interest, and therefore are issued and traded at a discount from their
face amounts or par value. PIK bonds pay interest through the issuance to
holders of additional securities. Zero coupon bonds and PIK bonds are generally
considered to be more
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interest-sensitive than income bearing bonds, to be more speculative than
interest-bearing bonds, and to have certain tax consequences which could,
under certain circumstances, be adverse to the Fund. For example, with zero
coupon bonds, the Fund accrues, and is required to distribute to shareholders,
income on such bonds. However, the Fund may not receive the cash associated
with this income until the bonds are sold or mature. If the Fund did not have
sufficient cash to make the required distribution of accrued income, the Fund
could be required to sell other securities in its portfolio or to borrow to
generate the cash required.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities, including GNMA
certificates. Such securities differ from other fixed-income securities in that
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. When prevailing interest rates rise, the
value of a GNMA security may decrease as do other debt securities. When
prevailing interest rates decline, however, the value of GNMA securities may
not rise on a comparable basis with other debt securities because of the
prepayment feature of GNMA securities. Additionally, if a GNMA certificate is
purchased at a premium above its principal value because its fixed rate of
interest exceeds the prevailing level of yields, the decline in price to par
may result in a loss of the premium in the event of prepayment. Funds received
from prepayments may be reinvested at the prevailing interest rates which
may be lower than the rate of interest that had previously been earned.
The mortgages backing these securities include conventional 30-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages.
These mortgages may be supported by various types of insurance, may be backed
by GNMA certificates or other mortgage pass-throughs issued or guaranteed by
the U.S. government, its agencies or instrumentalities. However, the guarantees
do not extend to the mortgage-backed securities' value, which is likely to vary
inversely with fluctuations in interest rates. These certificates are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the
certificate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the average life or realized
yield of a particular issue of pass-through certificates. During periods of
declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Fund may reinvest the prepaid amounts in securities, the yield of
which reflects interest rates prevailing at the time. Moreover, prepayments of
mortgages which underlie securities purchased at a premium could result in
capital losses.
CMOs and REMICs
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities. To the extent any privately-issued
CMOs or REMICs in which the Fund may invest are considered by the Securities
and Exchange Commission to be investment companies, the Fund will limit its
investment in such securities in a manner consistent with the provisions of the
1940 Act.
-31-
<PAGE>
Certain CMOs and REMICs may have variable or floating interest rates and
others may be stripped. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which the Fund may
invest.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and
the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the "interest-only" class), while the other class
will receive all of the principal (the "principal-only" class). The yield to
maturity on an interest-only class is extremely sensitive not only to changes
in prevailing interest rates but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the Fund's
yield to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the securities are rated in the
highest rating categories.
Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed and, accordingly,
these securities are generally illiquid and to such extent, together with any
other illiquid investments, will not exceed 15% of the Fund's net assets.
The Fund may invest in CMOs and REMICs issued by private entities which
are not collateralized by securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, so-called non-agency
mortgage-backed securities. Investments in these securities may be made only if
the securities (i) are rated at the time of purchase in the four top rating
categories by a nationally-recognized statistical rating organization (e.g.,
BBB or better by S&P or Fitch, or Baa or better by Moody's) and (ii) represent
interests in whole-loan mortgages, multi-family mortgages, commercial mortgages
and other mortgage collateral supported by a first mortgage lien on real
estate. Non-agency mortgage-backed securities are subject to the interest rate
and prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non-agency mortgage-backed securities may also be
subject to a greater risk of loss of interest and principal because they are
not collateralized by securities issued or guaranteed by the U.S. government.
In addition, timely information concerning the loans underlying these
securities may not be as readily available and the market for these securities
may be less liquid than other CMOs and REMICs.
Asset-Backed Securities
The asset-backed securities in which the Fund may invest must be rated in
the four top rating categories by a nationally recognized statistical rating
organization (e.g., BBB or better by S&P and Fitch, or Baa or better by
Moody's). The receivables underlying asset-backed securities are typically
securitized in either a pass-through or a pay-through structure. Pass-through
securities provide investors with an income stream consisting of both principal
and interest payments in respect of the receivables in the underlying pool.
Pay-through asset- backed securities are debt obligations issued usually by a
special purpose entity, which are collateralized by the various receivables and
in which the payments on the underlying receivables provide the funds to pay
the debt service on the debt obligations issued. The Fund may invest in these
and other types of asset-backed securities structured in this way that may be
developed in the future.
-32-
<PAGE>
The rate of principal payment on asset-backed securities generally depends
upon the rate of principal payments received on the underlying assets. Such
rate of payments may be affected by economic and various other factors such as
changes in interest rates. Therefore, the yield may be difficult to predict and
actual yield to maturity may be more or less than the anticipated yield to
maturity. Due to the shorter maturity of the collateral backing such
securities, there is less of a risk of substantial prepayment than with
mortgage-backed securities. Such asset-backed securities do, however, involve
certain risks not associated with mortgage-backed securities, including the
risk that security interests cannot be adequately or in many cases, ever,
established. In addition, with respect to credit card receivables, a number of
state and federal consumer credit laws give debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the outstanding
balance. In the case of automobile receivables, there is a risk that the
holders may not have either a proper or first security interest in all of the
obligations backing such receivables due to the large number of vehicles
involved in a typical issuance and technical requirements under state laws.
Therefore, recoveries on repossessed collateral may not always be available to
support payments on the securities.
Borrowings
The Fund may borrow money as a temporary measure or to facilitate
redemptions. The Fund will not borrow money in excess of one-third of the value
of its net assets. The Fund has no intention of increasing its net income
through borrowing. Any borrowing will be done from a bank and, to the extent
that such borrowing exceeds 5% of the value of the Fund's net assets, asset
coverage of at least 300% is required. In the event that such asset coverage
shall at any time fall below 300%, the Fund shall, within three days thereafter
(not including Sundays or holidays, or such longer period as the Securities and
Exchange Commission may prescribe by rules and regulations), reduce the amount
of its borrowings to such an extent that the asset coverage of such borrowings
shall be at least 300%. The Fund will not pledge more than 10% of its net
assets, or issue senior securities as defined in the 1940 Act, except for notes
to banks. Investment securities will not be purchased while the Fund has an
outstanding borrowing.
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are purchased with payment and
delivery taking place in the future in order to secure what is considered to be
an advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The Fund will maintain with its custodian bank a
separate account with a segregated portfolio of securities in an amount at
least equal to these commitments. The payment obligation and the interest rates
that will be received are each fixed at the time the Fund enters into the
commitment and no interest accrues to the Fund until settlement. Thus, it is
possible that the market value at the time of settlement could be higher or
lower than the purchase price if the general level of interest rates has
changed.
Portfolio Loan Transactions
The Fund may loan up to 25% of its assets to qualified broker/dealers or
institutional investors.
The major risk to which the Fund would be exposed on a loan transaction is
the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, the Fund will only enter into loan arrangements
after a review of all pertinent facts by the Manager, subject to overall
supervision by the Board of Directors, including the creditworthiness of the
borrowing broker, dealer or institution and then only if the consideration to
be received from such loans would justify the risk. Creditworthiness will be
monitored on an ongoing basis by the Manager.
-33-
<PAGE>
Rule 144A Securities
The Fund may invest in restricted securities, including privately placed
securities, some of which may be eligible for resale without registration
pursuant to Rule 144A ("Rule 144A Securities") under the Securities Act of
1933. Rule 144A permits many privately placed and legally restricted securities
to be freely traded among certain institutional buyers such as the Fund. The
Fund may invest no more than 15% of the value of its net assets in illiquid
securities.
While maintaining oversight, the Board of Directors has delegated to the
Manager the day-to-day function of determining whether or not individual Rule
144A Securities are liquid for purposes of the Fund's 15% limitation on
investments in illiquid assets. The Board has instructed the Manager to
consider the following factors in determining the liquidity of a Rule 144A
Security: (i) the frequency of trades and trading volume for the security; (ii)
whether at least three dealers are willing to purchase or sell the security and
the number of potential purchasers; (iii) whether at least two dealers are
making a market in the security; (iv) the nature of the security and the nature
of the marketplace trades (e.g., the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of transfer).
If the Manager or Sub-Adviser determines that a Rule 144A Security which
was previously determined to be liquid is no longer liquid and, as a result,
the Fund's holdings of illiquid securities exceed the Fund's 15% limit on
investments in such securities, the Manager will determine what action to take
to ensure that the Fund continues to adhere to such limitation.
Investment Company Securities
Any investments that the Fund makes in either closed-end or open-end
investment companies will be limited by the 1940 Act, and would involve an
indirect payment of a portion of the expenses, including advisory fees, of such
other investment companies. Under the 1940 Act's current limitations, the Fund
may not (1) own more than 3% of the voting stock of another investment company;
(2) invest more than 5% of the Fund's total assets in the shares of any one
investment company; nor (3) invest more than 10% of the Fund's total assets in
shares of other investment companies. If the Fund elects to limit its
investment in other investment companies to closed-end investment companies,
the 3% limitation described above is increased to 10%. These percentage
limitations also apply to the Fund's investments in unregistered investment
companies.
Repurchase Agreements
In order to invest its short-term cash reserves or when in a temporary
defensive posture, the Fund may enter into repurchase agreements with banks or
broker/dealers deemed to be creditworthy by the Manager, under guidelines
approved by the Board of Directors. A repurchase agreement is a short-term
investment in which the purchaser (i.e. the Fund) acquires ownership of a debt
security and the seller agrees to repurchase the obligation at a future time
and set price, thereby determining the yield during the purchaser's holding
period. Generally, repurchase agreements are of short duration, often less than
one week but on occasion for longer periods. Not more than 15% of the Fund's
assets may be invested in illiquid securities, of which no more than 10% may be
invested in repurchase agreements of over seven-days' maturity. 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 102% of
the repurchase price, including the portion representing the Fund's yield under
such agreements, which is monitored on a daily basis.
-34-
<PAGE>
Foreign Currency Transactions
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund will, however, from time to time, purchase or sell
foreign currencies and/or engage in forward foreign currency transactions in
order to expedite settlement of portfolio transactions and to minimize currency
value fluctuations. The Fund may conduct its foreign currency exchange
transactions on a spot (i.e., cash) basis at the spot rate prevailing in the
foreign currency exchange market or through entering into contracts to purchase
or sell foreign currencies at a future date (i.e., a "forward foreign currency"
contract or "forward" contract). A forward contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract, agreed upon by the parties, at a
price set at the time of the contract. The Fund will convert currency on a spot
basis from time to time, and investors should be aware of the costs of currency
conversion.
The Fund may enter into forward contracts to "lock in" the price of a
security it has agreed to purchase or sell, in terms of U.S. dollars or other
currencies in which the transaction will be consummated. By entering into a
forward contract for the purchase or sale, for a fixed amount of U.S. dollars
or foreign currency, of the amount of foreign currency involved in the
underlying security transaction, the Fund will be able to protect itself
against a possible loss resulting from an adverse change in currency exchange
rates during the period between the date the security is purchased or sold and
the date on which payment is made or received.
When the Sub-Adviser believes that the currency of a particular country
may suffer a significant decline against the U.S. dollar or against another
currency, the Fund may enter into a forward foreign currency contract to sell,
for a fixed amount of U.S. dollars or other appropriate currency, the amount
of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency.
The Fund will not enter into forward contracts or maintain a net exposure
to such contracts where the consummation of the contracts would obligate the
Fund to deliver an amount of foreign currency in excess of the value of the
Fund's securities or other assets denominated in that currency.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency. The Fund may realize a gain or loss from currency
transactions. With respect to forward foreign currency contracts, the precise
matching of forward contract amounts and the value of the securities involved
is generally not possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency strategy is highly
uncertain.
It is impossible to forecast the market value of Fund securities at the
expiration of the contract. Accordingly, it may be necessary for the Fund to
purchase additional foreign currency on the spot market (and bear the expense
of such purchase) if the market value of the security is less than the amount
of foreign currency the Fund is obligated to deliver and if a decision is made
to sell the security and make delivery of the foreign currency. Conversely, it
may be necessary to sell on the spot market some of the foreign currency
received upon the sale of a security if its market value exceeds the amount of
foreign currency the Fund is obligated to deliver.
-35-
<PAGE>
Options
The Manager and the Sub-Adviser may employ options techniques in
an attempt to protect appreciation attained and to take advantage of the
liquidity available in the options market. The Fund may purchase call options
on foreign or U.S. securities and indices and enter into related closing
transactions and the Fund may write covered call options on such securities.
The Fund may also purchase put options on such securities and indices and
enter into related closing transactions.
A call option enables the purchaser, in return for the premium paid, to
purchase securities from the writer of the option at an agreed price up to an
agreed date. A covered call option obligates the writer, in return for the
premium received, to sell the securities subject to the option to the purchaser
of the option for an agreed upon price up to an agreed date. The advantage is
that the purchaser may hedge against an increase in the price of securities it
ultimately wishes to buy or take advantage of a rise in a particular index. The
Fund will only purchase call options to the extent that premiums paid on all
outstanding call options do not exceed 2% of its total assets.
A put option enables the purchaser of the option, in return for the
premium paid, to sell the security underlying the option to the writer at the
exercise price during the option period, and the writer of the option has the
obligation to purchase the security from the purchaser of the option. The Fund
will only purchase put options to the extent that the premiums on all
outstanding put options do not exceed 2% of its total assets. The advantage is
that the purchaser can be protected should the market value of the security
decline or should a particular index decline.
An option on a securities index gives the purchaser of the option, in
return for the premium paid, the right to receive from the seller cash equal to
the difference between the closing price of the index and the exercise price of
the option.
Closing transactions essentially let the Fund offset put options or call
options prior to exercise or expiration. If the Fund cannot effect closing
transactions, it may have to hold a security it would otherwise sell or deliver
a security it might want to hold.
In purchasing put and call options, the premium paid by the Fund plus any
transaction costs will reduce any benefit realized by the Fund upon exercise of
the option. With respect to writing covered call options, the Fund may lose the
potential market appreciation of the securities subject to the option, if the
Manager's or the Sub-Adviser's judgment is wrong and the price of the security
moves in the opposite direction from what was anticipated.
The Fund may use both Exchange-traded and over-the-counter options.
Certain over-the-counter options may be illiquid. The Fund will only invest in
such options to the extent consistent with its 15% limitation on investment in
illiquid securities. The Fund will comply with U.S. Securities and Exchange
Commission asset segregation and coverage requirements when engaging in these
types of transactions.
Futures
Futures contracts are agreements for the purchase or sale for future
delivery of securities. When a futures contract is sold, the Fund incurs a
contractual obligation to deliver the securities underlying the contract at a
specified price on a specified date during a specified future month. A
purchase of a futures contract means the acquisition of a contractual right to
obtain delivery to the Fund of the securities called for by the contract at a
specified price during a specified future month.
-36-
<PAGE>
While futures contracts provide for the delivery of securities, deliveries
usually do not occur. Contracts are generally terminated by entering into an
offsetting transaction. When the Fund enters into a futures transaction, it
must deliver to the futures commission merchant selected by the Fund an amount
referred to as "initial margin." This amount is maintained by the futures
commission merchant in an account at the Fund's custodian bank. Thereafter, a
"variation margin" may be paid by the Fund to, or drawn by the Fund from, such
account in accordance with controls set for such account, depending upon
changes in the price of the underlying securities subject to the futures
contract.
The Fund may also purchase and write options to buy or sell futures
contracts. Options on futures are similar to options on securities except that
options on futures give the purchaser the right, in return for the premium
paid, to assume a position in a futures contract, rather than actually to
purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option.
The purpose of the purchase or sale of futures contracts consisting of
U.S. government securities is to protect the Fund against the adverse effects
of fluctuations in interest rates without actually buying or selling such
securities. Similarly, when it is expected that interest rates may decline,
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of U.S. government securities at higher prices.
REITs
REITs are pooled investment vehicles which invest primarily in
income-producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real estate mortgages and derive income from the collection of interest
payments. Like investment companies such as Income Funds, Inc., REITs are not
taxed on income distributed to shareholders provided they comply with several
requirements in the Code. REITs are subject to substantial cash flow
dependency, defaults by borrowers, self-liquidation, and the risk of failing to
qualify for tax-free pass-through of income under the Code, and/or to maintain
exemptions from the 1940 Act.
-37-
<PAGE>
APPENDIX A -- RATINGS
The Fund's assets may be invested in securities rated BBB or lower by S&P
or Fitch, Baa or lower by Moody's, in securities similarly rated by another
nationally recognized statistical rating organization, and in unrated corporate
bonds. These credit ratings evaluate only the safety of principal and interest
and do not consider the market value risk associated with high-yield
securities.
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 the fiscal year ended July 31, 1998. The paragraphs following the
table contain excerpts from Moody's and S&P's rating descriptions.
<TABLE>
<CAPTION>
Rating Moody's and/or S&P Average Weighted Percentage of Portfolio
------------------------- ----------------------------------------
<S> <C>
U.S. Treasury Obligations 5.86%
Aaa/AAA 29.63
Aa/AA 7.69
A/A 5.68
Baa/BBB 7.07
Ba/BB 1.04
B/B 43.08
Caa/CCC --
Not Rated/Other --
</TABLE>
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.
-38-
<PAGE>
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions;
C--reserved for income bonds on which no interest is being paid; D--in default,
and payment of interest and/or repayment of principal is in arrears.
Excerpts from Fitch's description of its bond ratings: AAA--Bonds
considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events;
AA--Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+;
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings; BBB--Bonds considered to be
investment grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more likely to have
adverse impact on these bonds, and therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings; BB--Bonds are considered
speculative. The obligor's ability to pay interest and repay principal may be
affected over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist the obligor in
satisfying its debt service requirements; B--Bond are considered highly
speculative. While bonds in this class are currently meeting debt service
requirements, the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the need for
reasonable business and economic activity throughout the life of the issue;
CCC--Bonds have certain identifiable characteristics which, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment; CC-- Bonds are minimally protected. Default
in payment of interest and/or principal seems probable over time; C--Bonds are
in imminent default in payment of interest or principal; and DDD, DD and
D--Bonds are in default on interest and/or principal payments. Such bonds are
extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on these bonds, and "D"
represents the lowest potential for recovery.
Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
-39-
<PAGE>
Commercial Paper
Excerpts from Moody's description of its two highest commercial paper
ratings: P-1--the highest grade possessing greatest relative strength;
P-2--second highest grade possessing less relative strength than the highest
grade.
Excerpts from S&P's description of its two highest commercial paper
ratings: A-1--judged to be the highest investment grade category possessing the
highest relative strength; A-2--investment grade category possessing less
relative strength than the highest rating.
-40-
<PAGE>
Delaware Investments 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 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 Investments at 800-523-1918,
and shareholders of the Institutional Class should contact Delaware Investments
at 800-828-5052.
INVESTMENT MANAGER
Delaware Management Company
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
CUSTODIAN
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
- ---------------------------------
DELAWARE GROUP INCOME FUNDS, INC.
- ---------------------------------
DELCHESTER FUND
- ---------------------------------
STRATEGIC INCOME FUND
- ---------------------------------
HIGH-YIELD OPPORTUNITIES FUND
- ---------------------------------
PART B
STATEMENT OF
ADDITIONAL INFORMATION
- ---------------------------------
SEPTEMBER 29, 1998
DELAWARE(SM)
INVESTMENTS
- ------------
<PAGE>
- -------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 29, 1998
- -------------------------------------------------------------------------------
DELAWARE GROUP INCOME FUNDS, INC.
- -------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- -------------------------------------------------------------------------------
For more information about the Institutional Class: 800-828-5052
For Prospectus and Performance of Class A Shares, Class B Shares and
Class C Shares:
Nationwide 800-523-1918
Information on Existing Accounts of Class A Shares, Class B Shares and
Class C Shares :
(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
- -------------------------------------------------------------------------------
Financial Statements
- -------------------------------------------------------------------------------
-3-
<PAGE>
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% 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 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, dated
September 29, 1998, 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 each Fund, except where noted.
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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 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 A - Ratings in each Classes' 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
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permit it to enter into forward foreign currency exchange contracts in order to
hedge the Fund's holdings and commitments against changes in the level of future
currency rates. Such contracts involve an obligation to purchase or sell a
specific currency at a future date at a price set at the time of the contract.
As disclosed in Strategic Income Fund's Prospectuses, there are a
number of risks involved in investing in foreign securities. For example, the
assets and profits appearing on the financial statements of a developing or
emerging country issuer may not reflect its financial position or results of
operations in the way they would be reflected had the financial statements been
prepared in accordance with United States generally accepted accounting
principles. Also, for an issuer that keeps accounting records in local currency,
inflation accounting rules may require for both tax and accounting purposes,
that certain assets and liabilities be restated on the issuer's balance sheet in
order to express items in terms of currency or constant purchasing power.
Inflation accounting may indirectly generate losses on profits.
With reference to the Fund's investment in foreign government
securities, there is the risk that a foreign governmental issuer may default on
its obligations. If such a default occurs, the Fund may have limited effective
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign government and government-related debt securities to
obtain recourse may be subject to the political climate in the relevant country.
In addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign government and
government-related debt obligations in the event of default under their
commercial bank loan agreements.
The issuers of the foreign government and government-related debt
securities in which the Fund expects to invest have in the past experienced
substantial difficulties in servicing their external debt obligations, which
have led to defaults on certain obligations and the restructuring of certain
indebtedness. Restructuring arrangements have included, among other things,
reducing and rescheduling interest and principal payments by negotiating new or
amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign government and government-related high-yield
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign government and
government-related securities in which the Fund may invest will not be subject
to similar defaults or restructuring arrangements which may adversely affect the
value of such investments. Furthermore, certain participants in the secondary
market for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.
There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by Strategic Income Fund.
Payment of such interest equalization tax, if imposed, would reduce the Fund's
rate of return on its investment. Dividends paid by foreign issuers may be
subject to withholding and other foreign taxes which may decrease the net return
on such investments as compared to dividends paid to the Fund by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the 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
-6-
<PAGE>
are generally not subject to the special currency rules, if they are or would be
treated as sold for their fair market value at year-end under the marking to
market rules applicable to other futures contracts, unless an election is made
to have such currency rules apply. With respect to transactions covered by the
special rules, foreign currency gain or loss is calculated separately from any
gain or loss on the underlying transaction and is normally taxable as ordinary
gain or loss. A taxpayer may elect to treat as capital gain or loss foreign
currency gain or loss arising from certain identified forward contracts, futures
contracts and options that are capital assets in the hands of the taxpayer and
which are not part of a straddle. Certain transactions subject to the special
currency rules that are part of a "section 988 hedging transaction" (as defined
in the Internal Revenue Code of 1986, as amended (the "Code"), and the Treasury
Regulations) will be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. The income tax effects of
integrating and treating a transaction as a single transaction are generally to
create a synthetic debt instrument that is subject to the original discount
provisions. It is anticipated that some of the non-U.S. dollar denominated
investments and foreign currency contracts Strategic Income Fund may make or
enter into will be subject to the special currency rules described above.
Investments and opportunities for investments by foreign investors in
emerging market countries are subject to a variety of national policies and
restrictions. These restrictions may take the form of prior governmental
approval, limits on the amount or type of securities held by foreigners, limits
on the types of companies in which foreigners may invest and prohibitions on
foreign investments in issuers or industries deemed sensitive to national
interests. Additional restrictions may be imposed at any time by these or other
countries in which Strategic Income Fund invests. Although these restrictions
may in the future make it undesirable to invest in emerging countries, Delaware
International Advisers Ltd., Strategic Income Fund's sub-adviser (the
"Sub-Adviser"), does not believe that any current registration restrictions
would affect its decision to invest in such countries.
Foreign Currency Transactions
The foreign investments made by Strategic Income Fund present currency
considerations which pose special risks. The Sub-Adviser uses a purchasing power
parity approach to evaluate currency risk. A purchasing power parity approach
attempts to identify the amount of goods and services that a dollar will buy in
the United States and compares that to the amount of a foreign currency required
to buy the same amount of goods and services in another country. When the dollar
buys less abroad, the foreign currency may be considered to be overvalued. When
the dollar buys more abroad, the foreign currency may be considered to be
undervalued. Eventually, currencies should trade at levels that should make it
possible for the dollar to buy the same amount of goods and services overseas as
in the United States.
Strategic Income Fund may purchase or sell currencies and/or engage in
forward foreign currency transactions in order to expedite settlement of
portfolio transactions and to minimize currency value fluctuations. Forward
foreign currency contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Strategic Income Fund will account for forward
contracts by marking to market each day at daily exchanges rates. When the Fund
enters into a forward contract to sell an amount of foreign currency
approximating the value of some or all of the Fund's assets denominated in such
foreign 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.
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<PAGE>
Strategic Income Fund's use of forward foreign currency exchange
contracts for hedging and other non-speculative purposes involves certain risks.
For example, a lack of correlation between price changes of a forward contract
and the assets being hedged could render Strategic Income Fund's hedging
strategy unsuccessful and could result in losses. The same results could occur
if movements of foreign currencies do not correlate as expected by the
Sub-Adviser at a time when the Fund is using a hedging instrument denominated in
one foreign currency to protect the value of a security denominated in a second
foreign currency against changes caused by fluctuations in the exchange rate for
the dollar and the second currency. If the direction of securities prices,
interest rates or foreign currency prices is incorrectly predicted, Strategic
Income Fund will be in a worse position than if such transactions had not been
entered into. In addition, since there can be no assurance that a liquid
secondary market will exist for any contract purchased or sold, the Fund may be
required to maintain a position until exercise or expiration, which could result
in losses. Further, forward contracts entail particular risks related to
conditions affecting the underlying currency. Over-the-counter transactions in
forward contracts also involve risks arising from the lack of an organized
exchange trading environment.
Successful use by Strategic Income Fund of forward foreign currency
exchange contracts for hedging and other non-speculative purposes is subject to
the Sub-Adviser's ability to predict correctly the direction of movements in
foreign currencies relative to the U.S. dollar. This requires different skills
and techniques than predicting changes in the prices of individual securities.
Options, Futures and Options on Futures
Strategic Income Fund may purchase call options or purchase put options
and will not engage in option strategies for speculative purposes. Strategic
Income Fund may invest in options that are either listed on U.S. or recognized
foreign exchanges or traded over-the-counter. Certain over-the-counter options
may be illiquid. Thus, it may not be possible to close options positions and
this may have an adverse impact on the Fund's ability to effectively hedge its
securities. Strategic Income Fund will not, however, invest more than 15% of the
value of its net assets in illiquid securities.
Purchasing Call Options--Strategic Income Fund may purchase call
options to the extent that premiums paid by the Fund do not aggregate more than
2% of the Fund's total assets. When the Fund purchases a call option, in return
for a premium paid by the Fund to the writer of the option, the Fund obtains the
right to buy the security underlying the option at a specified exercise price at
any time during the term of the option. The writer of the call option, who
receives the premium upon writing the option, has the obligation, upon exercise
of the option, to deliver the underlying security against payment of the
exercise price. The advantage of purchasing call options is that Strategic
Income Fund may alter portfolio characteristics and modify portfolio maturities
without incurring the cost associated with portfolio transactions.
Strategic Income Fund may, following the purchase of a call option,
liquidate its position by effecting a closing sale transaction. This is
accomplished by selling an option of the same series as the 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
-8-
<PAGE>
acquired through the exercise of such options. Further, unless the price of the
underlying security changes sufficiently, a call option purchased by Strategic
Income Fund may expire without any value to the Fund.
Purchasing Put Options--Strategic Income Fund may invest up to 2% of
its total assets in the purchase of put options. Strategic Income Fund will, at
all times during which it holds a put option, own the security covered by such
option.
A put option purchased by Strategic Income Fund gives it the right to
sell one of its securities for an agreed price up to an agreed date. The Fund
intends to purchase put options in order to protect against a decline in the
market value of the underlying security below the exercise price less the
premium paid for the option ("protective puts"). The ability to purchase put
options will allow Strategic Income Fund to protect unrealized gain in an
appreciated security in its portfolio without actually selling the security. If
the security does not drop in value, Strategic Income Fund will lose the value
of the premium paid. The Fund may sell a put option which it has previously
purchased prior to the sale of the securities underlying such option. Such sale
will result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid on
the put option which is sold.
Strategic Income Fund may sell a put option purchased on individual
portfolio securities. Additionally, the Fund may enter into closing sale
transactions. A closing sale transaction is one in which the Fund, when it is
the holder of an outstanding option, liquidates its position by selling an
option of the same series as the option previously purchased.
Futures and Options on Futures--Strategic Income Fund may enter into
contract for the purchase or sale for future delivery of securities or foreign
currencies. When the Fund engages in futures transactions, to the extent
required by the SEC, it will maintain with its custodian bank, assets in a
segregated account to cover its obligations with respect to such contracts,
which assets will consist of cash, cash equivalents or high quality debt
securities from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the margin payments made by the Fund with respect to such futures contracts.
The Fund may enter into such futures contracts to protect against the
adverse affects of fluctuations in interest or foreign exchange rates without
actually buying or selling the securities or foreign currency. For example, if
interest rates are expected to increase, the Fund might enter into futures
contracts for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the debt securities owned by the Fund.
If interest rates did increase, the value of the debt securities in the
portfolio would decline, 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
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<PAGE>
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 A- Ratings in each Prospectus describes the ratings of S&P,
Fitch Investors Service, Inc. and Moody's, and provides information concerning
the ratings of securities in the Fund's portfolio.
Non-Traditional Equity Securities
Strategic Income Fund may invest in convertible preferred stocks that
offer enhanced yield features, such as Preferred Equity Redemption Cumulative
Stock ("PERCS"), which provide an investor, such as the Fund, with the
opportunity to earn higher dividend income than is available on a company's
common stock. A PERCS is a preferred stock which generally features a mandatory
conversion date, as well as a capital appreciation limit which is usually
expressed in terms of a stated price. Upon the conversion date, most PERCS
convert into common stock of the issuer (PERCS are generally not convertible
into cash at maturity). Under a typical arrangement, if after a predetermined
number of years the issuer's common stock is trading at a price below that set
by the capital appreciation limit, each PERCS would convert to one share of
common stock. If, however, the issuer's common stock is trading at a price above
that set by the capital appreciation limit, the holder of the PERCS would
receive less than one full share of common stock. The amount of that fractional
share of common stock received by the PERCS holder is determined by dividing the
price set by the capital
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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.
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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 A - Ratings in each Classes' Prospectus describes the ratings
of S&P and Moody's and provides information concerning the ratings of the
securities in the Fund's portfolio.
Foreign and Emerging Markets Securities
Investors should recognize that investing in foreign issuers, including
issuers located in emerging market countries, involves certain considerations,
including those set forth in High-Yield Opportunities Fund's Prospectuses, which
are not typically associated with investing in United States issuers. Since the
stocks of foreign companies are frequently denominated in foreign currencies,
the Fund will be affected favorably or unfavorably by changes in currency rates
and in exchange control regulations, and may incur costs in connection with
conversions between various currencies.
As disclosed in High-Yield Opportunities Fund's Prospectuses, there are
a number of risks involved in investing in foreign securities. For example, the
assets and profits appearing on the financial statements of a developing or
emerging country issuer may not reflect its financial position or results of
operations in the way they would be reflected had the financial statements been
prepared in accordance with United States generally accepted accounting
principles. Also, for an issuer that keeps accounting records in local currency,
inflation accounting rules may require for both tax and accounting purposes,
that certain assets and liabilities be restated on the issuer's balance sheet in
order to express items in terms of currency or constant purchasing power.
Inflation accounting may indirectly generate losses on profits.
There has been in the past, and there may be again in the future, an
interest equalization tax levied by the United States in connection with the
purchase of foreign securities such as those purchased by High-Yield
Opportunities Fund. Payment of such interest equalization tax, if imposed, would
reduce the Fund's rate of return on its investment. Dividends paid by foreign
issuers may be subject to withholding and other foreign taxes which may decrease
the net return on such investments as compared to dividends paid to the Fund by
United States corporations. Special rules govern the federal income tax
treatment of certain transactions denominated in terms of a currency other than
the U.S. dollar or determined by reference to the value of one or more
currencies other than the U.S. dollar. The types of transactions covered by the
special rules generally include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury Regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instruments other than any "regulated futures contract" or "nonequity
option" marked to market. The disposition of a currency other than the U.S.
dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. With respect to transactions covered by the special
rules,
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<PAGE>
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 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.
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<PAGE>
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 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
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<PAGE>
considered to be an advantageous yield or price at the time of the transaction.
Delivery of and payment for these securities may take as long as a month or more
after the date of the purchase commitment. The Fund will maintain with its
Custodian Bank a separate account with a segregated portfolio of securities in
an amount at least equal to these commitments. The payment obligation and the
interest rates that will be received are each fixed at the time the Fund enters
into the commitment and no interest accrues to the Fund until settlement. Thus,
it is possible that the market value at the time of settlement could be higher
or lower than the purchase price if the general level of interest rates has
changed.
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<PAGE>
Borrowing From Banks
The Fund may borrow money as a temporary measure for extraordinary
purposes or to facilitate redemptions. The Fund will not borrow money in excess
of one-third of the value of its net assets. The Fund has no intention of
increasing its net income through borrowing. Any borrowing will be done from a
bank and, to the extent that such borrowing exceeds 5% of the value of the
Fund's net assets, asset coverage of at least 300% is required. In the event
that such asset coverage shall at any time fall below 300%, the Fund shall,
within three days thereafter (not including Sundays or holidays, or such longer
period as the Securities and Exchange Commission may prescribe by rules and
regulations), reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. The Fund will not
pledge more than 10% of its net assets, or issue senior securities as defined in
the 1940 Act, except for notes to banks. Investment securities will not be
purchased while the Fund has an outstanding borrowing.
Investment Policies Applicable to Each Fund
-------------------------------------------
High-Yield Securities
Among the possible risks of investing in high-yield securities are the
possibility of legislative and regulatory action and proposals. There are a
variety of legislative actions which have been taken or which are considered
from time to time by the United States Congress which could adversely affect the
market for high-yield securities. For example, Congressional legislation limited
the deductibility of interest paid on certain high-yield securities used to
finance corporate acquisitions. Also, Congressional legislation has, with some
exceptions, generally prohibited federally-insured savings and loan institutions
from investing in high-yield securities. Regulatory actions have also affected
the high-yield market. For example, many insurance companies have restricted or
eliminated their purchases of high-yield securities as a result of, among other
factors, actions taken by the National Association of Insurance Commissioners.
If similar legislative and regulatory actions are taken in the future, they
could result in further tightening of the secondary market for high-yield
issues, could reduce the number of new high-yield securities being issued and
could make it more difficult for a Fund to attain its investment objective.
Restricted Securities
The Funds may purchase privately-placed debt and other securities whose
resale is restricted under applicable securities laws. Such restricted
securities generally offer a higher return than comparable registered securities
but involve some additional risk since they can be resold only in
privately-negotiated transactions or after registration under applicable
securities laws. The registration process may involve delays which could result
in the Funds obtaining a less favorable price on a resale. Delchester Fund will
not purchase illiquid assets if more than 10% of its total assets would then
consist of such illiquid securities. Strategic Income Fund and High-Yield
Opportunities Fund will not purchase illiquid assets if more than 15% of its
respective net assets would then consist of such illiquid securities.
Repurchase Agreements
The Funds are permitted to invest in repurchase agreements, but they
normally do 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.
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<PAGE>
The funds in the Delaware Investments family 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 such funds in the Delaware
Investments family jointly to invest cash balances. Each Fund of the Income
Funds, Inc. may invest cash balances in a joint repurchase agreement in
accordance with the terms of the Order and subject generally to the conditions
described above.
Portfolio Loan Transactions
Each Fund may loan up to 25% of its assets to qualified broker/dealers
or institutional investors for their use relating to short sales or other
security transactions.
It is the understanding of the Manager that the staff of the Securities
and Exchange Commission (the "SEC" or the "Commission") permits portfolio
lending by registered investment companies if certain conditions are met. These
conditions are as follows: 1) each transaction must have 100% collateral in the
form of cash, short-term U.S. government securities, or irrevocable letters of
credit payable by banks acceptable to the Fund involved from the borrower; 2)
this collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund; 3) the Fund must be able to terminate any loan after notice, at any time;
4) the Fund must receive reasonable interest on any loan, and any dividends,
interest or other distributions on the lent securities, and any increase in the
market value of such securities; 5) the Fund may pay reasonable custodian fees
in connection with the loan; 6) the voting rights on the lent securities may
pass to the borrower; however, if the directors of Income Funds, Inc. know that
a material event will occur affecting an investment loan, they must either
terminate the loan in order to vote the proxy or enter into an alternative
arrangement with the borrower to enable the directors to vote the proxy.
The major risk to which a Fund would be exposed on a loan transaction
is the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, each Fund will only enter into loan arrangements
after a review of all pertinent facts by the Manager, under the supervision of
the Board of Directors, including the creditworthiness of the borrowing broker,
dealer or institution and then only if the consideration to be received from
such loans would justify the risk. Creditworthiness will be monitored on an
ongoing basis by the Manager.
Investment Restrictions
Delchester Fund
- ---------------
Delchester Fund has the following investment restrictions which may not
be amended without approval of a majority of the outstanding voting securities,
which is the lesser of more than 50% of the outstanding voting securities of
Delchester Fund, or 67% of the voting securities of Delchester Fund present at a
shareholder meeting if 50% or more of the voting securities are present in
person or represented by proxy. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities.
1. Delchester Fund will not invest more than 5% of the value of its
assets in securities of any one company (except U.S. government bonds) or
purchase more than 10% of the voting or nonvoting securities of any one company.
2. Delchester Fund will not invest for the purpose of acquiring
control of any company.
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.
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<PAGE>
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.
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<PAGE>
Strategic Income Fund
- ---------------------
Strategic Income Fund has the following investment restrictions which
may not be amended without approval of a majority of the outstanding voting
securities, which is the lesser of more than 50% of the outstanding voting
securities of Strategic Income Fund, or 67% of the voting securities of
Strategic Income Fund present at a shareholder meeting if 50% or more of the
voting securities are present in person or represented by proxy. The percentage
limitations contained in the restrictions and policies set forth herein apply at
the time of purchase of securities.
1. With respect to 75% of its total assets, Strategic Income Fund will
not invest more than 5% of the value of its total assets in securities of any
one issuer (except obligations issued, or guaranteed by, the U.S. government,
its agencies or instrumentalities or certificates of deposit for any such
securities, and cash and cash items) or purchase more than 10% of the voting
securities of any one company.
2. Strategic Income Fund will not make any investment in real estate.
This restriction does not preclude the Fund's purchase of securities issued by
real estate investment trusts, the purchase of securities issued by companies
that deal in real estate, or the investment in securities secured by real estate
or interests therein.
3. Strategic Income Fund will not sell short any security or property.
4. Strategic Income Fund will not buy or sell commodities or commodity
contracts, except that the Fund may enter into futures contracts and options
thereon.
5. Strategic Income Fund will not borrow money in excess of one-third
of the value of its net assets. Any borrowing will be done in accordance with
the rules and regulations prescribed from time to time by the SEC with respect
to open-end investment companies.
6. Strategic Income Fund will not make loans. However, (i) the
purchase of a portion of an issue of publicly distributed bonds, debentures or
other securities, or of other securities authorized to be purchased by the
Fund's investment policies, whether or not the purchase was made upon the
original issuance of the securities, and the entry into "repurchase agreements"
are not to be considered the making of a loan by the Fund; and (ii) the Fund may
loan securities to qualified broker/dealers or institutional investors for their
use relating to short sales and other security transactions.
7. Strategic Income Fund will not act as an underwriter of securities
of other issuers, except that the Fund may acquire restricted or not readily
marketable securities under circumstances where, if such securities are sold,
the Fund might be deemed to be an underwriter for purposes of the Securities Act
of 1933.
8. Strategic Income Fund will not invest more than 25% of the value of
its total assets in securities of issuers all of which conduct their principal
business activities in the same industry. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
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.
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<PAGE>
2. Strategic Income Fund will not invest in securities of other
investment companies, except that the Fund may invest in securities of open-end,
closed-end and unregistered investment companies, in accordance with the
limitations contained in the Investment Company Act of 1940 at the time of the
investment.
3. Strategic Income Fund will not purchase or retain securities of a
company which has an officer or director who is an officer or director of Income
Funds, Inc., or an officer, director or partner of the Manager if, to the
knowledge of the Fund, one or more of such persons beneficially owns in the
aggregate more than 5% thereof.
4. Strategic Income Fund will not invest in the securities of
companies which have a record of less than three years' continuous operation,
including any predecessor company or companies, if such investment at the time
of purchase would cause more than 5% of the total Fund assets to be invested in
the securities of such company or companies.
Although not a fundamental investment restriction, Strategic Income
Fund currently does not invest its assets in real estate limited partnerships or
oil, gas and other mineral leases. In addition, Strategic Income Fund currently
does not purchase securities on margin except short-term credits that may be
necessary for the clearance of purchases and sales of securities, and the Fund
may make margin payments as may be necessary in connection with the futures and
options transactions described in the Fund's Prospectuses and this Part B.
High-Yield Opportunities Fund
- -----------------------------
High-Yield Opportunities Fund has the following investment restrictions
which may not be amended without approval of a majority of the outstanding
voting securities, which is the lesser of more than 50% of the outstanding
voting securities of High-Yield Opportunities Fund, or 67% of the voting
securities of High-Yield Opportunities Fund present at a shareholder meeting if
50% or more of the voting securities are present in person or represented by
proxy. The percentage limitations contained in the restrictions and policies set
forth herein apply at the time the Fund purchases securities.
1. With respect to 75% of its total assets, High-Yield Opportunities
Fund will not invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities or certificates of deposit for any such
securities and cash and cash items) or purchase more than 10% of the voting
securities of any one company.
2. High-Yield Opportunities Fund will not make any investment in real
estate. This restriction does preclude the Fund's purchase of securities issued
by real estate investment trusts, the purchase of securities issued by companies
that deal in real estate, or the investment in securities secured by real estate
or interests therein.
3. High-Yield Opportunities Fund will not sell short any security or
property.
4. High-Yield Opportunities Fund will not buy or sell commodities or
commodity contracts except that the Fund may enter into futures contracts and
options thereon.
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.
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<PAGE>
6. High-Yield Opportunities Fund will not make loans. However, (i) the
purchase of a portion of an issue of publicly distributed bonds, debentures or
other securities, or of other securities authorized to be purchased by the
Fund's investment policies, whether or not the purchase was made upon the
original issuance of the securities, and the entry into "repurchase agreements"
are not to be considered the making of a loan by the Fund; and (ii) the Fund may
loan securities to qualified broker/dealers or institutional investors for their
use relating to short sales and other security transactions.
7. High-Yield Opportunities Fund will not act as an underwriter of
securities of other issuers, except that the Fund may acquire restricted or not
readily marketable securities under circumstances where, if such securities are
sold, the Fund may be deemed to be an underwriter for purposes of the Securities
Act of 1933.
8. High-Yield Opportunities Fund will not invest more than 25% of its
total assets in securities of issuers all of which conduct their principal
business activities in the same industry. This restriction does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
In addition to the above fundamental investment restrictions,
High-Yield Opportunities Fund has the following investment restrictions which
may be amended or changed without approval of shareholders.
1. High-Yield Opportunities Fund will not invest for the purpose of
acquiring control of any company.
2. High-Yield Opportunities Fund will not invest in securities of other
investment companies, except the Fund may invest in securities of open-end,
closed-end and unregistered investment companies, in accordance with the
limitations contained in the Investment Company Act at the time of the
investment.
3. High-Yield Opportunities Fund will not write, purchase or sell
options, puts, calls or combinations thereof with respect to securities.
4. High-Yield Opportunities Fund will not enter into futures contracts
or options thereon.
5. High-Yield Opportunities Fund will not purchase or retain the
securities of any issuer which has an officer, director or security holder who
is a director or officer of Income Funds, Inc. or of the Manager if or so long
as the directors and officers of Income Funds, Inc. and of the Manager together
own beneficially more than 5% of any class of securities of such issuer.
6. High-Yield Opportunities Fund will not invest in interests in oil,
gas and other mineral leases or other mineral exploration or development
programs.
7. High-Yield Opportunities Fund will not purchase securities on margin
except short-term credits that may be necessary for the clearance of purchases
and sales of securities.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, each Fund may state its Classes' total return in
advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life-of-fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information of its
Classes over additional periods of time.
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.
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.
Total return performance for classes of each Fund will be computed by
adding all reinvested income and realized securities profits distributions plus
the change in net asset value during a specific period and dividing by the
offering price at the beginning of the period. It will not reflect any income
taxes payable by shareholders on the reinvested distributions included in the
calculation. Because securities prices fluctuate, past performance should not be
considered as a representative of the results which may be realized from an
investment in the Fund in the future.
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, 1998, computed as
described above. The average annual total return for Delchester
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<PAGE>
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.
Average Annual Total Return
Delchester Delchester Delchester
Fund Fund Fund
A Class A Class Institutional
(at Offer) (at NAV) Class (1)
1 year
ended
7/31/98 5.43% 10.73% 13.07%
3 years
ended
7/31/98 10.27% 12.05% 18.86%
5 years
ended
7/31/98 8.11% 9.16% 14.65%
10 years
ended
7/31/98 9.64% 10.17% 14.10%
15 years
ended
7/31/98 11.03% 11.38% 11.57%
Period
8/20/70(2)
through
7/31/98 9.72% 9.91% 11.47%
- ----------------
(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.
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<PAGE>
The performance of Delchester Fund B Class, as shown below, is the
average annual total return quotation through July 31, 1998. 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, 1998. The average annual total return for Delchester
Fund B Class excluding deferred sales charge assumes the shares were not
redeemed at July 31, 1998 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
7/31/98 5.91% 9.91%
3 years
ended
7/31/98 10.41% 11.22%
Period
5/2/94(1)
through
7/31/98 8.91% 9.26%
- -------------
(1) Date of initial public offering of Delchester Fund B Class.
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<PAGE>
The performance of Delchester Fund C Class, as shown below, is the
average annual total return quotation through July 31, 1998. 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, 1998. The average annual total return for Delchester
Fund C Class excluding deferred sales charge assumes the shares were not
redeemed at July 31, 1998 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
7/31/98 8.90% 9.90%
Period
11/29/95(1)
through
7/31/98 11.85% 11.85%
- --------------
(1) Date of initial public offering of Delchester Fund C Class.
-25-
<PAGE>
The performance of Strategic Income Fund A Class and Strategic Income
Fund Institutional Class, as shown below, is the average annual total return
quotations through July 31, 1998, computed as described above. The average
annual 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
average annual 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.
Average Annual Total Return (1)
Strategic Strategic Strategic
Income Income Income
Fund Fund Fund
A Class A Class Institutional
(at Offer) (at NAV) Class
1 year
ended
7/31/98 1.25% 6.23% 6.36%
Period
10/1/96(2)
through
7/31/98 6.12% 8.93% 9.14%
- ---------------
(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, 1998. 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.
-26-
<PAGE>
The performance of Strategic Income Fund B Class, as shown below, is
the average annual total return quotation through July 31, 1998. The average
annual 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, 1998. The average annual total return for
Strategic Income Fund B Class excluding deferred sales charge assumes the shares
were not redeemed at July 31, 1998 and therefore does not reflect the deduction
of a CDSC.
Average Annual Total Return
Strategic Income Fund Strategic Income Fund
B Class B Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
1 year
ended
7/31/98 1.48% 5.32%
Period
10/1/96(2)
through
7/31/98 6.06% 8.11%
- -----------------
(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, 1998. In the absence of such waiver, performance would have been
affected negatively.
(2) Date of initial public offering of Strategic Income Fund B Class.
-27-
<PAGE>
The performance of Strategic Income Fund C Class, as shown below, is
the average annual total return quotation through July 31, 1998. The average
annual 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, 1998. The average annual total return for
Strategic Income Fund C Class excluding deferred sales charge assumes the shares
were not redeemed at July 31, 1998 and therefore does not reflect the deduction
of a CDSC.
Average Annual Total Return (1)
Strategic Income Fund Strategic Income Fund
C Class C Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
1 year
ended
7/31/98 4.35% 5.31%
Period
10/1/96(2)
through
7/31/98 8.11% 8.11%
- ----------------
(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, 1998. 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.
-28-
<PAGE>
The performance of High-Yield Opportunities Fund A Class and High-Yield
Opportunities Fund Institutional Class, as shown below, is the average annual
total return quotations through July 31, 1998, computed as described above. The
average annual 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 average annual 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.
Average Annual 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
1 year
ended
7/31/98 10.08% 15.66% 15.82%
Period
12/30/96(3)
through
7/31/98 13.38% 16.84% 16.93%
- -------------
(1) The Manager 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 did not exceed
0.75% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses) through December 31, 1997.
Beginning January 1, 1998, 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 High-Yield Opportunities Fund to the
extent necessary to ensure that the Total Operating Expenses of each
Class of the Fund do not exceed 0.95% (in each case, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses and,
in the case of Class A Shares, 12b-1 Plan Expenses) on an annualized
basis through March 31, 1999. In the absence of such waivers,
performance would have been affected negatively.
(2) Delaware Distributors, L.P. 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 Shares of the Fund through February
16, 1998. 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.
-29-
<PAGE>
The performance of High-Yield Opportunities Fund B Class, as shown
below, is the aggregate total return quotation through July 31, 1998. The
aggregate total return for High-Yield Opportunities 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, 1998. The aggregate total return
for High-Yield Opportunities Fund B Class excluding deferred sales charge
assumes the shares were not redeemed at July 31, 1998 and therefore does not
reflect the deduction of a CDSC.
Aggregate Total Return
High-Yield High-Yield
Opportunities Fund Opportunities Fund
B Class B Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
Period
2/17/97(2)
through
7/31/98 (0.46%) 3.54%
- -------------
(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 0.95% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses and applicable 12b-1 expenses)
through March 31, 1999. In the absence of such waiver, performance
would have been affected negatively.
(2) Date of initial public offering of High-Yield Opportunities Fund
B Class.
-30-
<PAGE>
The performance of High-Yield Opportunities Fund C Class, as shown
below, is the aggregate total return quotation through July 31, 1998. The
aggregate total return for High-Yield Opportunities 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, 1998. The aggregate total return
for High-Yield Opportunities Fund C Class excluding deferred sales charge
assumes the shares were not redeemed at July 31, 1998 and therefore does not
reflect the deduction of a CDSC.
Aggregate Total Return
High-Yield High-Yield
Opportunities Fund Opportunities Fund
C Class C Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
Period
2/1798(2)
through
7/31/98 2.54% 3.54%
- --------------
(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 0.95% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses and applicable 12b-1 expenses)
through March 31, 1999. In the absence of such waiver, performance
would have been affected negatively.
(2) Date of initial public offering of High-Yield Opportunities
Fund C Class.
-31-
<PAGE>
As stated in the Funds' Prospectuses, each Fund may also quote the
current yield of each of its Classes in advertisements and investor
communications.
The yield computation is determined by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period and annualizing the resulting figure,
according to the following formula:
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The above formula will be used in calculating quotations of yield for
each Class of the Funds, based on specified 30-day periods identified in
advertising by the Funds. 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, 1998, 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 8.71% 7.65% 7.81%
Class B Shares 8.38% 7.26% 7.50%
Class C Shares 8.38% 7.26% 7.56%
Institutional Class 9.41% 8.31% 8.52%
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.
-32-
<PAGE>
The average weighted portfolio maturity at July 31, 1998 for Delchester
Fund, Strategic Income Fund and High-Yield Opportunities Fund was 8.3 years, 7.1
years and 8.5 years, respectively.
From time to time, each Fund may quote actual total return and/or yield
performance for its Classes in advertising and other types of literature. This
information may be compared to that of other mutual funds with similar
investment objectives and to stock, bond an other relevant indices or to
rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of a Fund (or Class) may be compared to data prepared by Lipper
Analytical Services, Inc., Morningstar, Inc. or the performance of unmanaged
indices compiled or maintained by statistical research firms such as Lehman
Brothers or Salomon Brothers, Inc.
Lipper Analytical Services, Inc. maintains statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds. Morningstar, Inc. is a mutual fund rating service that rates mutual funds
on the basis of risk-adjusted performance. Rankings that compare the Fund's
performance to another fund in appropriate categories over specific time periods
also may be quoted in advertising and other types of literature. The total
return performance reported for these indices will reflect the reinvestment of
all distributions on a quarterly basis and market price fluctuations. The
indices do not take into account any sales charge or other fees. A direct
investment in an unmanaged index is not possible.
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 a Fund may
invest and the assumptions that were used in calculating the blended performance
will be described.
Comparative information on the Consumer Price Index may also be
included in advertisements or other literature. 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.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides
historical returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. Each Fund may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of a Fund. Each Fund may also compare performance to that of other compilations
or indices that may be developed and made available in the future.
The Funds may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification, risk
tolerance, and goal setting, questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation
-33-
<PAGE>
and hypothetical rates of return and action plans offering investment
alternatives), investment management techniques, policies or investment
suitability of a Fund (such as value investing, market timing, dollar cost
averaging, asset allocation, constant ratio transfer, automatic account
rebalancing, the advantages and disadvantages of investing in tax-deferred and
taxable investments or global or international investments), economic and
political conditions, the relationship between sectors of the economy and the
economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
bills. From time to time advertisements, sales literature, communications to
shareholders or other materials may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund), as well as the views as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to a Fund. In
addition, selected indices may be used to illustrate historic performance of
selected asset classes. The Funds may also include in advertisements, sales
literature, communications to shareholders or other materials, charts, graphs or
drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to, domestic and
international stocks, and/or bonds, treasury bills and shares of a Fund. In
addition, advertisements, sales literature, communications to shareholders or
other materials may include a discussion of certain attributes or benefits to be
derived by an investment in a Fund and/or other mutual funds, shareholder
profiles and hypothetical investor scenarios, timely information on financial
management, tax and retirement planning (such as information on Roth IRAs and
Educational IRAs) and investment alternatives to certificates of deposit and
other financial instruments. Such sales literature, communications to
shareholders or other materials may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
Materials may refer to the CUSIP numbers of the Funds and may
illustrate how to find the listings of the Funds in newspapers and periodicals.
Materials may also include discussions of other Funds, products, and services.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Funds may compare these measures to
those of other funds. Measures of volatility seek to compare the historical
share price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Fund may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to a Fund may include information
regarding the background and experience of its portfolio managers.
Total return performance for each Class of each Funds will reflect the
appreciation or depreciation of principal, reinvestment of income and any
capital gains distributions paid during any indicated period, and, in the case
of Class A Shares, the impact of the maximum front-end sales charge, if any,
paid on the illustrated investment amount, annualized. Performance of Class A
Shares may also be shown without reflecting the impact of any front-end sales
charge. The results will not reflect any income taxes, if applicable, payable by
shareholders on the reinvested distributions included in the calculations. The
performance of Class B Shares and Class C Shares will be calculated both with
the applicable CDSC included and excluded. The net asset values of the Funds
fluctuate so shares, when redeemed, may be worth more or less than the original
investment, and the Funds' results should not be considered a guarantee of
future performance.
The following tables are examples, for purposes of illustration only,
of cumulative total return performance for Class A Shares, Class B Shares, Class
C Shares and Institutional Class of each Fund
-34-
<PAGE>
through July 31, 1998. Pursuant to applicable regulation, total return shown for
the Institutional Class of Delchester Fund for the periods prior to the
commencement of operations of such Institutional Class is calculated by taking
the performance of the respective Class A Shares 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 by the Class A Shares, and
performance for the Institutional Class would have been affected had such an
adjustment been made. For these purposes, the calculations assume the
reinvestment of any distributions and income dividends paid during the indicated
periods, but does not reflect any income taxes payable by shareholders on the
reinvested distributions. The performance of Class A Shares reflects the maximum
front-end sales charge paid on the purchases of shares but 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. Past performance is no guarantee of future results.
Performance shown for short periods of time may not be representative of longer
term results.
-35-
<PAGE>
Cumulative Total Return
Delchester Delchester
Fund Fund
A Class Institutional
(at Offer) Class(2)
3 months
ended
7/31/98 (3.92%) 0.98%
6 months
ended
7/31/98 (1.40%)(3) 3.72%
9 months
ended
7/31/98 2.81% 8.16%
1 year
ended
7/31/98 5.43% 11.00%
3 years
ended
7/31/98 34.07% 41.74%
5 years
ended
7/31/98 47.71% 56.90%
10 years
ended
7/31/98 150.91% 170.35%
15 years
ended
7/31/98 380.27% 416.96%
Period
8/20/70(1)
through
7/31/98 1,234.72% 1,338.12%
- --------------
(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.
(3) Cumulative total return at net asset value for the six months ended
July 31, 1998 was 3.59%.
-36-
<PAGE>
Cumulative Total Return
Delchester Delchester
Fund Fund
B Class B Class
(Including (Excluding
Deferred Deferred
Sales Charge) Sales Charge)
3 months
ended
7/31/98 (3.21%) 0.73%
6 months
ended
7/31/98 (0.75%) 3.21%
9 months
ended
7/31/98 3.36% 7.36%
1 year
ended
7/31/98 5.91% 9.91%
3 years
ended
7/31/98 34.58% 37.58%
Period
5/2/94(1)
through
7/31/98 43.72% 45.70%
- -----------
(1) Date of initial public offering of Delchester Fund B Class.
-37-
<PAGE>
Cumulative Total Return
Delchester Delchester
Fund Fund
C Class C Class
(Including (Excluding
Deferred Deferred
Sales Charge) Sales Charge)
3 months
ended
7/31/98 (0.26%) 0.73%
6 months
ended
7/31/98 2.21% 3.20%
9 months
ended
7/31/98 6.36% 7.36%
1 year
ended
7/31/98 8.90% 9.90%
Period
11/29/95(1)
through
7/31/98 34.88% 34.88%
- ------------
(1) Date of initial public offering of Delchester Fund C Class.
-38-
<PAGE>
Cumulative Total Return (1)
Strategic Strategic
Income Income
Fund Fund
A Class Institutional
(at Offer) Class
3 months
ended
7/31/98 (4.91%) (0.08%)
6 months
ended
7/31/98 (3.22%) (3) 1.59%
9 months
ended
7/31/98 (1.49%) 3.71%
1 year
ended
7/31/98 1.25% 6.36%
Period
10/1/96(2)
through
7/31/98 11.49% 17.39%
- -------------
(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, 1998. 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.
(3) Cumulative total return at net asset value for the six months ended
July 31, 1998 was 1.62%.
-39-
<PAGE>
Cumulative Total Return (1)
Strategic Strategic
Income Income
Fund Fund
B Class B Class
(Including (Excluding
Deferred Deferred
Sales Charge) Sales Charge)
3 months
ended
7/31/98 (4.25%) (0.34%)
6 months
ended
7/31/98 (2.82%) 1.08%
9 months
ended
7/31/98 (0.87%) 2.94%
1 year
ended
7/31/98 1.48% 5.32%
Period
10/1/96(2)
through
7/31/98 11.38% 15.36%
- --------------
(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, 1998. In the absence of such waiver, performance would have been
affected negatively.
(3) Date of initial public offering of Strategic Income Fund B Class.
-40-
<PAGE>
Cumulative Total Return (1)
Strategic Strategic
Income Income
Fund Fund
C Class C Class
(Including (Excluding
Deferred Deferred
Sales Charge) Sales Charge)
3 months
ended
7/31/98 (1.49%) (0.52%)
6 months
ended
7/31/98 0.11% 1.08%
9 months
ended
7/31/98 1.81% 2.76%
Period
10/1/96(2)
through
7/31/98 15.35% 15.35%
- ---------------
(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, 1998. In the absence of such waiver, performance would have been
affected negatively.
(2) Date of initial public offering of Strategic Income Fund C Class.
-41-
<PAGE>
Cumulative Total Return (1)
High-Yield High-Yield
Opportunities Opportunities
Fund Fund
A Class (2) Institutional
(at Offer) Class
3 months
ended
7/31/98 (2.37%) 2.51%
6 months
ended
7/31/98 0.95%(3) 6.12%
9 months
ended
7/31/98 5.40% 10.78%
1 year
ended
7/31/98 10.08% 15.82%
Period
12/30/96(4)
through
7/31/98 22.16% 28.33%
- ------------------
(1) The Manager 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 did not exceed
0.75% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses) through December 31, 1997.
Beginning January 1, 1998, 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 High-Yield Opportunities Fund to the
extent necessary to ensure that the Total Operating Expenses of each
Class of the Fund do not exceed 0.95% (in each case, exclusive of
taxes, interest, brokerage commissions and extraordinary expenses and,
in the case of Class A Shares, 12b-1 Plan Expenses) on an annualized
basis through March 31, 1999. In the absence of such waivers,
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 February 16, 1998. In the absence of such waiver, performance
would have been affected negatively.
(3) Cumulative total return at net asset value for the six months ended
July 31, 1998 was 5.98%.
-42-
<PAGE>
(4) Date of initial public offering of High-Yield Opportunities Fund A
Class and High-Yield Opportunities Fund Institutional Class.
Aggregate Total Return
High-Yield High-Yield
pportunities Fund Opportunities Fund
B Class B Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
3 months
ended
7/31/98 (1.75%) 2.26%
Period
2/17/98(2)
through
7/31/98 (0.46%) 3.54%
- --------------
(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 0.95% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses and applicable 12b-1 expenses)
through March 31, 1999. In the absence of such waiver, performance
would have been affected negatively.
(2) Date of initial public offering of High-Yield Opportunities Fund
B Class.
-43-
<PAGE>
Aggregate Total Return
High-Yield High-Yield
Opportunities Fund Opportunities Fund
C Class C Class
(Including Deferred (Excluding Deferred
Sales Charge) Sales Charge)
3 months
ended
7/31/98 (1.26%) 2.26%
Period
2/17/98(2)
through
7/31/98 2.54% 3.54%
- -------------
(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 0.95% (in each case, exclusive of taxes, interest, brokerage
commissions, extraordinary expenses and applicable 12b-1 expenses)
through March 31, 1999. In the absence of such waiver, performance
would have been affected negatively.
(2) Date of initial public offering of High-Yield Opportunities Fund
C Class.
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<PAGE>
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 Investments family, 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, investment disciplines employed in
seeking the objectives of the Funds and other funds in the Delaware Investments
family. 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 such persons.
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
Investments 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.
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<PAGE>
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
Investments family. Dollar-cost averaging can be appropriate for investments in
shares of funds that tend to fluctuate in value. Please obtain the prospectus of
any fund in the Delaware Investments family in which you plan to invest through
a dollar-cost averaging program. The prospectus contains additional information,
including charges and expenses. Please read it carefully before you invest or
send money.
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional Fund
shares, your investment is given yet another opportunity to grow. It's called
the Power of Compounding. Each Fund may include illustrations showing the power
of compounding in advertisements and other types of literature.
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<PAGE>
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 past three fiscal years, 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, 1998, 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
the Manager or Sub-Adviser which constitute in some part brokerage and research
services used by the Manager or Sub-Adviser in connection with
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<PAGE>
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 Investments
family. 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 Investments family 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. Due to current market conditions, each
Fund anticipates that its respective annual rate 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.
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.
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<PAGE>
During the past three fiscal years, the portfolio turnover rates of the
Funds were as follows:
July 31
1998 1997 1996
---- ---- ----
Delchester Fund 117% 154% 108%
Strategic Income Fund (1) 175% 183% (3) N/A
High-Yield Opportunities Fund (2) 317% 270% (3) N/A
- ----------------
(1) Date of initial public offering was October 1, 1996.
(2) Date of initial public offering was December 30, 1996.
(3) Annualized.
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<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for each Fund's
classes of shares - Class A Shares, Class B Shares, Class C Shares and the
Institutional Class - and has agreed to use its best efforts to sell shares of
each Fund. See the Prospectuses for additional information on how to invest.
Shares of the Funds are offered on a continuous basis, and may be purchased
through authorized investment dealers or directly by contacting Income Funds,
Inc. or the Distributor.
The minimum initial investment generally is $1,000 for Class A Shares,
Class B Shares and Class C Shares. Subsequent purchases 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 fund in the Delaware Investments family, the Manager or the
Sub-Adviser or any of 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 Asset
Planner service are subject to a minimum initial investment of $2,000 per Asset
Planner strategy selected. There are no minimum purchase requirements for the
Funds' Institutional Classes, but certain eligibility requirements must be
satisfied.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. See Investment Plans for purchase limitations
applicable to retirement plans. Income Funds, Inc. will reject any purchase
order for more than $250,000 of Class B Shares and $1,000,000 or more of Class C
Shares. An investor may exceed these limitations by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers 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 amendments to its Conduct Rules relating to
investment company sales charges. Income Funds, Inc. and the Distributor intend
to operate in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 4.75%; however, lower front-end sales charges
apply for larger purchases. See the table below. Class A Shares are also subject
to annual 12b-1 Plan expenses for the life of the investment.
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; (iv) 1% if
shares are redeemed during the sixth year following purchase; and (v) 0%
thereafter. Class B Shares are also subject to annual 12b-1 Plan expenses which
are higher than those to which Class A Shares are subject and are assessed
against Class B Shares for approximately eight years after purchase. See
Automatic Conversion of Class B Shares under Classes of Shares in the Fund
Classes' Prospectuses.
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<PAGE>
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
Institutional Class shares are purchased at the net asset value per
share without the imposition of a front-end or contingent deferred sales charge
or 12b-1 Plan expenses. See Determining Offering Price and Net Asset Value and
Plans Under Rule 12b-1 for the Fund Classes in this Part B.
Class A Shares, Class B Shares, Class C Shares and Institutional Class
shares represent a proportionate interest in a Fund's assets and will receive a
proportionate interest in that Fund's income, before application, as to 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 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 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.
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<PAGE>
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 and may include a series of purchases over
a 13-month period under a Letter of Intention signed by the purchaser. See
Front-End Sales Charge Alternative-Class A Shares in the Prospectuses for the
Fund Classes for a table illustrating reduced front-end sales charges. See also,
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.
Certain dealers who enter into an agreement to provide extra training
and information on Delaware Investments products and services and who increase
sales of shares of the funds in the Delaware Investments family 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
As described more fully in the Prospectuses for the Fund Classes, 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. See Front-End Sales Charge Alternative -- Class A Shares in the
Prospectuses for the Fund Classes for the applicable schedule and further
details.
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 above, 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.
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. At the end of approximately eight years after purchase, the investor's
Class B Shares will be automatically converted into Class A Shares of the same
Fund. See Automatic Conversion of Class B Shares under Classes of Shares in the
Fund Classes' Prospectuses. Such conversion will constitute a tax-free exchange
for federal income tax purposes. See Taxes in the Prospectuses for the Fund
Classes.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Income Funds, Inc. has
adopted a separate plan for each of the Class A Shares, Class B Shares and Class
C Shares of each Fund (the "Plans"). Each Plan permits the relevant Fund to pay
for certain distribution, promotional and related expenses involved in the
marketing of only the class 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
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<PAGE>
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 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. The Distributor had 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.
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<PAGE>
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 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.
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<PAGE>
For the fiscal year ended July 31, 1998, payments from Class A Shares,
Class B Shares and Class C Shares of Delchester Fund amounted to $2,607,829,
$3,193,696 and $321,709, respectively. Such amounts were used for the following
purposes:
Delchester Delchester Delchester
Fund Fund Fund
A Class B Class C Class
Advertising $8,851 -------- --------
Annual/Semi-Annual Reports $56,465 -------- --------
Broker Trails $2,083,639 $778,140 $87,895
Broker Sales Charges -------- $1,355,219 $148,032
Dealer Service Expenses $1,276 $0,000 $592
Interest on Broker Sales Charges -------- $902,760 $10,531
Commissions to Wholesalers $196,401 $142,377 $61,328
Promotional-Broker Meetings $27,545 $13,201 $3,055
Promotional-Other $93,438 -------- --------
Prospectus Printing $83,043 -------- --------
Telephone $6,343 -------- $1,040
Wholesaler Expenses $50,823 $1,999 $9,236
Other -------- -------- --------
For the period ended July 31, 1998, payments from Class A Shares, Class
B Shares and Class C Shares of Strategic Income Fund amounted to $32,549
$110,077 and $33,810, respectively. Such amounts were used for the following
purposes:
Strategic Strategic Strategic
Income Income Income
Fund Fund Fund
A Class B Class C Class
Advertising $138 -------- --------
Annual/Semi-Annual Reports $119 -------- --------
Broker Trails $31,463 $27,488 $5,234
Broker Sales Charges -------- $34,281 $17,494
Dealer Service Expenses -------- $00,000 $133
Interest on Broker Sales Charges -------- $42,772 $1,463
Commissions to Wholesalers -------- $5,022 $8,003
Promotional-Broker Meetings $30 $514 $272
Promotional-Other $162 -------- --------
Prospectus Printing $637 -------- --------
Telephone $000 -------- $19
Wholesaler Expenses -------- -------- $1,192
Other -------- -------- --------
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For the period ended July 31, 1998, payments from Class A Shares, Class
B Shares and Class C Shares of High-Yield Opportunities Fund amounted to
$9,164, $1,108 and $279, respectively. Such amounts were used for the following
purposes:
High-Yield High-Yield High-Yield
Opportunities Opportunities Opportunities
Fund Fund Fund
A Class B Class C Class
Advertising -------- -------- --------
Annual/Semi-Annual Reports $1,457 -------- --------
Broker Trails $835 $276 --------
Broker Sales Charges -------- $342 $107
Dealer Service Expenses -------- -------- --------
Interest on Broker Sales Charges -------- $433 $31
Commissions to Wholesalers $942 $14 $141
Promotional-Broker Meetings $146 -------- --------
Promotional-Other $2,247 -------- --------
Prospectus Printing $3,287 -------- --------
Telephone -------- -------- --------
Wholesaler Expenses $250 $43 --------
Other -------- -------- --------
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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 funds in the Delaware Investments family. 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 expenses of preapproved dealer advertisements promoting the sale
of shares of the funds in the Delaware Investments family.
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 Investments family, the Manager, the
Manager's affiliates, the Sub-Adviser or any of the Manager's current affiliates
and those 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
Investments family, including any fund that may be created, at the net asset
value per share. Family members (regardless of age) 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 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 funds in the
Delaware Investments family. 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.
Investors in Delaware Investments 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 Investments family 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 each Fund; and 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 Retirement Financial Services,
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Inc. (formerly named Delaware Investment & Retirement Services, Inc.)
proprietary record keeping system that (i) has in excess of $500,000 of plan
assets invested in Class A Shares of Delaware Investments funds and any stable
value product available through Delaware Investments, 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 fund in the Delaware Investments
family and such employer has properly represented to Retirement Financial
Services, Inc. in writing that it has the requisite number of employees and has
received written confirmation back from Retirement Financial Services, Inc.
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
Investments fund 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 Investments family (except shares
of any fund in the Delaware Investments family 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 fund in
the Delaware Investments family 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 Investments 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 Investments 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
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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 funds in the Delaware Investments family which offer
corresponding classes of shares may also be aggregated for this purpose.
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of 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
funds in the Delaware Investments family (except shares of any Delaware
Investments 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 Investments 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 Investments 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 funds in the Delaware
Investments family which offer such classes (except shares of any fund in the
Delaware Investments family 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
Investments 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 Investments family 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 Investments
family, 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
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triggered the payment of a Limited CDSC. Persons investing redemption proceeds
from direct investments in mutual funds in the Delaware Investments family,
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 the fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Funds' shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Fund Classes' Prospectuses) in connection with
the features described above.
Group Investment Plans
Group Investment Plans that are not eligible to purchase shares of the
Institutional Classes may also benefit from the reduced front-end sales charges
for investments in Class A Shares set forth in the Prospectuses for the Funds'
Classes, based on total plan assets. If a company has more than one plan
investing in the Delaware Investments family 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 investment
accounts of Delaware Investments 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.
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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 are reinvested in
the accounts of the holders of such shares (based on the net asset value in
effect on the reinvestment date). A confirmation of each distribution from
realized securities profits, if any, will be mailed to shareholders in the first
quarter of the fiscal year.
Under the Reinvestment Plan/Open Account, shareholders may purchase and
add full and fractional shares to their plan accounts at any time either through
their investment dealers or by sending a check or money order to the specific
Fund and class in which shares are being purchased. Such purchases, which must
meet the minimum subsequent purchase requirements set forth in the Prospectuses
and this Part B, are made, for Class A Shares at the public offering price, and
for Class B Shares, Class C Shares and 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.
Reinvestment of Dividends in Other Funds in the Delaware Investments Family
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 Investments family, 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 Investments family 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.
Capital gains and/or dividend distributions to participants in the
following retirement plans are automatically reinvested into the same Delaware
Investments 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.
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Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for a Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and Class
C Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date although no check is required to initiate the transaction. (2) If
the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
This option is not available to participants in the following plans:
SAR/SEP, SEP/IRA, 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.
* * *
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 Investments family. Shareholders of the Fund Classes may
elect to invest in one or more of the other mutual funds in the Delaware
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Investments family 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
Investments family, 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.
Asset Planner
To invest in Delaware Investments funds using the Asset Planner asset
allocation service, you should complete a Asset Planner Account Registration
Form, which is available only from a financial adviser or investment dealer.
Effective September 1, 1997, the Asset Planner Service is only available to
financial advisers or investment dealers who have previously used this service.
The Asset Planner service offers a choice of four predesigned asset allocation
strategies (each with a different risk/reward profile) in predetermined
percentages in Delaware Investments 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
Investments 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 Investments family of
funds may be used in the same Strategy with consultant class shares that are
offered by certain other Delaware Investments funds. See Appendix B Classes
Offered in the Prospectus for the funds in the Delaware Investments that offer
consultant class shares.
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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 Investments 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 a Fund may be suitable for tax-deferred retirement
plans. Delaware Investments offers a full spectrum of retirement plans,
including the 401(k) deferred compensation plan, Individual Retirement Account
("IRA") and the new Roth IRA and Education IRA.
Among the retirement plans Delaware Investments offers, Class B Shares
are available for investment only by Individual Retirement Accounts, SIMPLE
IRAs, Roth IRAs, Education IRAs, Simplified Employee Pension Plans, Salary
Reduction Simplified Employee Pension Plans, and 403(b) and 457 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 under
Redemption and Exchange in the Prospectuses for Class B Shares and Class C
Shares 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 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 Institutional Class Shares. For
additional information on any of the Plans and Delaware's retirement services,
call the Shareholder Service Center telephone number.
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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, corporations and other eligible forms of organizations. These
plans can be maintained as Section 401(k), profit sharing or money purchase
pension plans. Contributions may be invested only in Class A Shares 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; however, participation
may be restricted based on certain income limits.
IRA Disclosures
The Taxpayer Relief Act of 1997 provides new opportunities for
investors. Individuals have five types of tax-favored IRA accounts that can be
utilized depending on the individual's circumstances. A new Roth IRA and
Education IRA are available in addition to the existing deductible IRA and
non-deductible IRA.
Deductible and Non-deductible IRAs
An individual can contribute up to $2,000 in his or her IRA each year.
Contributions may or may not be deductible depending upon the taxpayer's
adjusted gross income ("AGI") and whether the taxpayer is an active participant
in an employer sponsored retirement plan. Even if a taxpayer is an active
participant in an employer sponsored retirement plan, the full $2,000 deduction
is still available if the taxpayer's AGI is below $30,000 ($50,000 for taxpayers
filing joint returns) for years beginning after December 31, 1997. A partial
deduction is allowed for married couples with incomes between $50,000 and
$60,000, and for single individuals with incomes between $30,000 and $40,000.
These income phase-out limits reach $80,000 - $100,000 in 2007 for joint filers
and $50,000 - $60,000 in 2005 for single filers. No deductions are available for
contributions to IRAs by taxpayers whose AGI after IRA deductions exceeds the
maximum income limit established for each year and who are active participants
in an employer sponsored retirement plan.
Taxpayers who are not allowed deductions on IRA contributions still
can make non-deductible IRA contributions of as much as $2,000 for each working
spouse and defer taxes on interest or other earnings from the IRAs.
Under the new law, a married individual is not considered an active
participant in an employer sponsored retirement plan merely because the
individual's spouse is an active participant if the couple's combined AGI is
below $150,000. The maximum deductible IRA contribution for a married individual
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who is not an active participant, but whose spouse is, is phased out for
combined AGI between $150,000 and $160,000.
Conduit (Rollover) IRAs
Certain individuals who have received or are about to receive eligible
rollover distributions from an employer-sponsored retirement plan or another IRA
may rollover the distribution tax-free to a Conduit IRA. The rollover of the
eligible distribution must be completed by the 60th day after receipt of the
distribution; however, if the rollover is in the form of a direct
trustee-to-trustee transfer without going through the distributee's hand, the
60-day limit does not apply.
A distribution qualifies as an "eligible rollover distribution" if it
is made from a qualified retirement plan, a 403(b) plan or another IRA and does
not constitute one of the following:
(i) Substantially equal periodic payments over the employee's
life or life expectancy or the joint lives or life
expectancies of the employee and his/her designated
beneficiary;
(ii) Substantially equal installment payments for a period
certain of 10 or more years;
(iii) A distribution, all of which represents a required minimum
distribution after attaining age 70 1/2;
(iv) A distribution due to a Qualified Domestic Relations Order
to an alternate payee who is not the spouse (or former
spouse) of the employee; and
(v) A distribution of after-tax contributions which is not
includable in income.
Roth IRAs
For taxable years beginning after December 31, 1997, non-deductible
contributions of up to $2,000 per year can be made to a new Roth IRA. As a
result of the Internal Revenue Service Restructuring and Reform Act of 1998 (the
"1998 Act"), the $2,000 annual limit will not be reduced by any contributions to
a deductible or nondeductible IRA for the same year. The maximum contribution
that can be made to a Roth IRA is phased out for single filers with AGI between
$95,000 and $110,000, and for couples filing jointly with AGI between $150,000
and $160,000. Qualified distributions from a Roth IRA would be exempt from
federal taxes. Qualified distributions are distributions (1) made after the
five-taxable year period beginning with the first taxable year for which a
contribution was made to a Roth IRA and (2) that are (a) made on or after the
date on which the individual attains age 59 1/2, (b) made to a beneficiary on or
after the death of the individual, (c) attributed to the individual being
disabled, or (d) for a qualified special purpose (e.g., first time homebuyer
expenses).
Distributions that are not qualified distributions would always be
tax-free if the taxpayer is withdrawing contributions, not accumulated earnings.
Taxpayers with AGI of $100,000 or less are eligible to convert an
existing IRA (deductible, nondeductible and conduit) to a Roth IRA. Earnings and
contributions from a deductible IRA are subject to a tax upon conversion;
however, no 10% excise tax for early withdrawal would apply. If the conversion
is done prior to January 1, 1999, then the income from the conversion can be
included in income ratably over a four-year period beginning with the year of
conversion.
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Education IRAs
For taxable years beginning after December 31, 1997, an Education
IRA has been created exclusively for the purpose of paying qualified higher
education expenses. Taxpayers can make non-deductible contributions up to $500
per year per beneficiary. The $500 annual limit is in addition to the $2,000
annual contribution limit applicable to IRAs and Roth IRAs. Eligible
contributions must be in cash and made prior to the date the beneficiary reaches
age 18. Similar to the Roth IRA, earnings would accumulate tax-free. There is no
requirement that the contributor be related to the beneficiary, and there is no
limit on the number of beneficiaries for whom one contributor can establish
Education IRAs. In addition, multiple Education IRAs can be created for the same
beneficiaries, however, the contribution limit of all contributions for a single
beneficiary cannot exceed $500 annually.
This $500 annual contribution limit for Education IRAs is phased
out ratably for single contributors with modified AGI between $95,000 and
$110,000, and for couples filing jointly with modified AGI of between $150,000
and $160,000. Individuals with modified AGI above the phase-out range are not
allowed to make contributions to an Education IRA established on behalf of any
other individual.
Distributions from an Education IRA are excludable from gross
income to the extent that the distribution does not exceed qualified higher
education expenses incurred by the beneficiary during the year the distribution
is made regardless of whether the beneficiary is enrolled at an eligible
educational institution on a full-time, half-time, or less than half-time basis.
Any balance remaining in an Education IRA at the time a beneficiary
becomes 30 years old must be distributed, and the earnings portion of such a
distribution will be includible in gross income of the beneficiary and subject
to an additional 10% penalty tax if the distribution is not for qualified higher
educations expenses. Tax-free (and penalty-free) transfers and rollovers of
account balances from one Education IRA benefiting one beneficiary to another
Education IRA benefiting a different beneficiary (as well as redesignations of
the named beneficiary) is permitted, provided that the new beneficiary is a
member of the family of the old beneficiary and that the transfer or rollover is
made before the time the old beneficiary reaches age 30 and the new beneficiary
reaches age 18.
A company or association may establish a Group IRA or Group Roth
IRA for employees or members who want to purchase shares of the Fund.
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. For information concerning the applicability of a CDSC upon
redemption of
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Class B Shares and Class C Shares, see Contingent Deferred Sales Charge - Class
B Shares and Class C Shares under Classes of Shares in the Prospectus for Class
B Shares and Class C Shares.
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. In addition, effective January 1, 1998, the new law allows
for premature distribution without a 10% penalty if (i) the amounts are used to
pay qualified higher education expenses (including graduate level courses) of
the taxpayer, the taxpayer's spouse or any child or grandchild of the taxpayer
or the taxpayer's spouse, or (ii) used to pay acquisition costs of a principle
residence for the purchase of a first-time home by the taxpayer, taxpayer's
spouse or any child or grandchild of the taxpayer or the taxpayer's spouse. A
qualified first-time homebuyer is someone who has had no ownership interest in a
residence during the past two years. The aggregate amount of distribution for
first-time home purchases cannot exceed a lifetime cap of $10,000.
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 Funds 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 continue to 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. Effective January 1, 1997,
non-governmental tax-exempt organizations may establish 401(k) plans. 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 Investments family. 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 in the Prospectuses for the Fund
Classes.
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 shares of any of the Classes in conjunction with such an arrangement.
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
the Prospectuses for the Fund Classes.
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 the Fund. Although investors may use their
own plan, there is available a Delaware Investments 457 Deferred Compensation
Plan. Interested investors should contact the Distributor or their investment
dealers to obtain further information. Purchases under the Plan may be combined
for
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purposes of computing the reduced front-end sales charge applicable to Class
A Shares as set forth in the table in the Prospectuses for the Fund Classes.
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. A SIMPLE IRA is available only to plan
sponsors with 100 or fewer employees.
SIMPLE 401(k)
A SIMPLE 401(k) is like a regular 401(k) except that it is
available only to plan sponsors with 100 or fewer employees and, in exchange for
mandatory plan sponsor contributions, discrimination testing is not required.
Class B Shares are not available for purchase by such plans.
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund or its agent or certain other authorized
persons. See Distribution and Service under Investment Management Agreements and
Sub-Advisory Agreements. 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 by the Fund in which shares are being purchased after receipt of the
order by the Fund, its agent or certain other authorized persons. Selling
dealers are responsible for transmitting orders promptly.
The offering price for Class A Shares consists of the net asset
value per share plus any applicable front-end 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 days on which the following holidays are
observed: 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, will be
included in the Fund's financial statements which are incorporated by reference
into this Part B.
Each Fund's net asset value per share is computed by adding the
value of all the securities and other assets in the portfolio, deducting any
liabilities and dividing by the number of shares outstanding. Expenses and fees
are accrued daily. In determining a Fund's total net assets, portfolio
securities listed or traded on a national securities exchange, except for bonds,
are valued at the last sale price on the exchange upon which such securities are
primarily traded. Securities not traded on a particular day, over-the-counter
securities and government and agency securities are valued at the mean value
between bid and asked prices. Money market instruments having a maturity of less
than 60 days are valued at amortized cost. Debt securities (other than
short-term obligations) are valued on the basis of valuations provided by a
pricing service when such prices are believed to reflect the fair value of such
securities. Foreign currencies and the prices of foreign securities denominated
in foreign currencies are translated to U.S. Dollars at the mean between the bid
and offer quotations of such securities based on rates in effect as of the close
of the London Stock Exchange. 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
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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. A signature guarantee can be
obtained from a commercial bank, a trust company or a member of a securities
transfer association medallion program. A signature guarantee cannot be provided
by a notary public. A signature guarantee is designed to protect the
shareholders, each Fund and its respective agents from fraud. 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, its agent or certain other authorized persons (see Distribution and
Service under Investment Management Agreements and Sub-Advisory Agreement),
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.
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; (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 shares are redeemed within 12 months
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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 by each Fund or certain other authorized
persons (see Distribution and Service under Investment Management Agreement);
provided, however, that each commitment to mail or wire redemption proceeds by a
certain time, as described below, is modified by the qualifications described in
the next paragraph.
Each Fund will process written or telephone redemption requests to
the extent that the purchase orders for the shares being redeemed have already
settled. A Fund will honor redemption requests as to shares for which a check
was tendered as payment, but a Fund will not mail or wire the proceeds until it
is reasonably satisfied that the check has cleared. This potential delay can be
avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which
is subsequently returned unpaid for insufficient funds or for any other reason,
the Fund involved will automatically redeem from the shareholder's account the
shares purchased by the check plus any dividends earned thereon. Shareholders
may be responsible for any losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practical,
or it is not reasonably practical for a Fund fairly to value its assets, or in
the event that the SEC has provided for such suspension for the protection of
shareholders, a Fund may postpone payment or suspend the right of redemption or
repurchase. In such case, the shareholder may withdraw the request for
redemption or leave it standing as a request for redemption at the net asset
value next determined after the suspension has been terminated.
Payment for shares redeemed or repurchased may be made either in
cash or kind, or partly in cash and partly in kind. Any portfolio securities
paid or distributed in kind would be valued as described in Determining Offering
Price and Net Asset Value. Subsequent sale by an investor receiving a
distribution in kind could result in the payment of brokerage commissions.
However, Income Funds, Inc. has elected to be governed by Rule 18f-1 under the
Investment Company Act of 1940 pursuant to which each Fund is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1% of the net asset
value of such Fund during any 90-day period for any one shareholder.
The value of a Fund's investments is subject to changing market
prices. Thus, a shareholder reselling shares to a Fund may sustain either a gain
or loss, depending upon the price paid and the price received for such shares.
Small Accounts
Before a Fund involuntarily redeems shares from an account that,
under the circumstances listed in the relevant Prospectus, has remained below
the minimum amounts required by the Fund's Prospectuses and sends the proceeds
to the shareholder, the shareholder will be notified in writing that the value
of the shares in the account is less than the minimum required and will be
allowed 60 days from the date of notice to make an
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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.
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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 Investments 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
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that the Systematic Withdrawal Plan was established. See Waiver of Contingent
Deferred Sales Charge - Class B and Class C Shares and Waiver of Limited
Contingent Deferred Sales Charge - Class A Shares under Redemption and Exchange
in 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.
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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 Class A Shares, Class B
Shares and Class C Shares alone will incur distribution fees under their
respective 12b-1 Plans.
Dividends and any realized securities profits distributions are
automatically reinvested in additional shares of the same Class of the
respective Fund at net asset value, unless, in the case of shareholders of the
Fund Classes, an election to receive dividends in cash has been made. Payment by
check of cash dividends will ordinarily be mailed within three business days
after the payable date. Dividend payments of $1.00 or less will be automatically
reinvested, notwithstanding a shareholder's election to receive dividends in
cash. If such a shareholder's dividends increase to greater than $1.00, the
shareholder would have to file a new election in order to begin receiving
dividends in cash again. If a shareholder redeems an entire account, all
dividends accrued to the time of the withdrawal will be paid by separate check
at the end of that particular monthly dividend period, consistent with the
payment and mailing schedule described above. Any check in payment of dividends
or other distributions which cannot be delivered by the United States Post
Office or which remains uncashed for a period of more than one year may be
reinvested in the shareholder's account at the then-current net asset value and
the dividend option may be changed from cash to reinvest. A Fund may deduct from
a shareholder's account the costs of the Fund's effort to locate a shareholder
if a shareholder's mail is returned by the United States Post Office or the Fund
is otherwise unable to locate the shareholder or verify the shareholder's
mailing address. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for their location services.
Any distributions from net realized securities profits will be made
twice a year. The first payment would be made during the first quarter of the
next fiscal year. The second payment would be made near the end of the calendar
year to comply with certain requirements of the Code. Such distributions will be
reinvested in shares, unless the shareholders of the Fund Classes elect to
receive them in cash. The Funds will mail a quarterly statement showing the
dividends paid and all the transactions made during the period.
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<PAGE>
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. The Funds intend to meet the requirements each year.
The Funds also intend to meet the calendar year distribution requirements
imposed by the Code to avoid the imposition of a 4% excise tax.
The Funds have no fixed policy with regard to distributions of
realized securities profits when such realized securities profits may be offset
by capital losses carried forward. Presently, however, the Funds intend to
offset realized securities profits to the extent of the capital losses carried
forward. Delchester Fund had an accumulated capital loss carryforward of
approximately $145,009,543 at July 31, 1998 which for federal income tax
purposes may be carried forward and applied against future capital gains. The
capital loss carryforward expires as follows: 1999--$53,787,833,
2002--$3,628,131 and 2003--$87,593,579.
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 $15,871,999 as
of July 31, 1998.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), as revised
by the 1998 Act, each Fund is required to track its sales of portfolio
securities and to report its capital gain distributions to you according to the
following categories of holding periods:
"Mid-term capital gains" or "28 percent rate gain": securities sold
by a Fund after July 28, 1997 that were held more than one year but
not more than 18 months. These gains will be taxable to individual
investors at a maximum rate of 28%.
"1997 Act long-term capital gains" or "20 percent rate gain":
securities sold by the Fund between May 7, 1997 and July 28, 1997
that were held for more than 12 months, and securities sold by a
Fund after July 28, 1997 that were held for more than 18 months. As
revised by the 1998 Act, this rate applies to securities held for
more than 12 months for tax years beginning after December 31,
1997. These gains
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<PAGE>
will be taxable to individual investors at a maximum rate of 20%
for investors in the 28% or higher federal income tax brackets, and
at a maximum rate of 10% for investors in the 15% federal income
tax bracket.
"Qualified 5-year gains": For individuals in the 15% bracket,
qualified 5-year gains are net gains on securities held for more
than 5 years which are sold after December 31, 2000. For
individuals who are subject to tax at higher rate brackets,
qualified 5-year gains are net gains on securities which are
purchased after December 31, 2000 and are held for more than 5
years. Taxpayers subject to tax at a higher rate bracket may also
make an election for shares held on January 1, 2001 to recognize
gain on their shares (any loss is disallowed) in order to qualify
such shares as qualified 5-year property as though purchased after
December 31, 2000. These gains will be taxable to individual
investors at a maximum rate of 18% for investors in the 28% or
higher federal income tax brackets, and at a maximum rate of 8% for
investors in the 15% federal income tax bracket when sold after the
5 year holding period.
Each Fund has qualified, and intends to continue to qualify, as a
regulated investment company under Subchapter M of the Code. As such, a 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 and it satisfies other
requirements relating to the sources of its income and diversification of its
assets. In order to qualify as a regulated investment company for federal income
tax purposes, a Fund must meet certain specific requirements, including:
(i) The Fund must maintain a diversified portfolio of securities,
wherein no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other than
cash and cash items, U.S. government securities and securities of other
regulated investment companies) can exceed 5% of the Fund's total assets;
(ii) The Fund must derive at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, and gains from
the sale or disposition of stock and securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies;
(iii) The Fund must distribute to its shareholders at least 90% of
its investment company taxable income and net tax-exempt income for each of its
fiscal years, and
(iv) The Fund must realize less than 30% of its gross income for
each fiscal year from gains from the sale of securities and certain other assets
that have been held by the Fund for less than three months ("short-short
income"). The 1997 Act repealed the 30% short-short income test for tax years of
regulated investment companies beginning after August 5, 1997; however, this
rule may have continuing effect in some states for purposes of classifying the
Fund as a regulated investment company.
The Code requires a Fund to distribute at least 98% of its taxable
ordinary income earned during the calendar year and 98% of its capital gain net
income earned during the 12 month period ending October 31 (in addition to
amounts from the prior year that were neither distributed nor taxed to the Fund)
to shareholders by December 31 of each year in order to avoid federal excise
taxes. Each Fund
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<PAGE>
intends as a matter of policy to declare and pay sufficient dividends in
December or January (which are treated by shareholders as received in December)
but does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
The straddle rules of Section 1092 may apply. Generally, the
straddle provisions require the deferral of losses to the extent of unrecognized
gains related to the offsetting positions in the straddle. Excess losses, if
any, can be recognized in the year of loss. Deferred losses will be carried
forward and recognized in the year that unrealized losses exceed unrealized
gains or when the offsetting position is sold.
The 1997 Act has also added new provisions for dealing with
transactions that are generally called "Constructive Sale Transactions." Under
these rules, a Fund must recognize gain (but not loss) on any constructive sale
of an appreciated financial position in stock, a partnership interest or certain
debt instruments. A Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same or substantially identical
property; 2) enters into an offsetting notional principal contract; or 3) enters
into a futures or forward contract to deliver the same or substantially
identical property. Other transactions (including certain financial instruments
called collars) will be treated as constructive sales as provided in Treasury
regulations to be published. There are also certain exceptions that apply for
transactions that are closed before the end of the 30th day after the close of
the taxable year.
Investment in Foreign Currencies and Foreign Securities--Strategic
Income Fund and High-Yield Opportunities Fund are authorized to invest certain
limited amounts in foreign securities. Such investments, if made, will have the
following additional tax consequences to these Fund:
Under the Code, gains or losses attributable to fluctuations in
foreign currency exchange rates which occur between the time a Fund accrues
income (including dividends), or accrues expenses which are denominated in a
foreign currency, and the time the Fund actually collects such income or pays
such expenses generally are treated as ordinary income or loss. Similarly, on
the disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of its disposition are
also treated as ordinary gain or loss. These gains or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of a Fund's net investment company taxable income, which, in turn, will affect
the amount of income to be distributed to you by the Fund.
If a Fund's Section 988 losses exceed the Fund's other investment
company taxable income during a taxable year, the Fund generally will not be
able to make ordinary dividend distributions to you for that year, or
distributions made before the losses were realized will be recharacterized as
return of capital distributions for federal income tax purposes, rather than as
an ordinary dividend or capital gain distribution. If a distribution is treated
as a return of capital, your tax basis in your Fund shares will be reduced by a
like amount (to the extent of such basis), and any excess of the distribution
over your tax basis in your Fund shares will be treated as capital gain to you.
The 1997 Act generally requires that foreign income be translated
into U.S. dollars at the average exchange rate for the tax year in which the
transactions are conducted. Certain exceptions apply to taxes paid more than two
years after the taxable year to which they relate. This new law may require a
Fund to track and record adjustments to foreign taxes paid on foreign securities
in which it invests.
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<PAGE>
Under a Fund's current reporting procedure, foreign security transactions are
recorded generally at the time of each transaction using the foreign currency
spot rate available for the date of each transaction. Under the new law, a Fund
will be required to record at fiscal year end (and at calendar year end for
excise tax purposes) an adjustment that reflects the difference between the spot
rates recorded for each transaction and the year-end average exchange rate for
all of a Fund's foreign securities transactions. There is a possibility that the
mutual fund industry will be given relief from this new provision, in which case
no year-end adjustments will be required.
A Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the total assets of a
Fund at the end of its fiscal year are invested in securities of foreign
corporations, the Fund may elect to pass-through to you your pro rata share of
foreign taxes paid by the Fund. If this election is made, you will be: (i)
required to include in your gross income your pro rata share of foreign source
income (including any foreign taxes paid by a Fund); and (ii) entitled to either
deduct your share of such foreign taxes in computing your taxable income or to
claim a credit for such taxes against your U.S. income tax, subject to certain
limitations under the Code. You will be informed by your Fund at the end of each
calendar year regarding the availability of any such foreign tax credits and the
amount of foreign source income (including any foreign taxes paid by the Fund).
If your Fund elects to pass-through to you the foreign income taxes that it has
paid, you will be informed at the end of the calendar year of the amount of
foreign taxes paid and foreign source income that must be included on your
federal income tax return. If your Fund invests 50% or less of its total assets
in securities of foreign corporations, it will not be entitled to pass-through
to you your pro-rata shares of foreign taxes paid by the Fund. In this case,
these taxes will be taken as a deduction by the Fund, and the income reported to
you will be the net amount after these deductions. The 1997 Act also simplifies
the procedures by which investors in funds that invest in foreign securities can
claim tax credits on their individual income tax returns for the foreign taxes
paid by a Fund. These provisions will allow investors who pay foreign taxes of
$300 or less on a single return or $600 or less on a joint return during any
year (all of which must be reported on IRS Form 1099-DIV from the Fund to the
investor) to claim a tax credit against their U.S. federal income tax for the
amount of foreign taxes paid by a Fund. This process will allow you, if you
qualify, to bypass the burdensome and detailed reporting requirements on the
foreign tax credit schedule (Form 1116) and report your foreign taxes paid
directly on page 2 of Form 1040. You should note that this simplified procedure
will not be available until calendar year 1998.
Investment in Passive Foreign Investment Company
Securities--Strategic Income Fund and High-Yield Opportunities Fund may invest
in shares of foreign corporations which may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. If a Fund receives an "excess distribution" with respect
to PFIC stock, the Fund itself may be subject to U.S. federal income tax on a
portion of the distribution, whether or not the corresponding income is
distributed by the Fund to you. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Fund held the PFIC shares. The Fund itself will be subject to tax on
the portion, if any, of an excess distribution that is so allocated to prior
Fund taxable years, and an interest factor will be added to the tax, as if the
tax had been payable in such prior taxable years. In this case, you would not be
permitted to claim a credit on your own tax return for the tax paid by the Fund.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
distribution might have been classified as capital gain. This may have the
effect of increasing Fund distributions to you that are treated as ordinary
dividends rather than long-term capital gain dividends.
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<PAGE>
A Fund may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC during such period. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, the 1997 Act provides for
another election that would involve marking-to-market a Fund's PFIC shares at
the end of each taxable year (and on certain other dates as prescribed in the
Code), with the result that unrealized gains would be treated as though they
were realized. A Fund would also be allowed an ordinary deduction for the
excess, if any, of the adjusted basis of its investment in the PFIC stock over
its fair market value at the end of the taxable year. This deduction
would be limited to the amount of any net mark-to-market gains previously
included with respect to that particular PFIC security. If a Fund were to make
this second PFIC election, tax at the Fund level under the PFIC rules would
generally be eliminated.
The application of the PFIC rules may affect, among other things,
the amount of tax payable by a Fund (if any), the amounts distributable to you
by the Fund, the time at which these distributions must be made, and whether
these distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time
shares of a foreign corporation are acquired to ascertain that the foreign
corporation is a PFIC, and that there is always a possibility that a foreign
corporation will become a PFIC after the Fund acquires shares in that
corporation. While a Fund will generally seek to avoid investing in PFIC shares
to avoid the tax consequences detailed above, there are no guarantees that it
will do so and it reserves the right to make such investments as a matter of its
fundamental investment policy.
Most foreign exchange gains are classified as ordinary income which
will be taxable to you as such when distributed. Similarly, you should be aware
that any foreign exchange losses realized by your Fund, including any losses
realized on the sale of foreign debt securities, are generally treated as
ordinary losses for federal income tax purposes. This treatment could increase
or reduce the Fund's income available for distribution to you, and may cause
some or all of the Fund's previously distributed income to be classified as a
return of capital.
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<PAGE>
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 Investments since 1938. On July 31, 1998, the Manager and its
affiliates in Delaware Investments, including the Sub-Adviser, were managing in
the aggregate more than $43 billion in assets in the various institutional or
separately managed (approximately $25,873,990,000) and investment company
(approximately $17,929,500,000) accounts. The directors of Income Funds, Inc.
annually review fees paid to the Manager.
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 provides for 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, 1998, the total net assets of Delchester Fund
were $1,541,217,655. 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 $6,921,586 for 1996 and $7,362,089 for 1997 and
$8,245,496 for 1998.
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, 1998, the
total net assets of Strategic Income Fund were $42,513,379. 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 no fees were paid to the
Manager in connection with the voluntary waiver of fees. Investment management
fees incurred by Strategic Income Fund for the fiscal year ended July 31, 1998
were $212,472 and no fees were paid as a result of the voluntary waiver of fees
by the Manager described below.
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<PAGE>
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. For the period October 1, 1996
(date of initial public offering) through July 31, 1997 and for the fiscal year
ended July 31, 1998, no fees were paid to Delaware International due to 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 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,
1998.
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, 1998, the
total net assets of High-Yield Opportunities Fund were $15,658,307. 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 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. Investment management fees incurred by
High-Yield Opportunities Fund for the fiscal year ended July 31, 1998 were
$70,555 and $28,057 was paid and $42,498 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. Beginning January 1, 1998, 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 High-Yield Opportunities 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 0.95% on an annualized
basis through March 31, 1999.
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.
Distribution and Service
The Distributor, Delaware Distributors, L.P., located at 1818 Market
Street, Philadelphia, PA 19103, serves as the national distributor of each
Fund's shares under a Distribution Agreement dated
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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 the Funds on behalf of Class A Shares, Class B Shares and Class C
Shares under the 12b-1 Plan for each such class. The Distributor is an indirect,
wholly owned subsidiary of Delaware Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
the Funds' shareholder servicing, dividend disbursing and transfer agent
pursuant to an Amended and Restated Shareholders Services Agreement dated as of
September 14, 1998. 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.
The Funds have authorized one or more brokers to accept on their behalf
purchase and redemption orders in addition to the Transfer Agent. Such brokers
are authorized to designate other intermediaries to accept purchase and
redemption orders on the behalf of the Funds. For purposes of pricing, the Funds
will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. Investors may be charged a fee when effecting transactions through a
broker or agent.
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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 Investments family. On
August 31, 1998, Income Funds, Inc.'s officers and directors owned less than 1%
of the outstanding shares of Class A Shares of Strategic Income Fund,
approximately 1% of the outstanding shares of the Institutional Class of
Delchester Fund and Strategic Income Fund, approximately 2% of the outstanding
shares of the Class A Shares of Delchester Fund; approximately 63% of the
outstanding shares of the Institutional Class of Strategic Income Fund; and none
of the outstanding shares of the Class B Shares and Class C Shares of these
Funds.
As of August 31, 1998, management believes the following accounts held
of record 5% or more of the outstanding shares of a Class of shares of
Delchester Fund. Management does not have knowledge of beneficial owners.
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Delchester Fund B Class Merrill Lynch, Pierce, Fenner & Smith
For the Sole Benefit of its Customers
Attention: Fund Administration
4800 Deer Lake Dr East, 2nd Floor
Jacksonville, FL 32246 7,193,083 12.90%
Delchester Fund C Class MLPF&S For the Sole Benefit of
its Customers SEC#97HO2
Attention: Fund Administration
4800 Deer Lake Dr. East, 2nd Floor
Jacksonville, FL 32246 1,694,727 21.25%
Delchester Fund Nationwide Life Insurance Co.
Institutional Class National QPVA
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218 2,115,882 35.97%
Bear Stearns
For the Exclusive Benefit of
Raymond G. Perelman
Charitable Remainder Unitrust
One Metrotech Center North
Brooklyn, NY 11201 1,022,450 17.38%
</TABLE>
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<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Delchester Fund RS DMC Employee Profit Sharing Plan
Institutional Class Delaware Management Company
Employee Profit Sharing Trust
c/o Rick Seidel
1818 Market Street
Philadelphia, PA 19103 690,335 11.73%
Ogden Financial Services Inc.
Attention: George Warren
3411 Silverside Road
103 Springer Building
Wilmington, DE 19810 632,864 10.76%
</TABLE>
As of August 31, 1998, management believes the following accounts held
of record 5% or more of the outstanding shares of a Class of shares of Strategic
Income Fund. Management does not have knowledge of beneficial owners.
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Strategic Income MLPF&S
Fund B Class For the Sole Benefit of its Customers
Attn: Fund Administration SEC#97LM7
4800 Deer Lake Drive E., 2nd Floor
Jacksonville, FL 32246 280,485 9.25%
Strategic Income MLPF&S
Fund C Class For the Sole Benefit of its Customers
Attn: Fund Administration SEC#97LM8
4800 Deer Lake Drive E., 2nd Floor
Jacksonville, FL 32246 368,198 34.01%
Strategic Income Fund Chicago Trust Company
Institutional Class FBO Lincoln National Corporation
Employees Retirement Trust
1000 N. Water Street TR 14
Milwaukee, WI 53202 646,769 93.35%
RS DMC Employee Profit Sharing Plan
Delaware Management Company
Employee Profit Sharing Trust
c/o Rick Seidel
1818 Market Street
Philadelphia, PA 19103 40,420 5.83%
</TABLE>
-86-
<PAGE>
As of August 31, 1998, management believes the following accounts held
of record 5% or more of the outstanding shares of a Class of shares of
High-Yield Opportunities Fund. Management does not have knowledge of beneficial
owners.
<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 1,074,398 58.58%
MLPF&S
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr. E., 3rd Floor
Jacksonville, Fl 32246 167,977 9.15%
Millerbernd Manufacturing Co.
Retirement Account
P.O. Box 98
Winsted, MN 55395 103,326 5.63%
High-Yield Opportunities MLPF&S
Fund B Class For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr. E., 3rd Floor
Jacksonville, Fl 32246 184,969 53.41%
DMTC C/F The Rollover
IRA of Donald H. Cook
P.O. Box 182
Birchrunville, PA 19421 18,279 5.27%
</TABLE>
-87-
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
High-Yield Opportunities MLPF&S
Fund C Class For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Dr. E., 3rd Floor
Jacksonville, Fl 32246 48,080 37.68%
Painewebber For the Benefit of
Painewebber CDN FBO
Eugene B. Buerke
P.O. Box 3321
Weehawken, NJ 07087 10,344 8.10%
DMTC C/F The Rollover
IRA of Audrey K. Steiner
4639 Gilbert Grade
Orfino, ID 83544 8,272 6.48%
Dain Rauscher Incorporated FBO
St. Peter's Episcopal Church
Maintenance Fund
320 St. Peter St.
Kerrville, TX 78028 6,901 5.40%
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 653,837 99.99%
</TABLE>
DMH Corp., Delvoy, Inc., Delaware Management Business Trust, Delaware
Management Company (a series of Delaware Management Business Trust), Delaware
Management Company, Inc., Delaware Investment Advisers (a series of Delaware
Management Business Trust), 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 was
completed. DMH and the Manager are 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.
-88-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*Wayne A. Stork (61)
Chairman and Director and/or Trustee of Equity Funds II, Inc., 33 other
investment companies in the Delaware Investments family and
Delaware Capital Management, Inc.
Chairman, President, Chief Executive Officer and Director of DMH Corp., Delaware Distributors, Inc.
and Founders Holdings, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer and Director/Trustee of
Delaware Management Company, Inc. and Delaware Management Business Trust
Chairman, President, Chief Executive Officer and Chief Investment Officer of Delaware Management
Company (a series of Delaware Management Business Trust)
Chairman, Chief Executive Officer and Chief Investment Officer of Delaware Investment Advisers
(a series of Delaware Management Business Trust)
Chairman, Chief Executive Officer and Director of Delaware International Advisers Ltd., Delaware
International Holdings Ltd. and Delaware Management Holdings, Inc.
President and Chief Executive Officer of Delvoy, Inc.
Chairman of Delaware Distributors, L.P.
Director of Delaware Service Company, Inc. and Retirement Financial Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
*Jeffrey J. Nick (45)
President, Chief Executive Officer and Director of Equity Funds II, Inc. and 33 other investment
companies in the Delaware Investments family
President and Director of Delaware Management Holdings, Inc.
President, Chief Executive Officer and Director of Lincoln National Investment Companies, Inc.
President of Lincoln Funds Corporation
Director of Delaware International Advisers Ltd.
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.
Richard G. Unruh, Jr. (58)
ExecutiveVice President of Equity Funds II, Inc., 33 other investment
companies in the Delaware Investments family, Delaware
Management Holdings, Inc., Delaware Management Company (a
series of Delaware Management Business Trust) and Delaware
Capital Management, Inc.
President of Delaware Investment Advisers (a series of Delaware Management Business Trust)
Executive Vice President and Director/Trustee of Delaware Management Company, Inc. and Delaware
Management Business Trust
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.
</TABLE>
- ----------------------
*Director affiliated with the Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
-89-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Paul E. Suckow (51)
ExecutiveVice President/Chief Investment Officer, Fixed Income of
Equity Funds II, Inc., 33 other investment companies in the
Delaware Investments family, Delaware Management Company,
Inc., Delaware Management Company (a series of Delaware
Management Business Trust), Delaware Investment Advisers (a
series of Delaware Management Business Trust) and Delaware
Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc. and Delaware Management Business
Trust
Director of Founders CBO Corporation
Director of HYPPCO Finance Company Ltd.
Before returning to Delaware Investments 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 Delaware Investments.
David K. Downes (58)
ExecutiveVice President, Chief Operating Officer, Chief Financial
Officer of Equity Funds II, Inc., 33 other investment
companies in the Delaware Investments family, Delaware
Management Holdings, Inc., Founders CBO Corporation, Delaware
Capital Management, Inc., Delaware Management Company (a
series of Delaware Management Business Trust), Delaware
Investment Advisers (a series of Delaware Management Business
Trust) and Delaware Distributors, L.P.
Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Trustee of
Delaware Management Business Trust
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 Delvoy, Inc.
President, Chief Executive Officer, Chief Financial Officer and Director of Delaware Service
Company, Inc.
President, Chief Operating Officer, Chief Financial Officer and Director of Delaware International
Holdings Ltd.
Chairman,Chief Executive Officer and Director of Delaware Management
Trust Company and Retirement Financial Services, Inc.
Director of Delaware International Advisers Ltd.
Vice President of Lincoln Funds Corporation
During the past five years, Mr. Downes has served in various
executive capacities at different times within the Delaware
organization.
Walter P. Babich (70)
Director and/or Trustee of Equity Funds II, Inc. and 33 other investment companies in the Delaware
Investments family.
460 North Gulph Road, King of Prussia, PA 19406
Board Chairman, Citadel Constructors, Inc.
</TABLE>
-90-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
John H. Durham (61)
Director and/or Trustee of Equity Funds II, Inc. and 18 other investment companies in the Delaware
Investments family.
120 Gibraltar Road, Horsham, PA 19044
Partner, Complete Care Services
Mr. Durham served as Chairman of the Board of each fund in the
Delaware Investments family from 1986 to 1991; President of
each fund from 1977 to 1990; and Chief Executive Officer of
each fund from 1984 to 1990. Prior to 1992, with respect to
Delaware Management Holdings, Inc., Delaware Management
Company, Delaware Distributors, Inc. and Delaware Service
Company, Inc., Mr. Durham served as a director and in various
executive capacities at different times.
Anthony D. Knerr (59)
Director and/or Trustee of Equity Funds II, Inc. and 33 other investment companies in the Delaware
Investments family.
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 (57)
Director and/or Trustee of Equity Funds II, Inc. and 33 other investment companies in the Delaware
Investments family.
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 (77)
Director and/or Trustee of Equity Funds II, Inc. and 33 other investment companies in the Delaware
Investments family.
City Hall, Philadelphia, PA 19107
Philadelphia City Councilman.
Thomas F. Madison (62)
Director and/or Trustee of Equity Funds II, Inc. and 33 other investment companies in the Delaware
Investments family.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402
President and Chief Executive Officer, MLM Partners, Inc.
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.
</TABLE>
-91-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Charles E. Peck (72)
Director and/or Trustee of Equity Funds II, Inc. and 33 other investment companies in the Delaware
Investments family.
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.
George M. Chamberlain, Jr. (51)
Senior Vice President, Secretary and General Counsel of Equity Funds
II, Inc., 33 other investment companies in the Delaware
Investments family, Delaware Distributors, L.P., Delaware
Management Company (a series of Delaware Management Business
Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust) and Delaware Management Holdings,
Inc.
Senior Vice President, Secretary, General Counsel and Director/Trustee of DMH Corp., Delaware
Management Company, Inc., Delaware Distributors, Inc., Delaware Service Company, Inc.,
Founders Holdings, Inc., Retirement Financial Services, Inc., Delaware Capital Management,
Inc., Delvoy, Inc. and Delaware Management Business Trust
Executive Vice President, Secretary, General Counsel and Director of Delaware Management Trust
Company
Senior Vice President and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Secretary of Lincoln Funds Corporation
Attorney.
During the past five years, Mr. Chamberlain has served in various
executive capacities at different times within the Delaware
organization.
Joseph H. Hastings (48)
Senior Vice President/Corporate Controller of Equity Funds II, Inc.,
33 other investment companies in the Delaware Investments
family and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware Management Holdings, Inc.,
DMH Corp., Delaware Management Company, Inc., Delaware Management Company (a series
of Delaware Management Business Trust), Delaware Distributors, L.P., Delaware Distributors,
Inc., Delaware Service Company, Inc., Delaware Capital Management, Inc., Delaware
International Holdings Ltd., Delvoy, Inc. and Delaware Management Business Trust
Chief Financial Officer/Treasurer of Retirement Financial Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company Senior Vice President/Assistant Treasurer of
Founders CBO Corporation Treasurer of Lincoln Funds Corporation During
the past five years, Mr. Hastings has served in various executive
capacities at different times within the Delaware organization.
</TABLE>
-92-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Michael P. Bishof (36)
Senior Vice President/Treasurer of Equity Funds II, Inc., 33 other
investment companies in the Delaware Investments family and
Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware Management Business Trust) and Delaware
Service Company, Inc.
Senior Vice President and Treasurer/Manager of Investment Accounting of Delaware Distributors, L.P.
and Delaware Investment Advisers (a series of Delaware Management Business Trust)
Senior Vice President and Manager of Investment Accounting of Delaware International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation
Before joining Delaware Investments 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.
Paul A. Matlack (37)
Vice President/Senior Portfolio Manager of Income Funds, Inc., of
11 other investment companies in the Delaware Investments
family and of Delaware Management Company.
President and Director of Founders CBO Corporation.
Vice President of Founders Holdings, Inc.
During the past five years, Mr. Matlack has served in various
capacities at different times within the Delaware
organization.
Gerald T. Nichols (39)
Vice President/Senior Portfolio Manager of Income Funds, Inc., of
11 other investment companies in the Delaware Investments
family and of Delaware Management Company.
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 (34)
Vice President/Portfolio Manager of Income Funds, Inc. and 10 other investment companies in the
Delaware Investments family.
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 (39)
Vice President/Portfolio Manager of Income Funds, Inc. and of 11 other investment companies in the
Delaware Investments family.
During the past five years, Mr. Grillo has served in various
capacities at different times within the Delaware
organization.
</TABLE>
-93-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation received from
Income Funds, Inc. and the total compensation received from all investment
companies in the Delaware Investments family for which he or she serves as a
director for the fiscal year ended July 31, 1998 and an estimate of annual
benefits to be received upon retirement under the Delaware Investments
Retirement Plan for Directors/Trustees as of July 31, 1998. Only the independent
directors of Income Funds, Inc. receive compensation from the Fund.
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Total
Accrued Estimated Compensation
as Part Annual from the
Aggregate of Income Benefits Investment
Compensation from Funds, Inc. Upon Companies
Name Income Funds, Inc. Expenses Retirement(1) in Delaware
Investments(2)
<S> <C> <C> <C> <C>
W. Thacher Longstreth $4,126 None $38,500 $63,406
Ann R. Leven $4,646 None $38,500 $69,599
Walter P. Babich $4,558 None $38,500 $68,323
Anthony D. Knerr $4,558 None $38,500 $68,323
Charles E. Peck $4,126 None $38,500 $63,406
Thomas F. Madison $4,126 None $38,500 $63,406
John H. Durham(3) $1,436 None $31,500 $16,092
</TABLE>
(1) Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested director/trustee 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 investment company in the
Delaware Investments family for which he or she serves as a director or
trustee for a period equal to the lesser of the number of years that
such person served as a director or trustee 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/trustees of each investment company at the time of such
person's retirement. If an eligible director/trustee retired as of July
31, 1998, he or she would be entitled to annual payments totaling the
amount noted above, in the aggregate, from all of the investment
companies in the Delaware Investments family for which he or she served
as director or trustee, based on the number of investment companies in
the Delaware Investments family as of that date.
(2) Each independent director currently receives a total annual retainer
fee of $38,500 for serving as a director or trustee for all 34
investment companies in Delaware Investments, plus $3,145 for each
Board Meeting attended. Ann R. Leven, Walter P. Babich, Anthony D.
Knerr and Thomas F. Madison serve on the Fund's audit committee; Ms.
Leven is the chairperson. Members of the audit committee currently
receive additional annual compensation of $5,000 from all investment
companies, in the aggregate, with the exception of the chairperson, who
receives $6,000.
(3) John H. Durham joined the Board of Directors of the Fund and 18 other
investment companies in Delaware Investments on April 16, 1998.
-94-
<PAGE>
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of the Classes and
for shareholders of classes of other funds in the Delaware Investments family
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
Investments family. 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 Investments family on behalf of their clients by telephone
or other expedited means. This service may be discontinued or revised at any
time by the Transfer Agent. Such exchange requests may be rejected if it is
determined that a particular request or the total requests at any time could
have an adverse effect on any of the funds. Requests for expedited exchanges may
be submitted with a properly completed exchange authorization form, as described
above.
Telephone Exchange Privilege
Shareholders owning shares for which certificates have not been issued
or their investment dealers of record may exchange shares by telephone for
shares in other mutual funds in the Delaware Investments family. 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 Investments family. 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.
-95-
<PAGE>
As described in the Funds' Prospectuses, neither the Funds nor the
Transfer Agent is responsible for any shareholder loss incurred in acting upon
written or telephone instructions for redemption or exchange of Fund shares
which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), each Fund will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in funds in
the Delaware Investments family 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 funds in the Delaware Investments
family: (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 funds
in the Delaware Investments family are available for timed exchanges. Assets
redeemed or exchanged out of Timing Accounts in Delaware Investments funds not
listed above may not be reinvested back into that Timing Account. Each Fund
reserves the right to apply these same restrictions to the account(s) of any
person whose transactions seem to follow a timing pattern (as described above).
Each Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if a
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
* * *
Following is a summary of the investment objectives of the other funds
in the Delaware Investments family:
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.
-96-
<PAGE>
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.
Corporate Bond Fund seeks to provide investors with total return. It
seeks to achieve its objective by investing primarily in corporate bonds. The
average duration of the Corporate Bond Fund is expected to be between 4 and 7
years. Extended Duration Bond Fund seeks to provide investors with total return.
The average duration of the Extended Duration Bond Fund is expected to be
between 8 and 11 years. It seeks to achieve its objective by investing primarily
in corporate bonds.
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.
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.
REIT Fund seeks to achieve maximum long-term total return with capital
appreciation as a secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engages in real estate industry.
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.
-97-
<PAGE>
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 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. Tax-Free Pennsylvania Fund seeks a high
level of current interest income exempt from federal and, to the extent
possible, certain Pennsylvania state and local taxes, consistent with the
preservation of capital.
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation. Global Assets Fund seeks to achieve
long-term total return by investing in global securities which will provide
higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers located or operating in emerging countries.
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.
Foundation Funds are "fund of funds" which invest in other funds in the
Delaware Investments family (referred to as "Underlying Funds"). Foundation
Funds Income Portfolio seeks a combination of current income and preservation of
capital with capital appreciation by investing in primarily a mix of fixed
income and domestic equity securities, including fixed income and domestic
equity Underlying Funds. Foundation Funds Balanced Portfolio seeks capital
appreciation with current income as a secondary objective by investing primarily
in domestic equity and fixed income securities, including domestic equity and
fixed income Underlying Funds. Foundation Funds Growth Portfolio seeks long term
capital growth by investing primarily in equity securities, including equity
Underlying Funds, and, to a lesser extent, in fixed income securities, including
fixed-income Underlying Funds.
Delaware Group Premium Fund, Inc. offers 16 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
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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. Small Cap Value
Series seeks capital appreciation by investing primarily in small 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. Social Awareness 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. REIT Series seeks to achieve maximum long-term total return,
with capital appreciation as a secondary objective, by investing in securities
of companies primarily engaged in the real estate industry.
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
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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, 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
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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 funds in the Delaware
Investments family, including charges and expenses, you can obtain a prospectus
from the Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
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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 Investments family. 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 a variety
of 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 mutual funds in the Delaware Investments family as
available outside the annuity. See Delaware Group Premium Fund, Inc., above.
Access persons and advisory persons of the funds in the Delaware
Investments family, 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 Investments family. The Distributor 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, 1998 $3,072,617 $2,540,252 $532,365
July 31, 1997 2,938,512 2,431,253 507,259
July 31, 1996 3,186,228 2,659,208 527,020
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<PAGE>
Strategic Income Fund A Class
Total
Amount of Amounts Net
Underwriting Reallowed Commission
Fiscal Year Ended Commission to Dealers to Distributor
----------------- ---------- ---------- --------------
July 31, 1998 $288,045 $257,495 $30,551
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, 1998 $43,825 $40,025 $3,799
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, 1998 $2,671
July 31, 1997 563
July 31, 1996 2,090
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, 1998 $818,163
July 31, 1997 596,397
July 31, 1996 407,317
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The Distributor received CDSC payments with respect to Delchester Fund
C Class as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1998 $22,000
July 31, 1997 9,434
July 31, 1996 (1) 502
(1) Date of initial public offering was November 29, 1995.
The Distributor received Limited CDSC payments with respect to
Strategic Income Fund A Class as follows:
Fiscal Year Ended Limited CDSC Payments
----------------- ---------------------
July 31, 1998 $-0-
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, 1998 $34,503
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, 1998 $3,440
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, 1998 $-0-
July 31, 1997 (1) -0-
(1) Date of initial public offering was December 30, 1996.
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The Distributor received CDSC payments with respect to High-Yield
Opportunities Fund B Class as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1998(1) $66
(1) Date of initial public offering was February 17, 1997.
The Distributor received CDSC payments with respect to Strategic Income
Fund C Class as follows:
Fiscal Year Ended CDSC Payments
----------------- -------------
July 31, 1998(1) $149
(1) Date of initial public offering was February 17, 1997.
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for each Fund and for the
other mutual funds in the Delaware Investments family. The Transfer Agent is
paid a fee by each Fund for providing these services consisting of an annual per
account charge of $5.50 plus 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 unaffiliated directors. The
Transfer Agent also provides accounting services to each Fund. 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
Investments family 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 each
Fund, on an aggregate pro-rata basis. The asset-based fee payable to the
Transfer Agent is subject to a minimum fee calculated by determining the total
number of investment portfolios and associated classes.
The Manager and its affiliates own the name "Delaware Group." Under
certain circumstances, including the termination of 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 each Fund's securities and cash. As custodian for a
Fund, Chase 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.
Capitalization
Income Funds, Inc. has a present authorized capitalization of
1,400,000,000 shares of capital stock with a $1.00 par value per share. Each
fund offers four classes of shares, each representing a proportionate i
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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 that 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 the following number of shares to each fund and class:
Delchester Fund 500 million
Delchester Fund A Class 350 million
Delchester Fund B Class 50 million
Delchester Fund C Class 50 million
Delchester Fund Institutional Class 50 million
Strategic Income Fund 200 million
Strategic Income Fund A Class 100 million
Strategic Income Fund B Class 25 million
Strategic Income Fund C Class 25 million
Strategic Income Fund Institutional Class 50 million
High-Yield Opportunities Fund 200 million
High-Yield Opportunities Fund A Class 100 million
High-Yield Opportunities Fund B Class 25 million
High-Yield Opportunities Fund C Class 25 million
High-Yield Opportunities Fund Institutional Class 50 million
Corporate Bond Fund 200 million
Corporate Bond Fund A Class 100 million
Corporate Bond Fund B Class 25 million
Corporate Bond Fund C Class 25 million
Corporate Bond Fund Institutional Class 50 million
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<PAGE>
Extended Duration Bond Fund 200 million
Extended Duration Bond Fund A Class 100 million
Extended Duration Bond Fund B Class 25 million
Extended Duration Bond Fund C Class 25 million
Extended Duration Bond Fund Institutional Class 50 million
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 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. offered
Strategic Income Fund series, beginning December 27, 1996 offered the High-Yield
Opportunities Fund series and beginning September 14, 1998 offered Corporate
Bond Fund series and Extended Duration Bond Fund series.
Noncumulative Voting
Income Funds, Inc.'s shares have noncumulative voting rights which means
that the holders of more than 50% of the shares of Income Funds, Inc. voting for
the election of directors can elect all the directors if they choose to do so,
and, in such event, the holders of the remaining shares will not be able to
elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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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.
Each Fund's Statement of Net Assets, Statement of Operations, Statements
of Changes in Net Assets, Financial Highlights, and Notes to Financial
Statements as well as the reports of Ernst & Young LLP, independent auditors,
for the fiscal year ended July 31, 1998 are included in Delaware Group Income
Funds, Inc.'s Annual Reports to shareholders. The financial statements and
financial highlights, the notes relating thereto and the reports of Ernst &
Young LLP listed above are incorporated by reference from the Annual Reports
into this Part B.
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PART C
Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Part A - Financial Highlights
* Part B - Statement of Net Assets
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements
Report of Independent Auditors
* The financial statements and Report of Independent
Auditors listed above for Delchester Fund, Strategic
Income Fund and High-Yield Opportunities Fund are
incorporated by reference into Part B from the
Registrant's Annual Reports for the fiscal year ended
July 31, 1998.
(b) Exhibits:
(1) Articles of Incorporation.
(a) Articles of Incorporation, as amended and
supplemented through November 22, 1995,
incorporated into this filing by
reference to Post-Effective Amendment No.
52 filed November 22, 1995.
(b) Executed Articles Supplementary (November
28, 1995) incorporated into this filing
by reference to Post-Effective Amendment
No. 53 filed July 17, 1996.
(c) Executed Articles of Amendment (September
24, 1996) incorporated into this filing
by reference to Post-Effective Amendment
No. 55 filed October 17, 1996.
(d) Executed Articles Supplementary
(September 24, 1996) incorporated into
this filing by reference to
Post-Effective Amendment No. 55 filed
October 17, 1996.
(e) Executed Articles Supplementary (December
27, 1996) incorporated into this filing
by reference to Post-Effective Amendment
No. 56 filed March 3, 1997.
<PAGE>
PART C - Other Information
(Continued)
(f) Executed Articles Supplementary (August 19,
1998) attached as Exhibit.
(2) By-Laws. By-Laws, as amended to date, incorporated
into this filing by reference to Post-Effective
Amendment No. 52 filed November 22, 1995.
(3) Voting Trust Agreement. Inapplicable.
(4) Copies of All Instruments Defining the Rights of
Holders.
(a) Articles of Incorporation, Articles of
Amendment and Articles Supplementary.
(i) Article Second of Articles
Supplementary (June 1, 1992 and
April 29, 1995), Article Fifth of
Articles of Incorporation (March
4, 1983) and Article Tenth of
Articles of Amendment (May 2,
1985) incorporated into this
filing by reference to
Post-Effective Amendment No. 52
filed November 22, 1995.
(ii) Article Third of Articles
Supplementary (November 28, 1995)
incorporated into this filing by
reference to Post-Effective
Amendment No. 53 filed July 17,
1996.
(iii) Article Fourth of Articles
Supplementary (September, 24,
1996) incorporated into this
filing by reference to
Post-Effective Amendment No. 55
filed October 17, 1996.
(iv) Article Fourth of Articles
Supplementary (December 27, 1996)
incorporated into this filing by
reference to Post-Effective
Amendment No. 56 filed March 3,
1997.
(iv) Articles Fourth and Sixth of
Articles Supplementary (August
19, 1998) attached as Exhibit
24(b)(1)(f).
(b) By-Laws. Article II, Article III, as
amended, and Article XIII, which was
subsequently redesignated as Article XIV,
incorporated into this filing by
reference to Post-Effective Amendment No.
52 filed November 22, 1995.
<PAGE>
PART C - Other Information
(Continued)
(5) Investment Management Agreements.
(a) Executed Investment Management Agreement
(April 3, 1995) between Delaware
Management Company, Inc. and the
Registrant on behalf of Delchester Fund
incorporated into this filing by
reference to Post-Effective Amendment No.
52 filed November 22, 1995.
(b) Executed Investment Management Agreement
(September 30, 1996) between Delaware
Management Company, Inc. and the
Registrant on behalf of Strategic Income
Fund incorporated into this filing by
reference to Post-Effective Amendment No.
55 filed October 17, 1996.
(c) Executed Sub-Advisory Agreement
(September 30, 1996) between Delaware
Management Company, Inc. and Delaware
International Advisers Ltd. with respect
to Strategic Income Fund incorporated
into this filing by reference to
Post-Effective Amendment No. 55 filed
October 17, 1996.
(d) Executed Investment Management Agreement
(December 27, 1996) between Delaware
Management Company, Inc. and the
Registrant on behalf of High-Yield
Opportunities Fund incorporated into this
filing by reference to Post-Effective
Amendment No. 59 filed July 2, 1998.
(e) Form of Investment Management Agreement
(1998) between Delaware Management
Company and the Registrant on behalf of
Corporate Bond Fund incorporated into
this filing by reference to
Post-Effective Amendment No. 59 filed
July 2, 1998.
(f) Form of Investment Management Agreement
(1998) between Delaware Management
Company and the Registrant on behalf of
Extended Duration Bond Fund incorporated
into this filing by reference to
Post-Effective Amendment No. 59 filed
July 2, 1998.
(6) (a) Distribution Agreements.
(i) Executed Distribution Agreement
(April 3, 1995) between Delaware
Distributors, L.P. and the
Registrant on behalf of
Delchester Fund incorporated into
this filing by reference to
Post-Effective Amendment No. 53
filed July 17, 1996.
(ii) Executed Amendment No. 1 to
Distribution Agreement (November
29, 1995) between Delaware
Distributors, L.P. and the
Registrant on behalf of
Delchester Fund incorporated into
this filing by reference to
Post-Effective Amendment No. 53
filed July 17, 1996.
<PAGE>
PART C - Other Information
(Continued)
(iii) Executed Distribution Agreement
(September 30, 1996) between
Delaware Distributors, L.P. and
the Registrant on behalf of
Strategic Income Fund
incorporated into this filing by
reference to Post-Effective
Amendment No. 55 filed October
17, 1996.
(iv) Form of Distribution Agreement
(1996) between Delaware
Distributors, L.P. and the
Registrant on behalf of
High-Yield Opportunities Fund
(Module) incorporated into this
filing by reference to
Post-Effective Amendment No. 55
filed October 17, 1996.
(v) Form of Distribution Agreement
(1998) between Delaware
Distributors, L.P. and the
Registrant on behalf of Corporate
Bond Fund incorporated into this
filing by reference to
Post-Effective Amendment No. 59
filed July 2, 1998.
(vi) Form of Distribution Agreement
(1998) between Delaware
Distributors, L.P. and the
Registrant on behalf of Extended
Duration Bond Fund incorporated
into this filing by reference to
Post-Effective Amendment No. 59
filed July 2, 1998.
(b) Administration and Service Agreement.
Form of Administration and Service
Agreement (as amended November 1995)
incorporated into this filing by
reference to Post-Effective Amendment No.
52 filed November 22, 1995.
(c) Dealer's Agreement. Dealer's Agreement (as
amended November 1995) incorporated into
this filing by reference to Post-Effective
Amendment No. 52 filed November 22, 1995.
(d) Mutual Fund Agreement for the Delaware
Group of Funds (as amended November 1995)
incorporated into this filing by
reference to Post-Effective Amendment No.
53 filed July 17, 1996.
(7) Bonus, Profit Sharing, Pension Contracts.
(a) Amended and Restated Profit Sharing Plan
(November 17, 1994) incorporated into
this filing by reference to
Post-Effective Amendment No. 52 filed
November 22, 1995.
<PAGE>
PART C - Other Information
(Continued)
(b) Amendment to Profit Sharing Plan
(December 21, 1995) incorporated into
this filing by reference to
Post-Effective Amendment No. 53 filed
July 17, 1996.
(8) Custodian Agreements.
(a) Executed Custodian Agreement (May 1,
1996) between The Chase Manhattan Bank
and the Registrant on behalf of
Delchester Fund incorporated into this
filing by reference to Post-Effective
Amendment No. 53 filed July 17, 1996.
(b) Form of Securities Lending Agreement
(1996) between The Chase Manhattan Bank
and the Registrant on behalf of
Delchester Fund incorporated into this
filing by reference to Post-Effective
Amendment No. 53 filed July 17, 1996.
(c) Executed Letter (December 27, 1996) to
The Chase Manhattan Bank to add the
High-Yield Opportunities Fund to the
Custodian Agreement between The Chase
Manhattan Bank and the Registrant
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(d) Form of Letter (1998) to The Chase
Manhattan Bank to add the Corporate Bond
Fund and the Extended Duration Bond Fund
to the Custodian Agreement between The
Chase Manhattan Bank and the Registrant
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(e) Form of Letter (1998) to The Chase
Manhattan Bank to add the Strategic
Income Fund to the Custodian Agreement
between The Chase Manhattan Bank and the
Registrant attached as Exhibit.
(9) Other Material Contracts.
(a) Executed Second Amended and Restated
Shareholders Services Agreement (December
27, 1996) between Delaware Service
Company, Inc. and the Registrant on
behalf of Delchester Fund, Strategic
Income Fund and High-Yield Opportunities
Fund incorporated into this filing by
reference to Post-Effective Amendment No.
56 filed March 3, 1997.
(b) Form of Third Amended and Restated
Shareholders Services Agreement (1998)
between Delaware Service Company, Inc.
and the Registrant on behalf of each Fund
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
<PAGE>
PART C - Other Information
(Continued)
(c) Executed Delaware Group of Funds Fund
Accounting Agreement between Delaware
Service Company, Inc. and the Registrant
(August 19, 1996) incorporated into this
filing by reference to Post-Effective
Amendment No. 54 filed September 27,
1996.
(i) Form of Amendment No. 10 to
Delaware Group of Funds Fund
Accounting Agreement incorporated
into this filing by reference to
Post-Effective Amendment No. 59
filed July 2, 1998.
(ii) Form of Amendment No. 11 to
Delaware Group of Funds Fund
Accounting Agreement incorporated
into this filing by reference to
Post-Effective Amendment No. 59
filed July 2, 1998.
(iii) Form of Amendment No. 12 to
Delaware Group of Funds Fund
Accounting Agreement incorporated
into this filing by reference to
Post-Effective Amendment No. 59
filed July 2, 1998.
(10) Opinion of Counsel. Attached as Exhibit.
(11) Consent of Auditors. Attached as Exhibit.
(12-14) Inapplicable.
**(15) Plans under Rule 12b-1.
(a) Plan under Rule 12b-1 for Delchester Fund
A Class (November 29, 1995) incorporated
into this filing by reference to
Post-Effective Amendment No. 53 filed
July 17, 1996.
(b) Plan under Rule 12b-1 for Delchester Fund
B Class (November 29, 1995) incorporated
into this filing by reference to
Post-Effective Amendment No. 53 filed
July 17, 1996.
(c) Plan under Rule 12b-1 for Delchester Fund
C Class (November 29, 1995) incorporated
into this filing by reference to
Post-Effective Amendment No. 53 filed
July 17, 1996.
(d) Plan under Rule 12b-1 for Strategic
Income Fund A Class (September 30, 1996)
incorporated into this filing by
reference to Post-Effective Amendment No.
55 filed October 17, 1996.
(e) Plan under Rule 12b-1 for Strategic
Income Fund B Class (September 30, 1996)
incorporated into this filing by
reference to Post-Effective Amendment No.
55 filed October 17, 1996.
<PAGE>
PART C - Other Information
(Continued)
(f) Plan under Rule 12b-1 for Strategic
Income Fund C Class (September 30, 1996)
incorporated into this filing by
reference to Post-Effective Amendment No.
55 filed October 17, 1996.
(g) Plan under Rule 12b-1 for High-Yield
Opportunities Fund A Class (December 27,
1996) incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(h) Plan under Rule 12b-1 for High-Yield
Opportunities Fund B Class (December 27,
1996) incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(i) Plan under Rule 12b-1 for High-Yield
Opportunities Fund C Class (December 27,
1996) incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(j) Form of Plan under Rule 12b-1 for
Corporate Bond Fund A Class (1998)
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(k) Form of Plan under Rule 12b-1 for
Corporate Bond Fund B Class (1998)
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(l) Form of Plan under Rule 12b-1 for
Corporate Bond Fund C Class (1998)
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(m) Form of Plan under Rule 12b-1 for
Extended Duration Fund A Class (1998)
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(n) Form of Plan under Rule 12b-1 for
Extended Duration Fund B Class (1998)
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
(o) Form of Plan under Rule 12b-1 for
Extended Duration Fund C Class (1998)
incorporated into this filing by
reference to Post-Effective Amendment No.
59 filed July 2, 1998.
** Relates only to A, B and C Classes of Delchester Fund, Strategic Income
Fund and High-Yield Opportunities Fund.
<PAGE>
PART C - Other Information
(Continued)
(16) Schedules of Computation for each Performance
Quotation.
(a) Incorporated into this filing by reference
to Post-Effective Amendment No. 52 filed
November 22, 1995, Post-Effective
Amendment No. 54 filed September 27,
1996, Post-Effective Amendment No. 56
filed March 3, 1997, Post-Effective
Amendment No. 57 filed June 30, 1997 and
Post-Effective Amendment No. 58 filed
September 29, 1997.
(17) Financial Data Schedules. Attached as Exhibit.
***(18) Plan under Rule 18f-3.
(a) Amended Plan under Rule 18f-3 (September 18, 1997)
incorporated into this filing by reference to
Post-Effective Amendment No. 59 filed July 2, 1998.
(b) Amended Appendix A to Plan under Rule 18f-3 (1998)
incorporated into this filing by reference to
Post-Effective Amendment No. 59 filed July 2,
1998.
(19) Other: Directors' Power of Attorney. Incorporated
into this filing by reference to Post-Effective
Amendment No. 59 filed July 2, 1998.
Item 25. Persons Controlled by or under Common Control with Registrant. None.
***Relates only to Strategic Income Fund.
<PAGE>
PART C - Other Information
(Continued)
Item 26. Number of Holders of Securities.
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Delaware Group Income Funds, Inc.'s
Delchester Fund series:
Delchester Fund A Class
Common Stock Par Value 42,755 Accounts as of
$1.00 Per Share August 31, 1998
Delchester Fund B Class
Common Stock Par Value 13,226 Accounts as of
$1.00 Per Share August 31, 1998
Delchester Fund C Class
Common Stock Par Value 1,976 Accounts as of
$1.00 Per Share August 31, 1998
Delchester Fund Institutional Class
Common Stock Par Value 45 Accounts as of
$1.00 Per Share August 31, 1998
Delaware Group Income Funds, Inc.'s
Strategic Income Fund series:
Strategic Income Fund A Class
Common Stock Par Value 921 Accounts as of
$1.00 Per Share August 31, 1998
<PAGE>
PART C - Other Information
(Continued)
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Strategic Income Fund B Class
Common Stock Par Value 838 Accounts as of
$1.00 Per Share August 31, 1998
Strategic Income Fund C Class
Common Stock Par Value 263 Accounts as of
$1.00 Per Share August 31, 1998
Strategic Income Fund Institutional Class
Common Stock Par Value 13 Accounts as of
$1.00 Per Share August 31, 1998
Delaware Group Income Funds, Inc.'s
High-Yield Opportunities Fund series:
High-Yield Opportunities Fund A Class
Common Stock Par Value 133 Accounts as of
$1.00 Per Share August 31, 1998
High-Yield Opportunities Fund B Class
Common Stock Par Value 75 Accounts as of
$1.00 Per Share August 31, 1998
High-Yield Opportunities Fund C Class
Common Stock Par Value 29 Accounts as of
$1.00 Per Share August 31, 1998
High-Yield Opportunities Fund
Institutional Class
Common Stock Par Value 5 Accounts as of
$1.00 Per Share August 31, 1998
Delaware Group Income Funds, Inc.'s
Corporate Bond Fund series:
Corporate Bond Fund A Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
<PAGE>
PART C - Other Information
(Continued)
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Corporate Bond Fund B Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
Corporate Bond Fund C Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
Corporate Bond Fund
Institutional Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
Delaware Group Income Funds, Inc.'s
Extended Duration Bond Fund series:
Extended Duration Bond Fund A Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
Extended Duration Bond Fund B Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
Extended Duration Bond Fund C Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
Extended Duration Bond Fund
Institutional Class
Common Stock Par Value 0 Accounts as of
$1.00 Per Share August 31, 1998
Item 27. Indemnification. Incorporated into this filing by reference to
Post-Effective Amendment No. 30 filed July 28, 1983 and Article VII
of the By-Laws, as amended, incorporated into this filing by
reference to Post-Effective Amendment No. 52 filed November 22,
1995.
<PAGE>
PART C - Other Information
(Continued)
Item 28. Business and Other Connections of Investment Adviser.
(a) Delaware Management Company, a series of Delaware Management
Business Trust, (the "Manager") serves as investment manager to the Registrant
and also serves as investment manager or sub-adviser to certain of the other
funds in the Delaware Investments family (Delaware Group Equity Funds I, Inc.,
Delaware Group Equity Funds II, Inc., Delaware Group Equity Funds III, Inc.,
Delaware Group Equity Funds IV, Inc., Delaware Group Equity Funds V, Inc.,
Delaware Group Government Fund, Inc., Delaware Group Limited-Term Government
Funds, Inc., Delaware Group Cash Reserve, Inc., Delaware Group Tax-Free Fund,
Inc., Delaware Group State Tax-Free Income Trust, Delaware Group Tax-Free
Money Fund, Inc., Delaware Group Premium Fund, Inc., Delaware Group Global &
International Funds, Inc., Delaware Pooled Trust, Inc., Delaware Group Adviser
Funds, Inc., Delaware Group Foundation Funds, Delaware Group Dividend and
Income Fund, Inc., Delaware Group Global Dividend and Income Fund, Inc.,
Voyageur Tax-Free Funds, Inc., Voyageur Intermediate Tax-Free Funds, Inc.,
Voyageur Insured Funds, Inc., Voyageur Funds, Inc., Voyageur Investment Trust,
Voyageur Investment Trust II, Voyageur Mutual Funds, Inc., Voyageur Mutual
Funds II, Inc., Voyageur Mutual Funds III, Inc., Voyageur Arizona Municipal
Income Fund, Inc., Voyageur Colorado Insured Municipal Income Fund, Inc.,
Voyageur Florida Insured Municipal Income Fund, Voyageur Minnesota Municipal
Fund, Inc., Voyageur Minnesota Municipal Fund II, Inc. and Voyageur Minnesota
Municipal Fund III, Inc.) In addition, certain directors of the Manager also
serve as directors/trustees of the other funds in the Delaware Investments
family and certain officers are also officers of these other funds. A company
owned by the Manager's parent company acts as principal underwriter to the
mutual funds in the Delaware Investments family (see Item 29 below) and
another such company acts as the shareholder servicing, dividend disbursing,
accounting servicing and transfer agent for all of the mutual funds in the
Delaware Investments family.
The following persons serving as directors or officers of the
Manager have held the following positions during the past two years:
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ ------------------------------------------------
Wayne A. Stork Chairman of the Board, President, Chief
Executive Officer and Chief Investment Officer
of Delaware Management Company (a series of
Delaware Management Business Trust); Chairman
of the Board, President, Chief Executive
Officer, Chief Investment Officer and
Director/Trustee of Delaware Management
Company, Inc. and Delaware Management Business
Trust; Chairman of the Board, President, Chief
Executive Officer and Director of DMH Corp.,
Delaware Distributors, Inc. and Founders
Holdings, Inc.; Chairman, Chief Executive
Officer and Chief Investment Officer of
Dealware Investment Advisers (a series of
Delaware Management Business Trust); Chairman,
Chief Executive Officer and Director of
Delaware International Holdings Ltd. and
Delaware International Advisers Ltd.; Chairman
of the Board and Director of the Registrant,
each of the other funds in the Delaware
Investments family, Delaware Management
Holdings, Inc., and Delaware Capital
Management, Inc.; Chairman of Delaware
Distributors, L.P.; President and Chief
Executive Officer of Delvoy, Inc.; and
Director and/or Trustee of Delaware Service
Company, Inc. and Retirement Financial
Services, Inc.
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
Richard G. Unruh, Jr. Executive Vice President of the Registrant,
each of the other funds in the Delaware
Investments family, Delaware Management
Holdings, Inc., Delaware Capital Management,
Inc. and Delaware Management Company (a
series of Delaware Management Business
Trust); Executive Vice President and
Director/Trustee of Delaware Management
Company, Inc. and Delaware Management
Business Trust; President of Delaware
Investment Advisers (a series of Delaware
Management Business Trust); and Director of
Delaware International Advisers Ltd.
Board of Directors, Chairman of Finance
Committee, Keystone Insurance Company since
1989, 2040 Market Street, Philadelphia, PA;
Board of Directors, Chairman of Finance
Committee, AAA Mid Atlantic, Inc. since
1989, 2040 Market Street, Philadelphia, PA;
Board of Directors, Metron, Inc. since 1995,
11911 Freedom Drive, Reston, VA
Paul E. Suckow Executive Vice President/Chief Investment
Officer, Fixed Income of Delaware Management
Company, Inc., Delaware Management Company (a
series of Delaware Management Business
Trust), Delaware Investment Advisers (a
series of Delaware Management Business
Trust), the Registrant, each of the other
funds in the Delaware Investments family and
Delaware Management Holdings, Inc.; Executive
Vice President and Director of Founders
Holdings, Inc.; Executive Vice President of
Delaware Capital Management, Inc. and
Delaware Management Business Trust; and
Director of Founders CBO Corporation
Director, HYPPCO Finance Company Ltd.
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
David K. Downes Executive Vice President, Chief Operating
Officer and Chief Financial Officer of the
Registrant and each of the other funds in the
Delaware Investments family, Delaware
Management Holdings, Inc., Founders CBO
Corporation, Delaware Capital Management,
Inc., Delaware Management Company (a series
of Delaware Management Business Trust),
Delaware Investment Advisers (a series of
Delaware Management Business Trust) 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 Delvoy, Inc.; Executive Vice President,
Chief Financial Officer, Chief Administrative
Officer and Trustee of Delaware Management
Business Trust; President, Chief Executive
Officer, Chief Financial Officer and Director
of Delaware Service Company, Inc.; President,
Chief Operating Officer, Chief Financial
Officer and Director of Delaware
International Holdings Ltd.; Chairman, Chief
Executive Officer and Director of Retirement
Financial Services, Inc.; Chairman and
Director of Delaware Management Trust
Company; Director of Delaware International
Advisers Ltd.; and Vice President of Lincoln
Funds Corporation
Chief Executive Officer and Director of
Forewarn, Inc. since 1993, 8 Clayton Place,
Newtown Square, PA
Richard J. Flannery Executive Vice President and General Counsel of
Delaware Management Holdings, Inc., DMH
Corp., Delaware Management Company, Inc.,
Delaware Distributors, Inc., Delaware
Distributors, L.P., Delaware Management Trust
Company, Delaware Capital Management, Inc.,
Delaware Service Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust); Founders CBO
Corporation and Retirement Financial
Services, Inc.; Senior Vice
President/Corporate and International Affairs
of the Registrant and each of the other funds
in the Delaware Investments family; Executive
Vice President/General Counsel and Director
of Delaware International Holdings Ltd.;
Founders Holdings, Inc. and Delvoy, Inc.; and
Director of Delaware International Advisers
Ltd.
Director, HYPPCO Finance Company Ltd.
Limited Partner of Stonewall Links, L.P. since
1991, Bulltown Rd., Elverton, PA; Director
and Member of Executive Committee of
Stonewall Links, Inc. since 1991, Bulltown
Rd., Elverton, PA
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
George M. Senior Vice President, Secretary and General
Chamberlain, Jr. Counsel of the Registrant and each of the
other funds in the Delaware Investments
family; Senior Vice President and Secretary
of Delaware Distributors, L.P., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust) and Delaware
Management Holdings, Inc.; Senior Vice
President, Secretary and Director/Trustee of
Delaware Management Company, Inc., DMH Corp.,
Delaware Distributors, Inc., Delaware Service
Company, Inc., Founders Holdings, Inc.,
Delaware Capital Management, Inc., Retirement
Financial Services, Inc., Delvoy, Inc. and
Delaware Management Business Trust; Senior
Vice President and Director of Delaware
International Holdings Ltd.; Executive Vice
President, Secretary and Director of Delaware
Management Trust Company; Director of
Delaware International Advisers Ltd.;
Secretary of Lincoln Funds Corporation
Michael P. Bishof Senior Vice President/Investment Accounting of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust) and Delaware
Service Company, Inc.; Senior Vice President
and Treasurer of the Registrant, each of the
other funds in the Delaware Investments
family and Founders Holdings, Inc.; Senior
Vice President and Treasurer/ Manager,
Investment Accounting of Delaware
Distributors, L.P. and Delaware Investment
Advisers (a series of Delaware Management
Business Trust); Assistant Treasurer of
Founders CBO Corporation; and Senior Vice
President and Manager of Investment
Accounting of Delaware International Holdings
Ltd.
Joseph H. Hastings Senior Vice President/Corporate Controller and
Treasurer of Delaware Management Holdings,
Inc., DMH Corp., Delaware Management Company,
Inc., Delaware Distributors, Inc., Delaware
Capital Management, Inc., Delaware
Distributors, L.P., Delaware Service Company,
Inc., Delaware International Holdings Ltd.,
Delaware Management Company (a series of
Delaware Management Business Trust), Delvoy,
Inc. and Delaware Management Business Trust;
Senior Vice President/Corporate Controller of
the Registrant, each of the other funds in
the Delaware Investments family and Founders
Holdings, Inc.; Executive Vice President,
Chief Financial Officer and Treasurer of
Delaware Management Trust Company; Chief
Financial Officer and Treasurer of Retirement
Financial Services, Inc.; Senior Vice
President/Assistant Treasurer of Founders CBO
Corporation; and Treasurer of Lincoln Funds
Corporation.
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
Michael T. Taggart Senior Vice President/Facilities Management and
Administrative Services of Delaware
Management Company, Inc. and Delaware
Management Company (a series of Delaware
Management Business Trust)
Douglas L. Anderson Senior Vice President/Operations of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), Delaware Investment and
Retirement Services, Inc. and Delaware
Service Company, Inc.; Senior Vice
President/Operations and Director of Delaware
Management Trust Company
James L. Shields Senior Vice President/Chief Information Officer
of Delaware Management Company, Inc.,
Delaware Management Company (a series of
Delaware Management Business Trust), Delaware
Service Company, Inc. and Retirement
Financial Services, Inc.
Eric E. Miller Vice President, Assistant Secretary and Deputy
General Counsel of the Registrant and each of
the other funds in the Delaware Investments
family, Delaware Management Company, Inc.,
Delaware Management Company (a series of
Delaware Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), Delaware
Management Holdings, Inc., DMH Corp.,
Delaware Distributors, L.P., Delaware
Distributors Inc., Delaware Service Company,
Inc., Delaware Management Trust Company,
Founders Holdings, Inc., Delaware Capital
Management, Inc. and Retirement Financial
Services, Inc.; Assistant Secretary of
Delaware Management Business Trust; and Vice
President and Assistant Secretary of Delvoy,
Inc.
Richelle S. Maestro Vice President and Assistant Secretary of the
Registrant, each of the other funds in the
Delaware Investments family, Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), Delaware Investment Advisers
(a series of Delaware Management Business
Trust), Delaware Management Holdings, Inc.,
Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company,
Inc., DMH Corp., Delaware Management Trust
Company, Delaware Capital Management, Inc.,
Retirement Financial Services, Inc., Founders
Holdings, Inc. and Delvoy, Inc.; Vice
President and Secretary of Delaware
International Holdings Ltd.; and Secretary of
Founders CBO Corporation
Partner of Tri-R Associates since 1989, 10001
Sandmeyer Lane, Philadelphia, PA
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
Richard Salus(1) Vice President/Assistant Controller of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust) and Delaware Management Trust
Company
Bruce A. Ulmer Vice President/Director of LNC Internal Audit
of the Registrant, each of the other funds in
the Delaware Investments family, Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), Delaware Management
Holdings, Inc., DMH Corp., Delaware
Management Trust Company and Retirement
Financial Services, Inc.; Vice
President/Director of Internal Audit of
Delvoy, Inc.
Joel A. Ettinger(2) Vice President/Director of Taxation of the
Registrant, each of the other funds in the
Delaware Investments family, Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust) and Delaware Management
Holdings, Inc.
Christopher Adams Vice President/Strategic Planning of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust) and Delaware Service Company,
Inc.
Susan L. Hanson Vice President/Strategic Planning of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust) and Delaware Service Company,
Inc.
Dennis J. Mara(3) Vice President/Acquisitions of Delaware
Management Company, Inc. and Delaware
Management Company (a series of Delaware
Management Business Trust)
Scott Metzger Vice President/Business Development of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust) and Delaware Service Company,
Inc.
Lisa O. Brinkley Vice President/Compliance of the Registrant,
Delaware Management Company, Inc., each of
the other funds in the Delaware Investments
family, Delaware Management Company (a series
of Delaware Management Business Trust), DMH
Corp., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company,
Inc., Delaware Management Trust Company,
Delaware Capital Management, Inc. and
Retirement Financial Services, Inc.; Vice
President/Compliance Officer of Delaware
Management Business Trust; and Vice President
of Delvoy, Inc.
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
Mary Ellen Carrozza Vice President/Client Services of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), Delaware Investment Advisers
(a series of Delaware Management Business
Trust) and Delaware Pooled Trust, Inc.
Gerald T. Nichols Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), the Registrant
and 22 investment companies in the Delaware
Investments family; Vice President of
Founders Holdings, Inc.; and Treasurer,
Assistant Secretary and Director of Founders
CBO Corporation
Paul A. Matlack Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), the Registrant
and 21 investment companies in the Delaware
Investments family; Vice President of
Founders Holdings, Inc.; and President and
Director of Founders CBO Corporation
Gary A. Reed Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), the Registrant
and 19 investment companies in the Delaware
Investments family and Delaware Capital
Management, Inc.
Patrick P. Coyne Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), the Registrant
and 19 investment companies in the Delaware
Investments family and Delaware Capital
Management, Inc.
Roger A. Early Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), the Registrant
and 19 other investment companies in the
Delaware Investments family
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
Mitchell L. Conery(4) Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), the Registrant
and 20 investment companies in the Delaware
Investments family and Delaware Capital
Management, Inc.
George H. Burwell Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), 10 investment
companies in the Delaware Investments family
Cynthia Isom Vice President/Portfolio Manager of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), the Registrant and 17
investment companies in the Delaware
Investments family
John B. Fields Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), 10 investment
companies in the Delaware Investments family,
Delaware Capital Management, Inc. and Trustee
of Delaware Management Business Trust
Gerald S. Frey(5) Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), 10 investment
companies in the Delaware Investments family
Christopher Beck(6) Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), Delaware
Investment Advisers (a series of Delaware
Management Business Trust), the Registrant
and 10 investment companies in the Delaware
Investments family
Elizabeth H. Howell(7) Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), seven investment
companies in the Delaware Investments family
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
Andrew M. McCullagh, Jr.(8) Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust) eight investment
companies in the Delaware Investments family
Babak Zenouzi Vice President/Senior Portfolio Manager of
Delaware Management Company, Inc., Delaware
Management Company (a series of Delaware
Management Business Trust), 13 investment
companies in the Delaware Investments family
Paul Grillo Vice President/Portfolio Manager of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), Delaware Investment Advisers
(a series of Delaware Management Business
Trust), the Registrant and 19 other
investment companies in the Delaware
Investments family
J. Paul Dokas(9) Vice President/Portfolio Manager of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), and two investment companies
in the Delaware Investments family
Marshall T. Bassett(10) Vice President/Portfolio Manager of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust), Delaware Investment Advisers
(a series of Delaware Management Business
Trust), and 10 investment companies in the
Delaware Investments family
John A. Heffern(11) Vice President/Portfolio Manager of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust) and 10 investment companies
in the Delaware Investments family
Lori P. Wachs Vice President/Portfolio Manager of Delaware
Management Company, Inc., Delaware Management
Company (a series of Delaware Management
Business Trust) and 10 investment companies
in the Delaware Investments family
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(Continued)
1 SENIOR MANAGER, Ernst & Young LLP prior to December 1996.
2 TAX PRINCIPAL, Ernst & Young LLP prior to April 1998.
3 CORPORATE CONTROLLER, IIS prior to July 1997.
4 INVESTMENT OFFICER, Travelers Insurance prior to January 1997.
5 SENIOR DIRECTOR, Morgan Grenfell Capital Management prior to
June 1996.
6 SENIOR PORTFOLIO MANAGER, Pitcairn Trust Company prior to May 1997.
7 SENIOR PORTFOLIO MANAGER, Voyageur Fund Managers, Inc. prior to
May 1997.
8 SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER, Voyageur Asset
Management LLC prior to May 1997.
9 DIRECTOR OF TRUST INVESTMENTS, Bell Atlantic Corporation prior to
February 1997.
10 VICE PRESIDENT, Morgan Stanley Asset Management prior to March 1997.
11 SENIOR VICE PRESIDENT, EQUITY RESEARCH, NatWest Securities
Corporation prior to March 1997.
(b) Delaware International Advisers Ltd. ("Delaware International") serves as
sub-investment adviser to Strategic Income Fund of the Registrant and also
serves as investment manager or sub-investment adviser to certain of the other
funds in the Delaware Group (Delaware Group Global Dividend and Income Fund,
Inc., Delaware Group Global & International Funds, Inc., Delaware Pooled
Trust, Inc., Delaware Group Premium Fund, Inc. and Delaware Group Adviser
Funds, Inc.) and other institutional accounts.
<PAGE>
PART C - Other Information
(Continued)
Information regarding the officers and directors of Delaware
International and the positions they have held with the Registrant during the
past two fiscal years is provided below.
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Delaware International Advisers Ltd.
Business Address and its Affiliates and Other Positions and Offices Held
- ------------------ ---------------------------------------------------------------
<S> <C>
*Wayne A. Stork Chairman of the Board, President, Chief Executive Officer and Chief Investment
Officer of Delaware Management Company (a series of Delaware Management
Business Trust); Chairman of the Board, President, Chief Executive Officer,
Chief Investment Officer and Director/Trustee of Delaware Management
Company, Inc. and Delaware Management Business Trust; Chairman of the
Board, President, Chief Executive Officer and Director of DMH Corp.,
Delaware Distributors, Inc. and Founders Holdings, Inc.; Chairman, Chief
Executive Officer and Chief Investment Officer of Dealware Investment
Advisers (a series of Delaware Management Business Trust); Chairman, Chief
Executive Officer and Director of Delaware International Holdings Ltd. and
Delaware International Advisers Ltd.; Chairman of the Board and Director of the
Registrant, each of the other funds in the Delaware Investments family,
Delaware Management Holdings, Inc., and Delaware Capital Management, Inc.;
Chairman of Delaware Distributors, L.P.; President and Chief Executive Officer
of Delvoy, Inc.; and Director and/or Trustee of Delaware Service Company, Inc.
and Retirement Financial Services, Inc.
**G. Roger H. Kitson Vice Chairman and Director of Delaware International Advisers Ltd.
**Ian G. Sims Chief Investment Officer/Global Fixed Income and Director of Delaware
International Advisers Ltd.
**David G. Tilles Managing Director, Chief Investment Officer and Director of Delaware
International Advisers Ltd.
**John Emberson Secretary, Compliance Officer, Finance Director and Director of Delaware
International Advisers Ltd.
**Nigel G. May Director/Head of Pacific Basin Group and Director of Delaware International
Advisers Ltd.
**Elizabeth A. Desmond Director/Head of European Group and Director of Delaware International
Advisers Ltd.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
** Business address of each isThird Floor, 80 Cheapside, London,
England EC2V 6EE.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Delaware International Advisers Ltd.
Business Address and its Affiliates and Other Positions and Offices Held
- ------------------ ---------------------------------------------------------------
<S> <C>
*David K. Downes Executive Vice President, Chief Operating Officer and Chief Financial
Officer of the Registrant and each of the other funds in the Delaware
Investments family, Delaware Management Holdings, Inc., Founders CBO
Corporation, Delaware Capital Management, Inc., Delaware Management
Company (a series of Delaware Management Business Trust), Delaware
Investment Advisers (a series of Delaware Management Business Trust) 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 Delvoy, Inc.; Executive Vice President, Chief Financial Officer,
Chief Administrative Officer and Trustee of Delaware Management
Business Trust; President, Chief Executive Officer, Chief Financial Officer
and Director of Delaware Service Company, Inc.; President, Chief Operating
Officer, Chief Financial Officer and Director of Delaware International
Holdings Ltd.; Chairman, Chief Executive Officer and Director of
Retirement Financial Services, Inc.; Chairman and Director of Delaware
Management Trust Company; Director of Delaware International Advisers
Ltd.; and Vice President of Lincoln Funds Corporation
Chief Executive Officer and Director of Forewarn, Inc. since 1993,
8 Clayton Place, Newtown Square, PA
*Richard G. Unruh, Jr. Executive Vice President of the Registrant, each of the other funds in the
Delaware Investments family, Delaware Management Holdings, Inc.,
Delaware Capital Management, Inc. and Delaware Management Company
(a series of Delaware Management Business Trust); Executive Vice
President and Director/Trustee of Delaware Management Company, Inc. and
Delaware Management Business Trust; President of Delaware Investment
Advisers (a series of Delaware Management Business Trust); and Director
of Delaware International Advisers Ltd.
Board of Directors, Chairman of Finance Committee, Keystone Insurance Company
since 1989, 2040 Market Street, Philadelphia, PA; Board of Directors,
Chairman of Finance Committee, AAA Mid Atlantic, Inc. since 1989, 2040 Market
Street, Philadelphia, PA; Board of Directors, Metron, Inc. since 1995, 11911
Freedom Drive, Reston, VA
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
** Business address of each is Third Floor, 80 Cheapside, London,
England EC2V 6EE.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with Delaware International Advisers Ltd.
Business Address and its Affiliates and Other Positions and Offices Held
- ------------------ ---------------------------------------------------------------
<S> <C>
*Richard J. Flannery Executive Vice President and General Counsel of Delaware Management
Holdings, Inc., DMH Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Distributors, L.P., Delaware Management Trust
Company, Delaware Capital Management, Inc., Delaware Service Company,
Inc., Delaware Management Company (a series of Delaware Management
Business Trust), Delaware Investment Advisers (a series of Delaware
Management Business Trust); Founders CBO Corporation and Retirement
Financial Services, Inc.; Senior Vice President/Corporate and International
Affairs of the Registrant and each of the other funds in the Delaware
Investments family; Executive Vice President/General Counsel and Director of
Delaware International Holdings Ltd.; Founders Holdings, Inc. and Delvoy,
Inc.; and Director of Delaware International Advisers Ltd.
Director, HYPPCO Finance Company Ltd.
Limited Partner of Stonewall Links, L.P. since 1991, Bulltown Rd., Elverton,
PA; Director and Member of Executive Committee of Stonewall Links, Inc.
since 1991, Bulltown Rd., Elverton, PA
*John C. E. Campbell Director of Delaware International Advisers Ltd.: Senior Vice
President/International Marketing of Delaware Investment
Advisers (a series of Delaware Management Trust)
*George M. Chamberlain, Jr. Senior Vice President, Secretary and General Counsel of the Registrant and
each of the other funds in the Delaware Investments family; Senior Vice
President and Secretary of Delaware Distributors, L.P., Delaware Management
Company (a series of Delaware Management Business Trust), Delaware
Investment Advisers (a series of Delaware Management Business Trust) and
Delaware Management Holdings, Inc.; Senior Vice President, Secretary and
Director/Trustee of Delaware Management Company, Inc., DMH Corp.,
Delaware Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Capital Management, Inc., Retirement Financial
Services, Inc., Delvoy, Inc. and Delaware Management Business Trust; Senior
Vice President and Director of Delaware International Holdings Ltd.; Executive
Vice President, Secretary and Director of Delaware Management Trust
Company; Director of Delaware International Advisers Ltd.; Secretary of
Lincoln Funds Corporation
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
** Business address of each is Third Floor, 80 Cheapside, London,
England EC2V 6EE.
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices with the Manager and its
Business Address * Affiliates and Other Positions and Offices Held
- ------------------ -----------------------------------------------
<S> <C>
*George E. Deming Director of Delaware International Advisers Ltd.; Vice President and Senior
Portfolio Manager of Delaware Investment Advisers (a series of Delaware
Management Business Trust)
**Timothy W. Sanderson Chief Investment Officer - Equities and Director of Delaware International
Advisers Ltd.
**Clive A. Gillmore Senior Portfolio Manager, Director U.S. Mutual Fund Liaison and Director
of Delaware International Advisers Ltd.
**Hamish O. Parker Senior Portfolio Manager, Director U.S. Marketing Liaison and Director of
Delaware International Advisers Ltd.
**Gavin A. Hall Senior Portfolio Manager of Delaware International Advisers Ltd.
**Robert Akester Senior Portfolio Manager of Delaware International Advisers Ltd.
**Hywel Morgan Senior Portfolio Manager of Delaware International Advisers Ltd.
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
** Business address of each is Third Floor, 80 Cheapside, London,
England EC2V 1NQ.
Item 29. Principal Underwriters.
(a) Delaware Distributors, L.P. serves as principal
underwriter for all the mutual funds in the Delaware
Group.
(b) Information with respect to each director, officer or
partner of principal underwriter:
<PAGE>
PART C - Other Information
(Continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Delaware Distributors, Inc. General Partner None
Delaware Investment
Advisers Limited Partner None
Delaware Capital
Management, Inc. Limited Partner None
Wayne A. Stork Chairman Chairman
Bruce D. Barton President and Chief Executive None
Officer
David K. Downes Executive Vice President, Executive Vice President,
Chief Operating Officer Chief Operating Officer
and Chief Financial Officer and Chief Financial
Officer
Richard J. Flannery Executive Vice President/General Senior Vice President/
Counsel Corporate and
International
Affairs
George M. Chamberlain, Jr. Senior Vice President/Secretary Senior Vice President/
Secretary/General Counsel
Joseph H. Hastings Senior Vice President/Corporate Senior Vice President/
Controller & Treasurer Corporate Controller
Terrence P. Cunningham Senior Vice President/Financial None
Institutions
Thomas E. Sawyer Senior Vice President/ None
National Sales Director
Mac McAuliffe Senior Vice President/Sales None
Manager, Western Division
J. Chris Meyer Senior Vice President/ None
Director Product Management
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
William M. Kimbrough Senior Vice President/Wholesaler None
Daniel J. Brooks Senior Vice President/Wholesaler None
Bradley L. Kolstoe Senior Vice President/Western None
Division Sales Manager
Henry W. Orvin Senior Vice President/Eastern None
Division Sales Manager
Michael P. Bishof Senior Vice President and Treasurer/ Senior Vice
Manager, Investment Accounting President/Treasurer
Eric E. Miller Vice President/Assistant Secretary/ Vice President/Assistant
Deputy General Counsel Secretary/
Deputy General Counsel
Richelle S. Maestro Vice President/ Vice President/
Assistant Secretary Assistant Secretary
Lisa O. Brinkley Vice President/Compliance Vice
President/Compliance
Daniel H. Carlson Vice President/Strategic Marketing None
Diane M. Anderson Vice President/Plan Record Keeping None
and Administration
Anthony J. Scalia Vice President/Defined Contribution None
Sales, SW Territory
Courtney S. West Vice President/Defined Contribution None
Sales, NE Territory
Denise F. Guerriere Vice President/Client Services None
Gordon E. Searles Vice President/Client Services None
Lori M. Burgess Vice President/Client Services None
Julia R. Vander Els Vice President/Participant Services None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Jerome J. Alrutz Vice President/Retail Sales None
Scott Metzger Vice President/Business Development Vice President/Business
Development
Stephen C. Hall Vice President/Institutional Sales None
Gregory J. McMillan Vice President/ National Accounts None
Holly W. Reimel Vice President/Manager, National None
Accounts
Christopher H. Price Vice President/Manager, Insurance None
Stephen J. DeAngelis VicePresident/Product Development None
Andrew W. Whitaker Vice President/Financial Institutions None
Jesse Emery Vice President/ Marketing None
Communications
Darryl S. Grayson Vice President, Broker/Dealer None
Internal Sales
Dinah J. Huntoon Vice President/Product Manager Equity None
Soohee Lee Vice President/Fixed Income None
Product Management
Michael J. Woods Vice President/UIT Product None
Management
Ellen M. Krott Vice President/Marketing None
Dale L. Kurtz Vice President/Marketing Support None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
David P. Anderson Vice President/Wholesaler None
Lee D. Beck Vice President/Wholesaler None
Gabriella Bercze Vice President/Wholesaler None
Terrence L. Bussard Vice President/Wholesaler None
William S. Carroll Vice President/Wholesaler None
William L. Castetter Vice President/Wholesaler None
Thomas J. Chadie Vice President/Wholesaler None
Thomas C. Gallagher Vice President/Wholesaler None
Douglas R. Glennon Vice President/Wholesaler None
Ronald A. Haimowitz Vice President/Wholesaler None
Christopher L. Johnston Vice President/Wholesaler None
Michael P. Jordan Vice President/Wholesaler None
Jeffrey A. Keinert Vice President/Wholesaler None
Thomas P. Kennett Vice President/ Wholesaler None
Debbie A. Marler Vice President/Wholesaler None
Nathan W. Medin Vice President/Wholesaler None
Roger J. Miller Vice President/Wholesaler None
Patrick L. Murphy Vice President/Wholesaler None
Stephen C. Nell Vice President/Wholesaler None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
<PAGE>
PART C - Other Information
(continued)
<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address * with Underwriter with Registrant
- ------------------ --------------------- ---------------------
<S> <C> <C>
Julia A. Nye Vice President/Wholesaler None
Joseph T. Owczarek Vice President/Wholesaler None
Mary Ellen Pernice-Fadden Vice President/Wholesaler None
Mark A. Pletts Vice President/Wholesaler None
Philip G. Rickards Vice President/Wholesaler None
Laura E. Roman Vice President/Wholesaler None
Linda Schulz Vice President/Wholesaler None
Edward B. Sheridan Vice President/Wholesaler None
Robert E. Stansbury Vice President/Wholesaler None
Julia A. Stanton Vice President/Wholesaler None
Larry D. Stone Vice President/Wholesaler None
Edward J. Wagner Vice President/Wholesaler None
Wayne W. Wagner Vice President/Wholesaler None
John A. Wells Vice President/Marketing Technology None
Scott Whitehouse Vice President/Wholesaler None
</TABLE>
* Business address of each is 1818 Market Street, Philadelphia, PA 19103.
(c) Not Applicable.
Item 30. Location of Accounts and Records.
All accounts and records are maintained in Philadelphia at 1818 Market Street,
Philadelphia, PA 19103 or One Commerce Square, Philadelphia, PA 19103 and in
London at Third Floor, 80 Cheapside, London, England EC2V 6EE.
Item 31. Management Services. None.
<PAGE>
PART C - Other Information
(continued)
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the
Registrant's annual report to shareholders, upon request
and without charge.
(d) Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, this Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Philadelphia and Commonwealth of Pennsylvania on
this 25th day of September, 1998.
DELAWARE GROUP INCOME FUNDS, INC.
By /s/ Wayne A. Stork
-------------------------
Wayne A. Stork
Chairman
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
- ------------------------- --------------------- ------------------
/s/ Wayne A. Stork Chairman and Director September 25, 1998
- -------------------------
Wayne A. Stork
/s/David K. Downes Executive Vice President/ September 25, 1998
- ------------------------- Chief Operating Officer/Chief
David K. Downes Financial Officer (Principal
Financial Officer and
Principal Accounting Officer)
/s/Walter P. Babich * Director September 25, 1998
- -------------------------
Walter P. Babich
/s/Anthony D. Knerr * Director September 25, 1998
- -------------------------
Anthony D. Knerr
/s/Ann R. Leven * Director September 25, 1998
- -------------------------
Ann R. Leven
/s/W. Thacher Longstreth* Director September 25, 1998
- -------------------------
W. Thacher Longstreth
/s/ Thomas F. Madison * Director September 25, 1998
- -------------------------
Thomas F. Madison
/s/ Jeffrey J. Nick * Director September 25, 1998
- -------------------------
Jeffrey J. Nick
/s/Charles E. Peck * Director September 25, 1998
- -------------------------
Charles E. Peck
/s/John H. Durham * Director September 25, 1998
- -------------------------
John H. Durham
*By /s/Wayne A. Stork
---------------------
Wayne A. Stork
as Attorney-in-Fact for
each of the persons indicated
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Exhibits
to
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
EX-99.B1F Executed Articles Supplementary (August 19, 1998)
EX-99.B8E Form of Letter (1998) to The Chase Manhattan Bank to add
the Strategic Income fund to the Custodian Agreement
between The Chase Manhattan Bank and the Registrant
EX-99.B10 Opinion of Counsel
EX-99.B11 Consent of Auditors
EX-27 Financial Data Schedules
<PAGE>
Exhibit 99.B1F
Exhibit 24(b)(1)(f)
DELAWARE GROUP INCOME FUNDS, INC.
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
Delaware Group Income Funds, Inc. (formerly known as
Delaware Group Delchester High-Yield Bond Fund, Inc.), a Maryland corporation
having its principal office in Baltimore, Maryland (the "Corporation"), hereby
certifies, in accordance with Section 2-208 and Section 2-208.1 of the
Maryland General Corporation Law, to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Corporation has authority to issue a total of One
Billion (1,000,000,000) shares of common stock with a par value of One Dollar
($1.00) per share of the Corporation (the "Common Stock"), having an aggregate
par value of One Billion Dollars ($1,000,000,000.00). Of such One Billion
(1,000,000,000) shares of Common Stock, Five Hundred Million (500,000,000)
shares of the Common Stock have been allocated to the Delchester Fund series,
Two Hundred Million (200,000,000) shares of the Common Stock have been
allocated to the Strategic Income Fund series, and Two Hundred Million
(200,000,000) shares of the Common Stock have been allocated to the High-Yield
Opportunities Fund series as follows:
<TABLE>
<CAPTION>
Class of Shares Number of Shares
--------------- ----------------
<S> <C>
Delchester Fund A Class Three Hundred Fifty Million (350,000,000)
Delchester Fund B Class Fifty Million (50,000,000)
Delchester Fund C Class Fifty Million (50,000,000)
Delchester Fund Institutional Class Fifty Million (50,000,000)
Strategic Income Fund A Class One Hundred Million (100,000,000)
Strategic Income Fund B Class Twenty-Five Million (25,000,000)
Strategic Income Fund C Class Twenty-Five Million (25,000,000)
Strategic Income Fund Institutional Class Fifty Million (50,000,000)
High-Yield Opportunities Fund A Class One Hundred Million (100,000,000)
High-Yield Opportunities Fund B Class Twenty-Five Million (25,000,000)
High-Yield Opportunities Fund C Class Twenty-Five Million (25,000,000)
High-Yield Opportunities Fund Fifty Million (50,000,000)
Institutional Class
</TABLE>
SECOND: The Board of Directors of the Corporation, at a
meeting held on July 16, 1998, adopted resolutions increasing the aggregate
number of shares of Common Stock that the Corporation has authority to issue
from One Billion (1,000,000,000) shares to One Billion Four Hundred Million
(1,400,000,000) shares, designating two additional series of the
<PAGE>
Corporation's Common Stock as the Corporate Bond Fund series and the Extended
Duration Bond Fund series, and classifying and allocating Two Hundred Million
(200,000,000) shares of authorized, unissued and unclassified Common Stock to
the Corporate Bond Fund series and classifying and allocating Two Hundred
Million (200,000,000) shares of authorized, unissued and unclassified Common
Stock to the Extended Duration Bond Fund series. Such Four Hundred Million
(400,000,000) shares of the Common Stock, have been further classified and
allocated as follows:
<TABLE>
<CAPTION>
Class of Shares Number of Shares
--------------- ----------------
<S> <C>
Corporate Bond Fund A Class One Hundred Million (100,000,000)
Corporate Bond Fund B Class Twenty-Five Million (25,000,000)
Corporate Bond Fund C Class Twenty-Five Million (25,000,000)
Corporate Bond Fund Institutional Class Fifty Million (50,000,000)
Extended Duration Bond Fund A Class One Hundred Million (100,000,000)
Extended Duration Bond Fund B Class Twenty-Five Million (25,000,000)
Extended Duration Bond Fund C Class Twenty-Five Million (25,000,000)
Extended Duration Bond Fund Fifty Million (50,000,000)
Institutional Class
</TABLE>
One Hundred Million (100,000,000) shares of the Common Stock remain
authorized but unissued and unallocated shares.
THIRD: As a result of the aforesaid increase in the
authorized Common Stock and classification, the Corporation has authority to
issue One Billion Four Hundred Million (1,400,000,000) shares of Common Stock
with a par value of One Dollar ($1.00) per share, having an aggregate par
value of One Billion Four Hundred Million Dollars ($1,400,000,000.00). Of such
One Billion Four Hundred Million (1,400,000,000) shares of Common Stock, One
Billion Three Hundred Million (1,300,000,000) shares of the Common Stock have
been allocated as follows: (1) Five Hundred Million (500,000,000) shares have
been allocated to the Delchester Fund Series, (2) Two Hundred Million
(200,000,000) shares have been allocated to the Strategic Income Fund series,
(3) Two Hundred Million (200,000,000) shares have been allocated to the
High-Yield Opportunities Fund series, (4) Two Hundred Million (200,000,000)
shares have been allocated to the Corporate Bond Fund series, and (5) Two
Hundred Million (200,000,000) shares have been allocated to the Extended
Duration Bond Fund series. Of such shares of the Corporation's Common Stock
allocated to the respective series, such shares have been further classified
and allocated as follows:
<TABLE>
<CAPTION>
Class of Shares Number of Shares
--------------- ----------------
<S> <C>
Delchester Fund A Class Three Hundred Fifty Million (350,000,000)
Delchester Fund B Class Fifty Million (50,000,000)
Delchester Fund C Class Fifty Million (50,000,000)
Delchester Fund Institutional Class Fifty Million (50,000,000)
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Strategic Income Fund A Class One Hundred Million (100,000,000)
Strategic Income Fund B Class Twenty-Five Million (25,000,000)
Strategic Income Fund C Class Twenty-Five Million (25,000,000)
Strategic Income Fund Institutional Class Fifty Million (50,000,000)
High-Yield Opportunities Fund A Class One Hundred Million (100,000,000)
High-Yield Opportunities Fund B Class Twenty-Five Million (25,000,000)
High-Yield Opportunities Fund C Class Twenty-Five Million (25,000,000)
High-Yield Opportunities Fund Fifty Million (50,000,000)
Institutional Class
Corporate Bond Fund A Class One Hundred Million (100,000,000)
Corporate Bond Fund B Class Twenty-Five Million (25,000,000)
Corporate Bond Fund C Class Twenty-Five Million (25,000,000)
Corporate Bond Fund Institutional Class Fifty Million (50,000,000)
Extended Duration Bond Fund A Class One Hundred Million (100,000,000)
Extended Duration Bond Fund B Class Twenty-Five Million (25,000,000)
Extended Duration Bond Fund C Class Twenty-Five Million (25,000,000)
Extended Duration Bond Fund Fifty Million (50,000,000)
Institutional Class
</TABLE>
FOURTH: The shares of the Corporate Bond Fund A Class, the
Corporate Bond Fund B Class, the Corporate Bond Fund C Class and the Corporate
Bond Fund Institutional Class of the Corporate Bond Fund series shall
represent proportionate interests in the same portfolio of investments. The
shares of each Class of the Corporate Bond Fund series shall have the same
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions as
redemption, all as set forth in the Articles of Incorporation of the
Corporation, except for the differences hereinafter set forth:
1. The dividends and distributions of investment income and
capital gains with respect to shares of the Corporate Bond
Fund A Class, the Corporate Bond Fund B Class, the Corporate
Bond Fund C Class and the Corporate Bond Fund Institutional
Class of the Corporate Bond Fund series of the Common Stock,
shall be in such amounts as may be declared from time to
time by the Board of Directors, and such dividends and
distributions may vary with respect to each such class from
the dividends and distributions of investment income and
capital gains with respect to the other classes of the
Corporate Bond Fund series of the Common Stock, to reflect
differing allocations of the expenses of the Corporation
among the classes and any resultant difference among the net
asset value per share of the classes, to such extent and for
such purposes as the Board of Directors may deem
appropriate. The allocation of investment income and capital
gains and expenses and liabilities of the Corporate Bond
Fund series among its four classes of Common Stock, shall be
determined by the Board of Directors in a
-3-
<PAGE>
manner that is consistent with the orders, as applicable,
dated April 10, 1987 and September 6, 1994 (Investment
Company Act of 1940 Release Nos. 15675 and 20529) issued by
the Securities and Exchange Commission, and any amendments
to such orders, any existing or future order or any Multiple
Class Plan adopted by the Corporation in accordance with
Rule 18f-3 under the Investment Company Act of 1940, as
amended, that modifies or supersedes such orders.
2. Except as may otherwise be required by law, pursuant to
any applicable order, rule or interpretation issued by the
Securities and Exchange Commission, or otherwise, the
holders of shares of the Corporate Bond Fund A Class, the
Corporate Bond Fund B Class, the Corporate Bond Fund C Class
and the Corporate Bond Fund Institutional Class of the
Corporate Bond Fund series of the Common Stock shall have
(i) exclusive voting rights with respect to any matter
submitted to a vote of stockholders that affects only
holders of shares of the Corporate Bond Fund A Class, the
Corporate Bond Fund B Class, the Corporate Bond Fund C Class
and the Corporate Bond Fund Institutional Class of the
Corporate Bond Fund series, respectively, including, without
limitation, the provisions of any Distribution Plan adopted
pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (a "Distribution Plan"), applicable to
shares of the Corporate Bond Fund A Class, the Corporate
Bond Fund B Class and the Corporate Bond Fund C Class, and
(ii) no voting rights with respect to the provisions of any
Distribution Plan applicable to any other class of the
Corporate Bond Fund series of the Common Stock or with
regard to any other matter submitted to a vote of
stockholders which does not affect holders of shares of the
Corporate Bond Fund A Class, the Corporate Bond Fund B Class
and the Corporate Bond Fund C Class.
3. (a) Other than shares described in paragraph 3(b) herein,
each share of the Corporate Bond Fund B class shall be
converted automatically, and without any action or choice on
the part of the holder thereof, into shares of the Corporate
Bond Fund A Class, on the Conversion Date. The term
"Conversion Date" when used herein shall mean a date set
forth in the prospectus of the Corporate Bond Fund B Class,
as such prospectus may be amended from time to time, that is
no later than three months after either (i) the date on
which the eighth anniversary of the date of issuance of the
share occurs, or (ii) any such other anniversary date as may
be determined by the Board of Directors and set forth in the
prospectus of the Corporate Bond Fund B Class, as such
prospectus may be amended from time to time; provided that
any such other anniversary date determined by the Board of
Directors shall be a date that will occur prior to the
anniversary date set forth in clause (i) and any such other
date theretofore determined by the Board of Directors
pursuant to this clause (ii); but further provided that,
subject to the provisions of the next sentence, for any
shares of the Corporate Bond Fund B Class, acquired through
an exchange, or through a series of exchanges, as permitted
by the Corporation as provided in the prospectus of the
Corporate Bond Fund B Class, as such prospectus may be
amended from time to time, from another investment company
or another series of the Corporation (an "eligible
-4-
<PAGE>
investment company"), the Conversion Date shall be the
conversion date applicable to the shares of stock of the
eligible investment company originally subscribed for in
lieu of the Conversion Date of any stock acquired through
exchange if such eligible investment company issuing the
stock originally subscribed for had a conversion feature,
but not later than the Conversion Date determined under (i)
above. For the purpose of calculating the holding period
required for conversion, the date of issuance of a share of
the Corporate Bond Fund B Class shall mean (i) in the case
of the Corporate Bond Fund B Class obtained by the holder
thereof through an original subscription to the Corporation,
the date of the issuance of such share of the Corporate Bond
Fund B Class, or (ii) in the case of a share of the
Corporate Bond Fund B Class obtained by the holder thereof
through an exchange, or through a series of exchanges, from
an eligible investment company, the date of issuance of the
share of the eligible investment company to which the holder
originally subscribed.
(b) Each share of the Corporate Bond Fund B Class (i)
purchased through the automatic reinvestment of a dividend
or distribution with respect to the Corporate Bond Fund B
Class, or the corresponding class of any other investment
company or of any other series of the Corporation issuing
such class of shares or (ii) issued pursuant to an exchange
privilege granted by the Corporation in an exchange or
series of exchanges for shares originally purchased through
the automatic reinvestment of a dividend or distribution
with respect to shares of capital stock of an eligible
investment company, shall be segregated in a separate
sub-account on the stock records of the Corporation for each
of the holders of record thereof. On any Conversion Date, a
number of the shares held in the separate sub-account of the
holder of record of the share or shares being converted,
calculated in accordance with the next following sentence,
shall be converted automatically, and without any action or
choice on the part of the holder, into shares of the
Corporate Bond Fund A Class. The number of shares in the
holder's separate sub-account so converted shall (i) bear
the same ratio to the total number of shares maintained in
the separate sub-account on the Conversion Date (immediately
prior to conversion) as the number of shares of the holder
converted on the Conversion Date pursuant to paragraph 3(a)
hereof bears to the total number of Corporate Bond Fund B
Class shares, of the holder on the Conversion Date
(immediately prior to conversion) after subtracting the
shares then maintained in the holders' separate sub-account,
or (ii) be such other number as may be calculated in such
other manner as may be determined by the Board of Directors
and set forth in the prospectus of the Corporate Bond Fund B
Class, as such prospectus may be amended from time to time.
(c) The number of shares of the Corporate Bond Fund A Class
into which a share of the Corporate Bond Fund B Class is
converted pursuant to paragraphs 3(a) and 3(b) hereof shall
equal the number (including for this purpose fractions of a
share) obtained by dividing the net asset value per share of
the Corporate Bond Fund B Class, for purposes of sales and
redemption thereof on the
-5-
<PAGE>
Conversion Date by the net asset value per share of the
Corporate Bond Fund A Class, for purposes of sales and
redemption thereof on the Conversion Date.
(d) On the Conversion Date, the shares of the Corporate Bond
Fund B Class converted into shares of the Corporate Bond
Fund A Class, will no longer be deemed outstanding and the
rights of the holders thereof (except the right to receive
(i) the number of shares of the Corporate Bond Fund A Class
into which the shares of the Corporate Bond Fund B Class
have been converted, and (ii) declared but unpaid dividends
to the Conversion Date or such other date set forth in the
prospectus of the Corporate Bond Fund B Class, as such
prospectus may be amended from time to time and (iii) the
right to vote converting shares of the Corporate Bond Fund B
Class, held as of any record date occurring on or before the
Conversion Date and theretofore set with respect to any
meeting held after the Conversion Date will cease.
Certificates representing shares of the Corporate Bond Fund
A Class, resulting from the conversion need not be issued
until certificates representing shares of the Corporate Bond
Fund B Class, converted, if issued, have been received by
the Corporation or its agent duly endorsed for transfer.
(e) The automatic conversions of the Corporate Bond Fund B
Class into the Corporate Bond Fund A Class, as set forth in
paragraphs 3(a) and 3(b) of this Article FOURTH shall be
suspended at any time that the Board of Directors determines
(i) that there is not available a reasonably satisfactory
opinion of counsel to the effect that (x) the assessment of
the higher fee under the Distribution Plan with respect to
the Corporate Bond Fund B Class, does not result in the
Corporation's dividends or distributions constituting a
"preferential dividend" under the Internal Revenue Code of
1986, as amended, and (y) the conversion of the Corporate
Bond Fund B Class, does not constitute a taxable event under
federal income tax law, or (ii) any other condition to
conversion set forth in the prospectus of the Corporate Bond
Fund B Class, as such prospectuses may be amended from time
to time, is not satisfied.
(f) The automatic conversion of the Corporate Bond Fund B
Class into Corporate Bond Fund A Class, as set forth in
paragraphs 3(a) and 3(b) hereof, may also be suspended by
action of the Board of Directors at any time that the Board
of Directors determines such suspension to be appropriate in
order to comply with, or satisfy the requirements of the
Investment Company Act of 1940, as amended, and in effect
from time to time, or any rule, regulation or order issued
thereunder relating to the voting by the holders of the
Corporate Bond Fund B Class, on any Distribution Plan with
respect to, as relevant, the Corporate Bond Fund A Class,
and in effect from time to time, and in connection with, or
in lieu of, any such suspension, the Board of Directors may
provide holders of the Corporate Bond Fund B Class, with
alternative conversion or exchange rights into other classes
of stock of the Corporation in a manner consistent with the
law, rule, regulation or order giving rise to the possible
suspension of the conversion right.
-6-
<PAGE>
4. The shares of the Corporate Bond Fund C Class and the
Corporate Bond Fund Institutional Class shall not
automatically convert into shares of the Corporate Bond Fund
A Class of the Corporate Bond Fund series of the Common
Stock as do the shares of the Corporate Bond Fund B Class of
the Corporate Bond Fund series of the Common Stock.
FIFTH: The shares of the Corporate Bond Fund A Class, the
Corporate Bond Fund B Class, the Corporate Bond Fund C Class and the Corporate
Bond Fund Institutional Class of the Corporate Bond Fund series, have been
classified by the Board of Directors pursuant to authority contained in the
Articles of Incorporation of the Corporation.
SIXTH: The shares of the Extended Duration Bond Fund A
Class, the Extended Duration Bond Fund B Class, the Extended Duration Bond
Fund C Class and the Extended Duration Bond Fund Institutional Class of the
Extended Duration Bond Fund series shall represent proportionate interests in
the same portfolio of investments. The shares of each Class of the Extended
Duration Bond Fund series shall have the same preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions as redemption, all as set forth in the
Articles of Incorporation of the Corporation, except for the differences
hereinafter set forth:
1. The dividends and distributions of investment income and
capital gains with respect to shares of the Extended
Duration Bond Fund A Class, the Extended Duration Bond Fund
B Class, the Extended Duration Bond Fund C Class and the
Extended Duration Bond Fund Institutional Class of the
Extended Duration Bond Fund series of the Common Stock,
shall be in such amounts as may be declared from time to
time by the Board of Directors, and such dividends and
distributions may vary with respect to each such class from
the dividends and distributions of investment income and
capital gains with respect to the other classes of the
Extended Duration Bond Fund series of the Common Stock, to
reflect differing allocations of the expenses of the
Corporation among the classes and any resultant difference
among the net asset value per share of the classes, to such
extent and for such purposes as the Board of Directors may
deem appropriate. The allocation of investment income and
capital gains and expenses and liabilities of the Extended
Duration Bond Fund series among its four classes of Common
Stock, shall be determined by the Board of Directors in a
manner that is consistent with the orders, as applicable,
dated April 10, 1987 and September 6, 1994 (Investment
Company Act of 1940 Release Nos. 15675 and 20529) issued by
the Securities and Exchange Commission, and any amendments
to such orders, any existing or future order or any Multiple
Class Plan adopted by the Corporation in accordance with
Rule 18f-3 under the Investment Company Act of 1940, as
amended, that modifies or supersedes such orders.
2. Except as may otherwise be required by law, pursuant to
any applicable order, rule or interpretation issued by the
Securities and Exchange Commission, or otherwise, the
holders of shares of the Extended Duration Bond Fund A
Class, the Extended Duration Bond Fund B Class, the Extended
Duration Bond Fund C
-7-
<PAGE>
Class and the Extended Duration Bond Fund Institutional
Class of the Extended Duration Bond Fund series of the
Common Stock shall have (i) exclusive voting rights with
respect to any matter submitted to a vote of stockholders
that affects only holders of shares of the Extended Duration
Bond Fund A Class, the Extended Duration Bond Fund B Class,
the Extended Duration Bond Fund C Class and the Extended
Duration Bond Fund Institutional Class of the Extended
Duration Bond Fund series, respectively, including, without
limitation, the provisions of any Distribution Plan adopted
pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (a "Distribution Plan"), applicable to
shares of the Extended Duration Bond Fund A Class, the
Extended Duration Bond Fund B Class and the Extended
Duration Bond Fund C Class, and (ii) no voting rights with
respect to the provisions of any Distribution Plan
applicable to any other class of the Extended Duration Bond
Fund series of the Common Stock or with regard to any other
matter submitted to a vote of stockholders which does not
affect holders of shares of the Extended Duration Bond Fund
A Class, the Extended Duration Bond Fund B Class and the
Extended Duration Bond Fund C Class.
3. (a) Other than shares described in paragraph 3(b) herein,
each share of the Extended Duration Bond Fund B class shall
be converted automatically, and without any action or choice
on the part of the holder thereof, into shares of the
Extended Duration Bond Fund A Class, on the Conversion Date.
The term "Conversion Date" when used herein shall mean a
date set forth in the prospectus of the Extended Duration
Bond Fund B Class, as such prospectus may be amended from
time to time, that is no later than three months after
either (i) the date on which the eighth anniversary of the
date of issuance of the share occurs, or (ii) any such other
anniversary date as may be determined by the Board of
Directors and set forth in the prospectus of the Extended
Duration Bond Fund B Class, as such prospectus may be
amended from time to time; provided that any such other
anniversary date determined by the Board of Directors shall
be a date that will occur prior to the anniversary date set
forth in clause (i) and any such other date theretofore
determined by the Board of Directors pursuant to this clause
(ii); but further provided that, subject to the provisions
of the next sentence, for any shares of the Extended
Duration Bond Fund B Class, acquired through an exchange, or
through a series of exchanges, as permitted by the
Corporation as provided in the prospectus of the Extended
Duration Bond Fund B Class, as such prospectus may be
amended from time to time, from another investment company
or another series of the Corporation (an "eligible
investment company"), the Conversion Date shall be the
conversion date applicable to the shares of stock of the
eligible investment company originally subscribed for in
lieu of the Conversion Date of any stock acquired through
exchange if such eligible investment company issuing the
stock originally subscribed for had a conversion feature,
but not later than the Conversion Date determined under (i)
above. For the purpose of calculating the holding period
required for conversion, the date of issuance of a share of
the Extended Duration Bond Fund B Class shall mean (i) in
the case of the Extended Duration Bond Fund B Class obtained
by the holder
-8-
<PAGE>
thereof through an original subscription to the Corporation,
the date of the issuance of such share of the Extended
Duration Bond Fund B Class, or (ii) in the case of a share
of the Extended Duration Bond Fund B Class obtained by the
holder thereof through an exchange, or through a series of
exchanges, from an eligible investment company, the date of
issuance of the share of the eligible investment company to
which the holder originally subscribed.
(b) Each share of the Extended Duration Bond Fund B Class
(i) purchased through the automatic reinvestment of a
dividend or distribution with respect to the Extended
Duration Bond Fund B Class, or the corresponding class of
any other investment company or of any other series of the
Corporation issuing such class of shares or (ii) issued
pursuant to an exchange privilege granted by the Corporation
in an exchange or series of exchanges for shares originally
purchased through the automatic reinvestment of a dividend
or distribution with respect to shares of capital stock of
an eligible investment company, shall be segregated in a
separate sub-account on the stock records of the Corporation
for each of the holders of record thereof. On any Conversion
Date, a number of the shares held in the separate
sub-account of the holder of record of the share or shares
being converted, calculated in accordance with the next
following sentence, shall be converted automatically, and
without any action or choice on the part of the holder, into
shares of the Extended Duration Bond Fund A Class. The
number of shares in the holder's separate sub-account so
converted shall (i) bear the same ratio to the total number
of shares maintained in the separate sub-account on the
Conversion Date (immediately prior to conversion) as the
number of shares of the holder converted on the Conversion
Date pursuant to paragraph 3(a) hereof bears to the total
number of Extended Duration Bond Fund B Class shares, of the
holder on the Conversion Date (immediately prior to
conversion) after subtracting the shares then maintained in
the holders' separate sub-account, or (ii) be such other
number as may be calculated in such other manner as may be
determined by the Board of Directors and set forth in the
prospectus of the Extended Duration Bond Fund B Class, as
such prospectus may be amended from time to time.
(c) The number of shares of the Extended Duration Bond Fund
A Class into which a share of the Extended Duration Bond
Fund B Class is converted pursuant to paragraphs 3(a) and
3(b) hereof shall equal the number (including for this
purpose fractions of a share) obtained by dividing the net
asset value per share of the Extended Duration Bond Fund B
Class, for purposes of sales and redemption thereof on the
Conversion Date by the net asset value per share of the
Extended Duration Bond Fund A Class, for purposes of sales
and redemption thereof on the Conversion Date.
(d) On the Conversion Date, the shares of the Extended
Duration Bond Fund B Class converted into shares of the
Extended Duration Bond Fund A Class, will no longer be
deemed outstanding and the rights of the holders thereof
(except the right to receive (i) the number of shares of the
Extended Duration Bond Fund A Class into which the shares of
the Extended Duration Bond Fund B Class have
-9-
<PAGE>
been converted, and (ii) declared but unpaid dividends to
the Conversion Date or such other date set forth in the
prospectus of the Extended Duration Bond Fund B Class, as
such prospectus may be amended from time to time and (iii)
the right to vote converting shares of the Extended Duration
Bond Fund B Class, held as of any record date occurring on
or before the Conversion Date and theretofore set with
respect to any meeting held after the Conversion Date will
cease. Certificates representing shares of the Extended
Duration Bond Fund A Class, resulting from the conversion
need not be issued until certificates representing shares of
the Extended Duration Bond Fund B Class, converted, if
issued, have been received by the Corporation or its agent
duly endorsed for transfer.
(e) The automatic conversions of the Extended Duration Bond
Fund B Class into the Extended Duration Bond Fund A Class,
as set forth in paragraphs 3(a) and 3(b) of this Article
SIXTH shall be suspended at any time that the Board of
Directors determines (i) that there is not available a
reasonably satisfactory opinion of counsel to the effect
that (x) the assessment of the higher fee under the
Distribution Plan with respect to the Extended Duration Bond
Fund B Class, does not result in the Corporation's dividends
or distributions constituting a "preferential dividend"
under the Internal Revenue Code of 1986, as amended, and (y)
the conversion of the Extended Duration Bond Fund B Class,
does not constitute a taxable event under federal income tax
law, or (ii) any other condition to conversion set forth in
the prospectus of the Extended Duration Bond Fund B Class,
as such prospectus may be amended from time to time, is not
satisfied.
(f) The automatic conversion of the Extended Duration Bond
Fund B Class into Extended Duration Bond Fund A Class, as
set forth in paragraphs 3(a) and 3(b) hereof, may also be
suspended by action of the Board of Directors at any time
that the Board of Directors determines such suspension to be
appropriate in order to comply with, or satisfy the
requirements of the Investment Company Act of 1940, as
amended, and in effect from time to time, or any rule,
regulation or order issued thereunder relating to the voting
by the holders of the Extended Duration Bond Fund B Class,
on any Distribution Plan with respect to, as relevant, the
Extended Duration Bond Fund A Class, and in effect from time
to time, and in connection with, or in lieu of, any such
suspension, the Board of Directors may provide holders of
the Extended Duration Bond Fund B Class, with alternative
conversion or exchange rights into other classes of stock of
the Corporation in a manner consistent with the law, rule,
regulation or order giving rise to the possible suspension
of the conversion right.
4. The shares of the Extended Duration Bond Fund C Class and
the Extended Duration Bond Fund Institutional Class shall
not automatically convert into shares of the Extended
Duration Bond Fund A Class of the Extended Duration Bond
Fund series of the Common Stock
-10-
<PAGE>
as do the shares of the Extended Duration Bond Fund B Class
of the Extended Duration Bond Fund series of the Common
Stock.
SEVENTH: The shares of the Extended Duration Bond Fund A
Class, the Extended Duration Bond Fund B Class, the Extended Duration Bond
Fund C Class and the Extended Duration Bond Fund Institutional Class of the
Extended Duration Bond Fund series, have been classified by the Board of
Directors pursuant to authority contained in the Articles of Incorporation of
the Corporation.
EIGHTH: The Corporation is registered as an open-end
management investment company under the Investment Company Act of 1940, as
amended.
NINTH: The total number of shares of Common Stock that the
Corporation has authority to issue has been increased by the Board of
Directors in accordance with Section 2-105(c) of the Maryland General
Corporation Law.
TENTH: These Articles Supplementary shall become effective
immediately upon filing.
IN WITNESS WHEREOF, Delaware Group Income Funds, Inc. has
caused these Articles Supplementary to be signed in its name and on its behalf
by its Vice President and attested by its Assistant Secretary on this 19th day
of August, 1998.
DELAWARE GROUP INCOME FUNDS, INC.
By: /s/ Eric E. Miller
-----------------------------
Eric E. Miller
Vice President
ATTEST:
/s/ Michael T. Pellegrino
-------------------------
Michael T. Pellegrino
Assistant Secretary
-11-
<PAGE>
THE UNDERSIGNED, Vice President of DELAWARE GROUP INCOME
FUNDS, INC., who executed on behalf of the said Corporation the foregoing
Articles Supplementary, of which this instrument is made a part, hereby
acknowledges, in the name of and on behalf of said Corporation, said Article
Supplementary to be the corporate act of said Corporation and further
certifies that, to the best of his knowledge, information and belief, the
matters and facts set forth therein with respect to the authorization and
approval thereof are true in all material respects, under the penalties of
perjury.
/s/ Eric E. Miller
-----------------------------
Eric E. Miller
Vice President
-12-
<PAGE>
EX-99.B8E
Exhibit 24(b)(8)(e)
As of ,1998
VIA UPS OVERNIGHT
The Chase Manhattan Bank
4 Chase MetroTech Center
Brooklyn, New York 11245
Attention: Global Custody Division
Re: Global Custody Agreement, Effective May 1, 1996
between The Chase Manhattan Bank and those registered
investment companies (and on behalf of certain series
thereof), listed on Schedule A attached thereto
("Agreement")
-------------------------------------------------------
Ladies and Gentlemen:
Pursuant to the provisions of Section 1 of the Agreement, the undersigned, on
behalf of Delaware Group Income Funds, Inc. for the benefit of Strategic
Income Fund (the "Series") hereby appoints The Chase Manhattan Bank to provide
custodial services for this Series under and in accordance with the terms of
the Agreement and accordingly, requests that the Series be added to Schedule A
to the Agreement effective 1998. Kindly acknowledge your agreement to provide
such services and to add this Series to Schedule A by signing in the space
provided below.
DELAWARE GROUP INCOME FUNDS, INC.
on behalf of Strategic Income Fund
By:________________________________
David K. Downes
Its: Executive Vice President
Chief Operating Officer
Chief Financial Officer
AGREED:
THE CHASE MANHATTAN BANK
By:_____________________
Its:____________________
<PAGE>
EX-99.B10
Exhibit 24(b)(10)
Law Offices
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
September 23, 1998
Delaware Group Income Funds, Inc.
1818 Market Street
Philadelphia, PA 19103
Re: Legal Opinion-Securities Act of 1933
------------------------------------
Ladies and Gentlemen:
We have examined the Articles of Incorporation, as amended and
supplemented (the "Articles") of Delaware Group Income Funds, Inc. (the "Fund"),
a series corporation organized under Maryland law on March 4, 1983, the By-Laws
of the Fund, and its proposed form of Share Certificates (if any), all as
amended to date, and the various pertinent corporate proceedings we deem
material. We have also examined the Notification of Registration and the
Registration Statements filed under the Investment Company Act of 1940 (the
"Investment Company Act") and the Securities Act of 1933 (the "Securities Act"),
all as amended to date, as well as other items we deem material to this opinion.
The Fund is authorized by the Articles to issue one billion
four hundred million (1,400,000,000) shares of common stock at a par value of
$1.00 and currently issues shares of the Delchester Fund, the High-Yield
Opportunities Fund, the Strategic Income Fund, the Corporate Bond Fund and the
Extended Duration Bond Fund. The Articles also empower the Board to designate
any additional series or classes and allocate shares to such series or classes.
The Fund has filed with the U.S. Securities and Exchange
Commission, a registration statement under the Securities Act, which
registration statement is deemed to register an indefinite number of shares of
the Fund pursuant to the provisions of Section 24(f) of the Investment Company
Act. You have further advised us that the Fund has filed, and each year
hereafter will timely file, a Notice pursuant to Rule 24f-2 under the Investment
Company Act perfecting the registration of the shares sold by the Fund during
each fiscal year during which such registration of an indefinite number of
shares remains in effect.
You have also informed us that the shares of the Fund have
been, and will continue to be, sold in accordance with the Fund's usual method
of distributing its registered shares, under which prospectuses are made
available for delivery to offerees and purchasers of such shares in accordance
with Section 5(b) of the Securities Act.
<PAGE>
Based upon the foregoing information and examination, so long
as the Fund remains a valid and subsisting entity under the laws of its state of
organization, and the registration of an indefinite number of shares of the Fund
remains effective, the authorized shares of the Fund when issued for the
consideration set by the Board of Directors pursuant to the Articles, and
subject to compliance with Rule 24f-2, will be legally outstanding, fully-paid,
and non-assessable shares, and the holders of such shares will have all the
rights provided for with respect to such holding by the Articles and the laws of
the State of Maryland.
We hereby consent to the use of this opinion, in lieu of any
other, as an exhibit to the Registration Statement of the Fund, along with any
amendments thereto, covering the registration of the shares of the Fund under
the Securities Act and the applications, registration statements or notice
filings, and amendments thereto, filed in accordance with the securities laws of
the several states in which shares of the Fund are offered, and we further
consent to reference in the registration statement of the Fund to the fact that
this opinion concerning the legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/ Bruce G. Leto
-------------
Bruce G. Leto
<PAGE>
EX-99.B11
Exhibit 24(b)(11)
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectuses and "Financial Statements" in the Statement of
Additional Information and to the incorporation by reference in this
Post-Effective Amendment No. 60 to the Registration Statement (Form N-1A) (No.
2-37707) of Delaware Group Income Funds, Inc. of our report dated September 4,
1998 included in the 1998 Annual Report to shareholders.
/s/Ernst & Young LLP
- ---------------------
Ernst & Young LLP
Philadelphia, Pennsylvania
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000027825
<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 011
<NAME> DELCHESTER FUND FUND A CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,499,559,329
<INVESTMENTS-AT-VALUE> 1,516,224,164
<RECEIVABLES> 26,260,789
<ASSETS-OTHER> 4,178,579
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,546,663,532
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,445,877
<TOTAL-LIABILITIES> 5,445,877
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,667,891,057
<SHARES-COMMON-STOCK> 159,491,210
<SHARES-COMMON-PRIOR> 156,443,338
<ACCUMULATED-NII-CURRENT> 2,464,142
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (145,802,379)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,664,835
<NET-ASSETS> 1,060,135,783
<DIVIDEND-INCOME> 4,554,186
<INTEREST-INCOME> 142,905,106
<OTHER-INCOME> 0
<EXPENSES-NET> 17,862,610
<NET-INVESTMENT-INCOME> 129,596,682
<REALIZED-GAINS-CURRENT> 45,654,625
<APPREC-INCREASE-CURRENT> (33,736,187)
<NET-CHANGE-FROM-OPS> 141,515,120
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 94,068,758
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29,471,425
<NUMBER-OF-SHARES-REDEEMED> 33,418,788
<SHARES-REINVESTED> 6,683,860
<NET-CHANGE-IN-ASSETS> 174,232,085
<ACCUMULATED-NII-PRIOR> 335,666
<ACCUMULATED-GAINS-PRIOR> (168,423,333)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 8,245,496
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 17,862,610
<AVERAGE-NET-ASSETS> 1,043,627,746
<PER-SHARE-NAV-BEGIN> 6.57
<PER-SHARE-NII> .608
<PER-SHARE-GAIN-APPREC> .070
<PER-SHARE-DIVIDEND> .000
<PER-SHARE-DISTRIBUTIONS> .598
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.650
<EXPENSE-RATIO> 1.060
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000027825
<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 012
<NAME> DELCHESTER FUND FUND B CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 1,499,559,329
<INVESTMENTS-AT-VALUE> 1,516,224,164
<RECEIVABLES> 26,260,789
<ASSETS-OTHER> 4,178,579
<OTHER-ITEMS-ASSETS> 0
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<SERIES>
<NUMBER> 014
<NAME> DELCHESTER FUND FUND INSTITUTIONAL CLASS
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<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 021
<NAME> STRATEGIC INCOME FUND A CLASS
<S> <C>
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<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 022
<NAME> STRATEGIC INCOME FUND B CLASS
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<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 023
<NAME> STRATEGIC INCOME FUND C CLASS
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<CIK> 0000027825
<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 024
<NAME> STRATEGIC INCOME FUND INSTITUTIONAL CLASS
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<TABLE> <S> <C>
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<CIK> 0000027825
<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 031
<NAME> HIGH YIELD OPPORTUNITIES FUND A CLASS
<S> <C>
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<TABLE> <S> <C>
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<CIK> 0000027825
<NAME> DELAWARE GROUP INCOME FUNDS, INC.
<SERIES>
<NUMBER> 032
<NAME> HIGH YIELD OPPORTUNITIES FUND B CLASS
<S> <C>
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