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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
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DELAWARE GROUP INCOME FUNDS, INC.
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DELCHESTER FUND
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STRATEGIC INCOME FUND
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HIGH-YIELD OPPORTUNITIES FUND
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PART B
STATEMENT OF
ADDITIONAL INFORMATION
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SEPTEMBER 29, 1998
DELAWARE(SM)
INVESTMENTS
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PART B--STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 29, 1998
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DELAWARE GROUP INCOME FUNDS, INC.
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1818 Market Street
Philadelphia, PA 19103
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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
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TABLE OF CONTENTS
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Cover Page
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Investment Objectives and Policies
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Performance Information
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Trading Practices and Brokerage
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Purchasing Shares
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Investment Plans
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Determining Offering Price and Net Asset Value
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Redemption and Repurchase
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Dividends and Realized Securities Profits Distributions
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Taxes
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Investment Management Agreements
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Officers and Directors
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Exchange Privilege
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General Information
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Financial Statements
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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
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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
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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
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<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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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
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<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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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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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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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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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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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 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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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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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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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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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 the 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 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
-22-
<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% 11.00%
3 years
ended
7/31/98 10.27% 12.05% 12.33%
5 years
ended
7/31/98 8.11% 9.16% 9.43%
10 years
ended
7/31/98 9.64% 10.17% 10.46%
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% 10.01%
- ----------------
(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.
-23-
<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.
-24-
<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 8.91% 9.91%
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
2/17/98(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.
-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
2/17/98(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.
-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 and 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 8.91% 9.91%
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%
1 year
ended
7/31/98 4.35% 5.31%
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.
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<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%.
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<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.
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<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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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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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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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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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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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.
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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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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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 family 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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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.
-84-
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of Income Funds, Inc. are managed under the
direction of its Board of Directors.
Certain officers and directors of Income Funds, Inc. hold identical
positions in each of the other funds in the Delaware 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>
-85-
<PAGE>
<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.
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 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 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.
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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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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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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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