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Delaware Investments includes funds with a wide DELAWARE GROUP INCOME FUNDS
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 DELAWARE DELCHESTER FUND
portfolio that fits their personal financial goals. For DELAWARE STRATEGIC INCOME FUND
more information, shareholders of the Funds' Classes DELAWARE HIGH-YIELD OPPORTUNITIES FUND
should contact their financial adviser or call Delaware DELAWARE CORPORATE BOND FUND
Investments at 800-523-1918 and shareholders of the DELAWARE EXTENDED DURATION BOND FUND
Institutional Classes should contact Delaware Investments ---------------------------------------------------------------
at 800-510-4015.
DELAWARE GROUP INCOME FUNDS
INVESTMENT MANAGER ---------------------------------------------------------------
Delaware Management Company
One Commerce Square
Philadelphia, PA 19103
SUB-ADVISER
Delaware Strategic Income Fund:
Delaware International Advisers Ltd.
Third Floor
80 Cheapside
London, England EC2V 6EE
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P. PART B
1818 Market Street
Philadelphia, PA 19103 STATEMENT OF
ADDITIONAL INFORMATION
SHAREHOLDER SERVICING, ---------------------------------------------------------------
DIVIDEND DISBURSING,
ACCOUNTING SERVICES SEPTEMBER 29, 1999
AND TRANSFER AGENT (as revised November 18, 1999)
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
[GRAPHIC OMITTED]
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STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 29, 1999
(as revised November 18, 1999)
DELAWARE DELCHESTER FUND
DELAWARE STRATEGIC INCOME FUND
DELAWARE HIGH-YIELD OPPORTUNITIES FUND
DELWARE CORPORATE BOND FUND
DELWARE EXTENDED DURATION BOND FUND
1818 Market Street, Philadelphia, PA 19103
For Prospectus, Performance and Information on Existing Accounts of
Class A Shares, Class B Shares and Class C Shares:
Nationwide 800-523-1918
For more information about Institutional Classes: 800-510-4015
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
Delaware Group Income Funds ("Income Funds"), a Delaware business
trust, is a professionally-managed mutual fund of the series type which
currently offers five series of shares: Delaware Delchester Fund ("Delchester
Fund"), Delaware Strategic Income Fund ("Strategic Income Fund"), Delaware
High-Yield Opportunities Fund ("High-Yield Opportunities Fund"), Delaware
Corporate Bond Fund ("Corporate Bond Fund") and Delaware Extended Duration Bond
Fund ("Extended Duration Bond Fund") (individually, a "Fund", and collectively,
the "Funds"). Each Fund offers three retail classes: Class A Shares, Class B
Shares and Class C Shares (individually, a "Class" and collectively, the "Fund
Classes"). Each Fund also offers an institutional class (collectively, the
"Institutional Classes").
This Statement of Additional Information ("Part B" of the registration
statement) supplements the information contained in the current Prospectuses for
the Funds September 29, 1999, as they may be amended from time to time. Part B
should be read in conjunction with the Class' Prospectuses. Part B is not itself
a prospectus but is, in its entirety, incorporated by reference into each Class'
Prospectus. A prospectus may be obtained by writing or calling your investment
dealer or by contacting each Fund's national distributor, Delaware Distributors,
L.P. (the "Distributor"), at the above address or by calling the above phone
numbers. The Funds' financial statements, the notes relating thereto, the
financial highlights and the report of independent auditors are incorporated by
reference from each Fund's Annual Report into this Part B. The Annual Reports
will accompany any request for Part B. The Annual Reports can be obtained,
without charge, by calling 800-523-1918.
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TABLE OF CONTENTS
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Investment Objectives and Policies 2 Redemption and Exchange 56
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Performance Information 23 Dividends and Distributions 64
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Trading Practices and Brokerage 31 Taxes 65
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Purchasing Shares 33 Investment Management Agreements and Sub-Advisory 67
Agreement
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Retirement Plans 50 Officers and Trustees 70
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Investment Plans 47 General Information 86
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Determining Offering Price and Net Asset Value 55 Appendix A -- Ratings 91
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Financial Statements 101
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INVESTMENT OBJECTIVES AND POLICIES
Investment Restrictions
Fundamental Investment Restrictions--Each 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 the Fund, or 67% of the voting securities of
that 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 a Fund purchases securities.
A Fund may not:
1. Make investments that will result in the concentration (as that term
may be defined in the Investment Company Act of 1940 (the "Act"), any rule or
order thereunder, or U.S. Securities and Exchange Commission ("SEC") staff
interpretation thereof) of its investments in the securities of issuers
primarily engaged in the same industry, provided that this restriction does not
limit a Fund from investing in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or in tax-exempt securities or
certificates of deposit.
2. Borrow money or issue senior securities, except as the 1940 Act, any
rule or order thereunder, or SEC staff interpretation thereof, may permit.
3. Underwrite the securities of other issuers, except that a Fund may
engage in transactions involving the acquisition, disposition or resale of its
portfolio securities, under circumstances where it may be considered to be an
underwriter under the Securities Act of 1933 (the "1933 Act").
4. Purchase or sell real estate, unless acquired as a result of
ownership of securities or other instruments and provided that this restriction
does not prevent a Fund from investing in issuers which invest, deal or
otherwise engage in transactions in real estate or interests therein, or
investing in securities that are secured by real estate or interests therein.
5. Purchase or sell physical commodities, unless acquired as a result
of ownership of securities or other instruments and provided that this
restriction does not prevent a Fund from engaging in transactions involving
futures contracts and options thereon or investing in securities that are
secured by physical commodities.
6. Make loans, provided that this restriction does not prevent a Fund
from purchasing debt obligations, entering into repurchase agreements, loaning
its assets to broker/dealers or institutional investors and investing in loans,
including assignments and participation interests.
Non-Fundamental Investment Restrictions--In addition to the fundamental
policies and investment restrictions described above, and the various general
investment policies described in the Prospectuses, each Fund will be subject to
the following investment restrictions, which are considered non-fundamental and
may be changed by the Board of Trustees without shareholder approval.
<PAGE>
1. Each Fund is permitted to invest in other investment companies,
including open-end, closed-end or unregistered investment companies, either
within the percentage limits set forth in the 1940 Act, any rule or order
thereunder, or SEC staff interpretation thereof, or without regard to percentage
limits in connection with a merger, reorganization, consolidation or other
similar transaction. However, a Fund may not operate as a "fund of funds" which
invests primarily in the shares of other investment companies as permitted by
Section 12(d)(1)(F) or (G) of the 1940 Act, if its own shares are utilized as
investments by such a "fund of funds."
2. Neither Fund may invest more than 15% of its net assets in
securities which it can not sell or dispose of in the ordinary course of
business within seven days at approximately the value at which a Fund has valued
the investment.
Following are additional non-fundamental investment restrictions for the Funds:
Delchester Fund
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,
or an officer, director or partner of the Delaware Management Company, (the
"Manager") if, to the knowledge of the Fund, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares of the company, and in the
aggregate more than 5% thereof.
4. Delchester Fund will not invest in securities of other investment
companies.
5. Delchester Fund will not make any investment in real estate. This
restriction does not preclude the Fund's purchase of securities issued by real
estate investment trusts.
6. Delchester Fund will not sell short any security or property.
7. Delchester Fund will not buy or sell commodities or commodity
contracts.
8. Delchester Fund will not borrow money in excess of 10% of the value
of its assets and then only as a temporary measure for extraordinary or
emergency purposes. Any borrowing will be done from a bank and to the extent
that such borrowing exceeds 5% of the value of the Fund's assets, asset coverage
of at least 300% is required. In the event that such asset coverage shall at any
time fall below 300%, the Fund shall, within three days thereafter (not
including Sundays and holidays) or such longer period as the SEC may prescribe
by rules and regulations, reduce the amount of its borrowings to an extent that
the asset coverage of such borrowings shall be at least 300%. The Fund shall not
issue senior securities as defined in the 1940 Act, except for notes to banks.
9. Delchester Fund will not make loans. However, (i) the purchase of a
portion of an issue of publicly distributed bonds, debentures or other
securities, or of other securities authorized to be purchased by the Fund's
investment policies, whether or not the purchase was made upon the original
issuance of the securities, and the entry into "repurchase agreements" are not
to be considered the making of a loan by the Fund; and (ii) the Fund may loan up
to 25% of its assets to qualified broker/dealers or institutional investors for
their use relating to short sales and other security transactions.
<PAGE>
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 1933 Act.
12. No long or short positions on shares of the Fund may be taken by
Income Funds's officers, trustees 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.
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.
Strategic Income Fund
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.
<PAGE>
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.
9. Strategic Income Fund will not invest for the purpose of acquiring
control of any company.
10. 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 1940 Act at the time of the investment.
11. 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 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.
12. 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
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 1940 Act, except for notes to banks.
6. High-Yield Opportunities Fund will not make loans. However, (i) the
purchase of a portion of an issue of publicly distributed bonds, debentures or
other securities, or of other securities authorized to be purchased by the
Fund's investment policies, whether or not the purchase was made upon the
original issuance of the securities, and the entry into "repurchase agreements"
are not to be considered the making of a loan by the Fund; and (ii) the Fund may
loan securities to qualified broker/dealers or institutional investors for their
use relating to short sales and other security transactions.
<PAGE>
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 1933 Act.
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.
9. High-Yield Opportunities Fund will not invest for the purpose of
acquiring control of any company.
10. 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 1940 Act at the time of the investment.
11. High-Yield Opportunities Fund will not write, purchase or sell
options, puts, calls or combinations thereof with respect to securities.
12. High-Yield Opportunities Fund will not enter into futures contracts
or options thereon.
13. 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 or of the Manager if or so long as the
trustees and officers of Income Funds and of the Manager together own
beneficially more than 5% of any class of securities of such issuer.
14. High-Yield Opportunities Fund will not invest in interests in oil,
gas and other mineral leases or other mineral exploration or development
programs.
15. 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.
Delchester Fund
In investing for income and safety of principal, Delchester Fund's
emphasis in selection will be on securities having a liberal and consistent
yield and those tending to reduce the risk of market fluctuations. The types of
securities in which Delchester Fund invests are subject to price fluctuations
particularly due to changes in interest rates and economic conditions. The
Manager 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.
<PAGE>
As a matter of practice, Delaware Delchester Fund has consistently
invested more than 80% of its assets in such securities. With respect to the
remaining assets, if any, that Delaware 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
The Manager will seek to achieve this objective by allocating the
Fund's investments principally among the following three sectors of the
fixed-income securities markets:
(1) a High-Yield Sector, consisting of high-yielding, lower-rated
or unrated fixed-income securities issued by U.S. companies;
(2) an Investment Grade Sector, consisting of investment grade
debt obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or by U.S. companies; and
(3) an International Sector, consisting of obligations of foreign
governments, their agencies and instrumentalities, and other fixed-income
securities of issuers in foreign countries and denominated in foreign
currencies.
The Manager will determine the amount of assets of the Fund that will
be allocated to each of the three sectors in which the Fund will invest, based
on its analysis of economic and market conditions and its assessment of the
returns and potential for appreciation that can be achieved from investment in
each of the three sectors. The Manager will periodically reallocate the Fund's
assets as it deems necessary, and as little as 20% and as much as 60% of the
Fund's assets among sectors may be invested in each fixed-income sector. In
addition, the Fund may invest up to 10% of its assets in U.S. equity securities.
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. The Manager will seek to achieve High-Yield
Opportunities Fund's objective by investing at least 65% of the Fund's assets at
time of purchase in corporate bonds rated BB or lower by S&P or Ba or lower by
Moody's or similarly rated by other rating agencies, and in unrated bonds judged
to be of comparable quality by the Manager. Unrated bonds may be more
speculative in nature than rated bonds.
The Fund may also invest in securities of, or guaranteed by, the U.S.
and foreign governments, their agencies or instrumentalities and commercial
paper of companies having, at the time of purchase, an issue of outstanding debt
securities rated as described above or commercial paper rated A-1 or A-2 by S&P
or rated P-1 or P-2 by Moody's or similarly rated by other rating agencies, and
in unrated paper judged to be of comparable quality by the Manager.
Corporate Bond Fund and Extended Duration Bond Fund
The types of securities in which each Fund invests are subject to price
fluctuations particularly due to changes in interest rates and economic
conditions. The Manager will seek to achieve each Fund's objective by investing
in investment grade corporate bonds. Each Fund may also invest in corporate
bonds rated BB by S&P or Ba by Moody's or similarly rated by other rating
agencies, and in unrated bonds judged to be of comparable quality by the
Manager. Unrated bonds may be more speculative in nature than rated bonds.
<PAGE>
Each 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 this Part B describes the ratings of S&P and
Moody's.
Duration
Most debt obligations provide interest (coupon) payments in addition to
a final (par) payment at maturity. Some obligations also have call provisions.
Depending on the relative magnitude of these payments and the nature of the call
provisions, the market values of debt obligations may respond differently to
changes in the level and structure of interest rates. Traditionally, a debt
security's term-to-maturity has been used as a proxy for the sensitivity of the
security's price to changes in interest rates (which is the interest rate risk
or volatility of the security). However, term-to-maturity measures only the time
until a debt security provides its final payment, taking no account of the
pattern of the security's payments prior to maturity.
Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept of
term-to-maturity. Duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Duration is one of
the fundamental tools used by the Manager in the selection of fixed income
securities. Duration is a measure of the expected life of a fixed income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any fixed income security with interest payments
occurring prior to the payment of principal, duration is always less than
maturity. In general, all other factors being the same, the lower the stated or
coupon rate of interest of a fixed income security, the longer the duration of
the security; conversely, the higher the stated or coupon rate of interest of a
fixed income security, the shorter the duration of the security.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Manager will use sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
High-Yield, High Risk Securities
Investing in so-called "high-yield" or "high risk" securities entails
certain risks, including the risk of loss of principal, which may be greater
than the risks involved in investment grade securities, and which should be
considered by investors contemplating an investment in the Funds. Such
securities are sometimes issued by companies whose earnings at the time of
issuance are less than the projected debt service on the high-yield securities.
The risks include the following:
A. Youth and Volatility of the High-Yield Market--Although the market
for high-yield securities has been in existence for many years, including
periods of economic downturns, the high-yield market grew rapidly during the
long economic expansion which took place in the United States during the 1980s.
During that economic expansion, the use of high-yield debt securities to fund
highly leveraged corporate acquisitions and restructurings increased
dramatically. As a result, the high-yield market grew substantially during that
economic expansion. Although experts disagree on the impact recessionary periods
have had and will have on the high-yield market, some analysts believe a
protracted economic downturn would severely disrupt the market for high-yield
securities, would adversely affect the value of outstanding bonds and would
adversely affect the ability of high-yield issuers to repay principal and
interest. Those analysts cite volatility experienced in the high-yield market in
the past as evidence for their position. It is likely that protracted periods of
economic uncertainty would result in increased volatility in the market prices
of high-yield securities, an increase in the number of high-yield bond defaults
and corresponding volatility in a Fund's net asset value.
<PAGE>
B. Liquidity and Valuation--The secondary market for high-yield
securities is currently dominated by institutional investors, including mutual
funds and certain financial institutions. There is generally no established
retail secondary market for high-yield securities. As a result, the secondary
market for high-yield securities is more limited and less liquid than other
secondary securities markets. The high-yield secondary market is particularly
susceptible to liquidity problems when the institutions which dominate it
temporarily cease buying such securities for regulatory, financial or other
reasons, such as the savings and loan crisis. A less liquid secondary market may
have an adverse effect on a Fund's ability to dispose of particular issues, when
necessary, to meet a Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of the issuer.
In addition, a less liquid secondary market makes it more difficult for a Fund
to obtain precise valuations of the high-yield securities in its portfolio.
During periods involving such liquidity problems, judgment plays a greater role
in valuing high-yield securities than is normally the case. The secondary market
for high-yield securities is also generally considered to be more likely to be
disrupted by adverse publicity and investor perceptions than the more
established secondary securities markets. Privately placed high-yield securities
are particularly susceptible to the liquidity and valuation risks outlined
above.
C. 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 bonds. For example, Congressional legislation limited the
deductibility of interest paid on certain high-yield bonds 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 bonds 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
and could reduce the number of new high-yield securities being issued.
Corporate Bond Fund and Extended Duration Bond Fund will not purchase
securities rated below BB by S&P or Ba by Moody's. These Funds will not invest
more than 20% of its assets in such securities.
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, a 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.
<PAGE>
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.
Foreign and Emerging Markets Securities
Strategic Income Fund, High-Yield Opportunities Fund, Corporate Bond
Fund and Extended Duration Bond Fund may invest in foreign and emerging markets
securities. Investors should recognize that investing in foreign issuers,
including issuers located in emerging market countries, involves certain
considerations which are not typically associated with investing in United
States issuers. Since the stocks of foreign companies are frequently denominated
in foreign currencies, and since Strategic Income Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of Strategic Income Fund permit it
to enter into forward foreign currency exchange contracts in order to hedge the
Fund's holdings and commitments against changes in the level of future currency
rates. Such contracts involve an obligation to purchase or sell a specific
currency at a future date at a price set at the time of the contract.
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 respect to a 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 Strategic Income 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.
<PAGE>
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 these Funds. Payment
of such interest equalization tax, if imposed, would reduce a Fund's rate of
return on its investment. Dividends paid by foreign issuers may be subject to
withholding and other foreign taxes which may decrease the net return on such
investments as compared to dividends paid to the Fund by United States
corporations. Special rules govern the federal income tax treatment of certain
transactions denominated in terms of a currency other than the U.S. dollar or
determined by reference to the value of one or more currencies other than the
U.S. dollar. The types of transactions covered by the special rules generally
include the following: (i) the acquisition of, or becoming the obligor under, a
bond or other debt instrument (including, to the extent provided in Treasury
Regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option and similar financial instruments other than
any "regulated futures contract" or "nonequity option" marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules, if they are or would be treated as
sold for their fair market value at year-end under the marking to market rules
applicable to other futures contracts, unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. Certain transactions subject to the special currency rules
that are part of a "section 988 hedging transaction" (as defined in the Internal
Revenue Code of 1986, as amended (the "Code"), and the Treasury Regulations)
will be integrated and treated as a single transaction or otherwise treated
consistently for purposes of the Code. The income tax effects of integrating and
treating a transaction as a single transaction are generally to create a
synthetic debt instrument that is subject to the original discount provisions.
It is anticipated that some of the non-U.S. dollar denominated investments and
foreign currency contracts the Funds 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 the Funds invest. Although these restrictions may in the
future make it undesirable to invest in emerging countries, a Fund's manager or
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. Delaware International Advisers Ltd.,
the Fund's sub-adviser ("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 exchange 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.
<PAGE>
Strategic Income Fund's use of forward foreign currency exchange
contracts for hedging and other non-speculative purposes involves certain risks.
For example, a lack of correlation between price changes of a forward contract
and the assets being hedged could render Strategic Income Fund's hedging
strategy unsuccessful and could result in losses. The same results could occur
if movements of foreign currencies do not correlate as expected by the
Sub-Adviser at a time when the Fund is using a hedging instrument denominated in
one foreign currency to protect the value of a security denominated in a second
foreign currency against changes caused by fluctuations in the exchange rate for
the dollar and the second currency. If the direction of securities prices,
interest rates or foreign currency prices is incorrectly predicted, Strategic
Income Fund will be in a worse position than if such transactions had not been
entered into. In addition, since there can be no assurance that a liquid
secondary market will exist for any contract purchased or sold, the Fund may be
required to maintain a position until exercise or expiration, which could result
in losses. Further, forward contracts entail particular risks related to
conditions affecting the underlying currency. Over-the-counter transactions in
forward contracts also involve risks arising from the lack of an organized
exchange trading environment.
Successful use by Strategic Income Fund of forward foreign currency
exchange contracts for hedging and other non-speculative purposes is subject to
the Sub-Adviser's ability to predict correctly the direction of movements in
foreign currencies relative to the U.S. dollar. This requires different skills
and techniques than predicting changes in the prices of individual securities.
Convertible Debt and Non-Traditional Equity Securities
From time to time, a portion of Strategic Income Fund's, High-Yield
Opportunities Fund's, Corporate Bond Fund's and Extended Duration Bond 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 High-Yield, High Risk Securities for a further discussion
of these types of investments.
Strategic Income Fund, High-Yield Opportunities and Corporate Bond Fund
and Extended Duration Bond 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.
<PAGE>
Strategic Income Fund, High-Yield Opportunities Fund, Corporate Bond
Fund and Extended Duration Bond 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
Each Fund may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are purchased with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment. The Fund will maintain with its Custodian Bank a
separate account with a segregated portfolio of securities in an amount at least
equal to these commitments. The payment obligation and the interest rates that
will be received are each fixed at the time the Fund enters into the commitment
and no interest accrues to the Fund until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
Borrowing From Banks
Each 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 SEC 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.
Restricted/Illiquid 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. Each Fund will not
purchase illiquid assets if more than 15% of its respective net assets (10% for
Delchester Fund) would then consist of such illiquid securities.
<PAGE>
Illiquid securities, for purposes of this policy, include repurchase
agreements maturing in more than seven days.
Each Fund may invest in restricted securities, including securities
eligible for resale without registration pursuant to Rule 144A ("Rule 144A
Securities") under the 1933 Act. Rule 144A exempts many privately placed and
legally restricted securities from the registration requirements of the 1933 Act
and permits such securities to be freely traded among certain institutional
buyers such as the Funds.
While maintaining oversight, the Board of Trustees has delegated to the
Manager the day-to-day functions of determining whether or not individual Rule
144A Securities are liquid for purposes of a Fund's limitation on investments in
illiquid assets. The Board has instructed the Manager to consider the following
factors in determining the liquidity of a Rule 144A Security: (i) the frequency
of trades and trading volume for the security; (ii) whether at least three
dealers are willing to purchase or sell the security and the number of potential
purchasers; (iii) whether at least two dealers are making a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security which was
previously determined to be liquid is no longer liquid and, as a result, a
Fund's holdings of illiquid securities exceed the Fund's limit on investment in
such securities, the Manager will determine what action shall be taken to ensure
that the Fund continues to adhere to such limitation.
Repurchase Agreements
The Funds are permitted to invest in repurchase agreements, but they
normally so only to invest cash balances. A repurchase agreement is a short-term
investment by which the purchaser acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the purchaser's holding period. Should an
issuer of a repurchase agreement fail to repurchase the underlying security, the
loss to a Fund, if any, would be the difference between the repurchase price and
the market value of the security. Each Fund will limit its investments in
repurchase agreements to those which the Manager, under the guidelines of the
Board of Trustees, determines present minimal credit risks and which are of high
quality. In addition, each Fund must have collateral of at least 102% of the
repurchase price, including the portion representing the Fund's yield under such
agreements, which is monitored on a daily basis.
The funds in the Delaware Investments family have obtained an exemption
from the joint-transaction prohibitions of Section 17(d) of the 1940 Act to
allow the funds jointly to invest cash balances. The Funds may invest cash
balances in a joint repurchase agreement in accordance with the terms of the
Order and subject generally to the conditions described above.
Portfolio Loan Transactions
Each Fund may loan up to 25% of its assets to qualified broker/dealers
or institutional investors for their use relating to short sales or other
security transactions.
It is the understanding of the Manager that the staff of the SEC
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 Trustees
of Income Funds 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 Trustees to vote
the proxy.
<PAGE>
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 Trustees, 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.
Interest Rate and Index Swaps
Strategic Income Fund, Corporate Bond Fund and Extended Duration Bond
Fund may invest in interest rate and index swaps to the extent consistent with
their respective investment objectives and strategies. A Fund will only invest
in swaps in which all the reference rates are related to or derived from
instruments or markets in which the Fund is otherwise eligible to invest, and
subject to the investment limitations on the instruments to which the purchased
reference rate relates.
Swaps are agreements to exchange payment streams over a period of time
with another party, called a counterparty. Each payment stream is based on a
specified rate, which could be a fixed or variable interest rate, the rate of
return on an index, or some other reference rate. The payment streams are
calculated with reference to a hypothetical principal amount, called the
notional principal or the notional amount. For example, in an interest rate swap
one party may agree to pay a fixed interest rate to a counterparty and to
receive in return variable interest rate payments from the counterparty. The
amount that each party pays is calculated by multiplying the fixed and variable
rates, respectively, by the notional amount. The payment streams may thus be
thought of as interest payments on the notional amount. The notional amount does
not actually change hands at any point in the swap transaction; it is used only
to calculate the value of the payment streams.
When two counterparties each wish to swap interest rate payments, they
typically each enter into a separate interest rate swap contract with a
broker/dealer intermediary, who is the counterparty in both transactions, rather
than entering into a swap contract with each other directly. The broker/dealer
intermediary enters into numerous transactions of this sort, and attempts to
mange its portfolio of swaps so as to match and offset its payment receipts and
obligations.
The typical minimum notional amount is $5 million. Variable interest
rates are usually set by reference to the London Inter-Bank Offered Rate
(LIBOR). The typical maximum term of an interest rate swap agreement ranges from
one to twelve years. Index swaps tend to be shorter term, often for one year.
The Manager presently intends to purchase swaps with maturities of six to twelve
months, and in no event greater than two years.
The Funds may also engage in index swaps, also called total return
swaps. In an index swap, a Fund may enter into a contract with a counterparty in
which the counterparty will make payments to the Fund based on the positive
returns of an index, such as a corporate bond index, in return for the Fund
paying to the counterparty a fixed or variable interest rate, as well as paying
to the counterparty any negative returns on the index. In a sense, the Fund is
purchasing exposure to an index in the amount of the notional principal in
return for making interest rate payments on the notional principal. As with
interest rate swaps, the notional principal does not actually change hands at
any point in the transaction. The counterparty, typically an investment bank,
manages its obligations to make total return payments by maintaining an
inventory of the fixed income securities that are included in the index.
Swap transactions provide several benefits to the Funds. Interest rate
swaps may be used as a duration management tool. Duration is a measure of a
bond's interest-rate sensitivity, expressed in terms of years because it is
related to the length of time remaining on the life of a bond. In general, the
longer a bond's duration, the more sensitive the bond's price will be to changes
in interest rates. The average duration of a fund is the weighted average of the
durations of the fund's fixed income securities.
If a Fund wished to shorten the duration of certain of its assets,
longer term assets could be sold and shorter term assets acquired, but these
transactions have potential tax and return differential consequences. By using
an interest rate swap, the Fund could agree to make semi-annual fixed rate
payments and receive semi-annual floating rate LIBOR payments adjusted every six
months. The duration of the floating rate payments received by the fund will now
be six months. In effect, the Fund has reduced the duration of the notional
amount invested from a longer term to six months over the life of the swap
agreement.
<PAGE>
The Funds may also use swaps to gain exposure to specific markets. For
example, suppose bond dealers have particularly low inventories of corporate
bonds, making it difficult for a fixed income fund to increase its exposure to
the corporate bond segment of the market. It is generally not possible to
purchase exchange-traded options on a corporate bond index. A Fund could
replicate exposure to the corporate bond market, however, by engaging in an
index swap in which the Fund gains exposure to a corporate bond index in return
for paying a LIBOR-based floating interest rate.
Other uses of swaps could help permit the Funds to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against an increase in the price of securities a Fund anticipates purchasing at
a later date. Interest rate swaps may also be considered as a substitute for
interest rate futures in many cases where the hedging horizon is longer than the
maturity of the typical futures contract, and may be considered to provide more
liquidity than similar forward contracts, particularly long-term forward
contracts.
The primary risk of swap transactions is the creditworthiness of the
counterparty, since the integrity of the transaction depends on the willingness
and ability of the counterparty to maintain the agreed upon payment stream. This
risk is often referred to as counterparty risk. If there is a default by a
counterparty in a swap transaction, the Fund's potential loss is the net amount
of payments the Fund is contractually entitled to receive for one payment period
(if any - the Fund could be in a net payment position), not the entire notional
amount, which does not change hands in a swap transaction. Swaps do not involve
the delivery of securities or other underlying assets or principal as collateral
for the transaction. A Fund will have contractual remedies pursuant to the swap
agreement but, as with any contractual remedy, there is no guarantee that a Fund
would be successful in pursuing them -- the counterparty may be judgement proof
due to insolvency, for example. The Funds thus assume the risk that they will be
delayed or prevented from obtaining payments owed to them. The standard industry
swap agreements do, however, permit a Fund to terminate a swap agreement (and
thus avoid making additional payments) in the event that a counterparty fails to
make a timely payment to the Fund.
In response to this counterparty risk, several securities firms have
established separately capitalized subsidiaries that have a higher credit
rating, permitting them to enter into swap transactions as a dealer. The Funds
will not be permitted to enter into any swap transaction unless, at the time of
entering into such transaction, the unsecured long-term debt of the actual
counterparty, combined with any credit enhancements, is rated at least A by S&P
or Moody's or is determined to be of equivalent credit quality by the Manager.
In addition, the Manager will closely monitor the ongoing creditworthiness of
swap counterparties in order to minimize the risk of swaps.
In addition to counterparty risk, the use of swaps also involves risks
similar to those associated with ordinary portfolio security transactions. If
the portfolio manager is incorrect in his or her forecast of market values or
interest rates, the investment performance of a Fund which has entered into a
swap transaction could be less favorable than it would have been if this
investment technique were not used. It is important to note, however, that there
is no upper limit on the amount a Fund might theoretically be required to pay in
a swap transaction.
In order to ensure that a Fund will only engage in swap transactions to
the extent consistent with its investment objectives and strategies, a Fund will
only engage in a swap transaction if all of the reference rates used in the swap
are related to or derived from securities, instruments or markets that are
otherwise eligible investments for the Fund. Similarly, the extent to which a
Fund may invest in a swap, as measured by the notional amount, will be subject
to the same limitations as the eligible investments to which the purchased
reference rate relates.
<PAGE>
The Funds will, consistent with industry practice, segregate and
mark-to-market daily cash or other liquid assets having an aggregate market
value at least equal to the net amount of the excess, if any, of the Fund's
payment obligations over its entitled payments with respect to each swap
contract. To the extent that a Fund is obligated by a swap to pay a fixed or
variable interest rate, the Fund may segregate securities that are expected to
generate income sufficient to meet the Fund's net payment obligations.
There is not a well developed secondary market for interest rate or
index swaps. Most interest rate swaps are nonetheless relatively liquid because
they can be sold back to the counterparty/dealer relatively quickly at a
determinable price. Most index swaps, on the other hand, are considered to be
illiquid because the counterparty/dealer will typically not unwind an index swap
prior to its termination (and, not surprisingly, index swaps tend to have much
shorter terms). The Funds will therefore treat all swaps as subject to their
limitation on illiquid investments. For purposes of calculating these percentage
limitations, the Funds will refer to the notional amount of the swap.
Swaps will be priced using fair value pricing. The income provided by a
swap should be qualifying income for purposes of Subchapter M of the Internal
Revenue Code. Swaps should not otherwise result in any significant
diversification or valuation issues under Subchapter M.
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 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.
<PAGE>
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 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.
<PAGE>
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.
U.S. Government Securities
U.S. Treasury securities are backed by the "full faith and credit" of
the United States. Securities issued or guaranteed by federal agencies and U.S.
government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, investors in such securities
look principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment. Agencies which are backed by the full faith and credit of
the United States include the Export-Import Bank, Farmers Home Administration,
Federal Financing Bank, the Federal Housing Administration, the Maritime
Administration, the Small Business Administration, and others. Certain agencies
and instrumentalities, such as the Government National Mortgage Association
("GNMA"), are, in effect, backed by the full faith and credit of the United
States through provisions in their charters that they may make "indefinite and
unlimited" drawings on the Treasury, if needed to service its debt. Debt from
certain other agencies and instrumentalities, including the Federal Home Loan
Bank and Federal National Mortgage Association, are not guaranteed by the United
States, but those institutions are protected by the discretionary authority for
the U.S. Treasury to purchase certain amounts of their securities to assist the
institutions in meeting their debt obligations. Finally, other agencies and
instrumentalities, such as the Farm Credit System, the Tennessee Valley
Authority and the Federal Home Loan Mortgage Corporation, are federally
chartered institutions under U.S. government supervision, but their debt
securities are backed only by the creditworthiness of those institutions, not
the U.S. government.
An instrumentality of a U.S. government agency is a government agency
organized under Federal charter with government supervision. Instrumentalities
issuing or guaranteeing securities include, among others, Federal Home Loan
Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks and the Federal National Mortgage Association.
<PAGE>
The maturities of such securities usually range from three months to
thirty years. While such securities are guaranteed as to principal and interest
by the U.S. government or its instrumentalities, their market values may
fluctuate and are not guaranteed, which may, along with the other securities in
a Fund's portfolio, cause a Class' daily net asset value to fluctuate.
Short-Term Investments
The short-term investments in which the Funds may invest are:
(1) Time deposits, certificates of deposit (including marketable
variable rate certificates of deposit) and bankers' acceptances issued by a U.S.
commercial bank. Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a stated interest rate.
Time deposits maturing in more than seven days will not be purchased by the
Funds, and time deposits maturing from two business days through seven calendar
days will not exceed 15% of the total assets of a Fund. Certificates of deposit
are negotiable short-term obligations issued by commercial banks against funds
deposited in the issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specified market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
The Fund will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion or, in the case of a
bank which does not have total assets of at least $1 billion, the aggregate
investment made in any one such bank is limited to $100,000 and the principal
amount of such investment is insured in full by the Federal Deposit Insurance
Corporation, (ii) it is a member of the Federal Deposit Insurance Corporation,
and (iii) the bank or its securities have received the highest quality rating by
a nationally-recognized statistical rating organization;
(2) Commercial paper with the highest quality rating by a
nationally-recognized statistical rating organization (e.g., A-1 by S&P or
Prime-1 by Moody's) or, if not so rated, of comparable quality as determined by
the Manager;
(3) Short-term corporate obligations with the highest quality rating by
a nationally-recognized statistical rating organization (e.g., AAA by S&P or Aaa
by Moody's) or, if not so rated, of comparable quality as determined by the
Manager;
(4) U.S. government securities (see U.S. Government Securities); and
(5) Repurchase agreements collateralized by securities listed above.
Unseasoned Companies
High-Yield Opportunities Fund, Corporate Bond Fund and Extended
Duration Bond Fund may invest in relatively new or unseasoned companies which
are in their early stages of development, or small companies positioned in new
and emerging industries where the opportunity for rapid growth is expected to be
above average. Securities of unseasoned companies present greater risks than
securities of larger, more established companies. The companies in which a Fund
may invest may have relatively small revenues, limited product lines, and may
have a small share of the market for their products or services. Small companies
may lack depth of management, they may be unable to internally generate funds
necessary for growth or potential development or to generate such funds through
external financing or favorable terms, or they may be developing or marketing
new products or services for which markets are not yet established and may never
become established. Due these and other factors, small companies may suffer
significant losses as well as realize substantial growth, and investments in
such companies tend to be volatile and are therefore speculative.
<PAGE>
Mortgage-Backed Securities
Strategic Income Fund may invest in mortgage-backed securities,
including GNMA certificates. Such securities differ from other fixed-income
securities in that principal is paid back by the borrower over the length of the
loan rather than returned in a lump sum at maturity. When prevailing interest
rates rise, the value of a GNMA security may decrease as do other debt
securities. When prevailing interest rates decline, however, the value of GNMA
securities may not rise on a comparable basis with other debt securities because
of the prepayment feature of GNMA securities. Additionally, if a GNMA
certificate is purchased at a premium above its principal value because its
fixed rate of interest exceeds the prevailing level of yields, the decline in
price to par may result in a loss of the premium in the event of prepayment.
Funds received from prepayments may be reinvested at the prevailing interest
rates which may be lower than the rate of interest that had previously been
earned.
The mortgages backing these securities include conventional 30-year
fixed rate mortgages, graduated payment mortgages and adjustable rate mortgages.
These mortgages may be supported by various types of insurance, may be backed by
GNMA certificates or other mortgage pass-throughs issued or guaranteed by the
U.S. government, its agencies or instrumentalities. However, the guarantees do
not extend to the mortgage-backed securities' value, which is likely to vary
inversely with fluctuations in interest rates. These certificates are in most
cases "pass-through" instruments, through which the holder receives a share of
all interest and principal payments from the mortgages underlying the
certificate. Because the prepayment characteristics of the underlying mortgages
vary, it is not possible to predict accurately the average life or realized
yield of a particular issue of pass-through certificates. During periods of
declining interest rates, prepayment of mortgages underlying mortgage-backed
securities can be expected to accelerate. When the mortgage obligations are
prepaid, the Fund may reinvest the prepaid amounts in securities, the yield of
which reflects interest rates prevailing at the time. Moreover, prepayments of
mortgages which underlie securities purchased at a premium could result in
capital losses.
CMOs and REMICs
CMOs are debt securities issued by U.S. government agencies or by
financial institutions and other mortgage lenders and collateralized by a pool
of mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. To the extent any privately-issued CMOs or
REMICs in which the Fund may invest are considered by the Securities and
Exchange Commission to be investment companies, Strategic Income Fund will limit
its investment in such securities in a manner consistent with the provisions of
the 1940 Act.
Certain CMOs and REMICs may have variable or floating interest rates
and others may be stripped. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which Strategic Income
Fund may invest.
Stripped mortgage securities are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of mortgage assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the "interest-only" class), while the other class will receive
all of the principal (the "principal-only" class). The yield to maturity on an
interest-only class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories.
<PAGE>
Although stripped mortgage securities are purchased and sold by
institutional investors through several investment banking firms acting as
brokers or dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed and, accordingly,
these securities are generally illiquid and to such extent, together with any
other illiquid investments, will not exceed 15% of the Fund's net assets.
The Fund may invest in CMOs and REMICs issued by private entities which
are not collateralized by securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, so-called non-agency
mortgage-backed securities. Investments in these securities may be made only if
the securities (i) are rated at the time of purchase in the four top rating
categories by a nationally-recognized statistical rating organization (e.g., BBB
or better by S&P or Fitch, or Baa or better by Moody's) and (ii) represent
interests in whole-loan mortgages, multi-family mortgages, commercial mortgages
and other mortgage collateral supported by a first mortgage lien on real estate.
Non-agency mortgage-backed securities are subject to the interest rate and
prepayment risks, described above, to which other CMOs and REMICs issued by
private issuers are subject. Non-agency mortgage-backed securities may also be
subject to a greater risk of loss of interest and principal because they are not
collateralized by securities issued or guaranteed by the U.S. government. In
addition, timely information concerning the loans underlying these securities
may not be as readily available and the market for these securities may be less
liquid than other CMOs and REMICs.
Asset-Backed Securities
The asset-backed securities in which Strategic Income Fund may invest
must be rated in the four top rating categories by a nationally recognized
statistical rating organization (e.g., BBB or better by S&P and Fitch, or Baa or
better by Moody's). The receivables underlying asset-backed securities are
typically securitized in either a pass-through or a pay-through structure.
Pass-through securities provide investors with an income stream consisting of
both principal and interest payments in respect of the receivables in the
underlying pool. Pay-through asset-backed securities are debt obligations issued
usually by a special purpose entity, which are collateralized by the various
receivables and in which the payments on the underlying receivables provide the
funds to pay the debt service on the debt obligations issued. The Fund may
invest in these and other types of asset-backed securities structured in this
way that may be developed in the future.
The rate of principal payment on asset-backed securities generally
depends upon the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors such
as changes in interest rates. Therefore, the yield may be difficult to predict
and actual yield to maturity may be more or less than the anticipated yield to
maturity. Due to the shorter maturity of the collateral backing such securities,
there is less of a risk of substantial prepayment than with mortgage-backed
securities. Such asset-backed securities do, however, involve certain risks not
associated with mortgage-backed securities, including the risk that security
interests cannot be adequately or in many cases, ever, established. In addition,
with respect to credit card receivables, a number of state and federal consumer
credit laws give debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the outstanding balance. In the case of automobile
receivables, there is a risk that the holders may not have either a proper or
first security interest in all of the obligations backing such receivables due
to the large number of vehicles involved in a typical issuance and technical
requirements under state laws. Therefore, recoveries on repossessed collateral
may not always be available to support payments on the securities.
Investment Company Securities
Any investments that Strategic Income Fund makes in either closed-end
or open-end investment companies will be limited by the 1940 Act, and would
involve an indirect payment of a portion of the expenses, including advisory
fees, of such other investment companies. Under the 1940 Act's current
limitations, the Fund may not (1) own more than 3% of the voting stock of
another investment company; (2) invest more than 5% of the Fund's total assets
in the shares of any one investment company; nor (3) invest more than 10% of the
Fund's total assets in shares of other investment companies. If the Fund elects
to limit its investment in other investment companies to closed-end investment
companies, the 3% limitation described above is increased to 10%. These
percentage limitations also apply to the Fund's investments in unregistered
investment companies.
<PAGE>
REITs
REITs are pooled investment vehicles which invest primarily in
income-producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination of
equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest
payments. Like investment companies such as Income Funds, REITs are not taxed on
income distributed to shareholders provided they comply with several
requirements in the Code. REITs are subject to substantial cash flow dependency,
defaults by borrowers, self-liquidation, and the risk of failing to qualify for
tax-free pass-through of income under the Code, and/or to maintain exemptions
from the 1940 Act.
Concentration
In applying a Fund's policy on concentration; (i) utility companies
will be divided according to their services, for example, gas, gas transmission,
electric and telephone will each be considered a separate industry; (ii)
financial service companies will be classified according to the end users of
their services, for example, automobile finance, bank finance and diversified
finance will each be considered a separate industry; and (iii) asset backed
securities will be classified according to the underlying assets securing such
securities.
<PAGE>
PERFORMANCE INFORMATION
From time to time, each Fund may state its Classes' total return in
advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year, or life-of-fund periods, as applicable. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC, applicable only to certain redemptions of those shares, will not be
deducted from any computation of total return. See the Prospectus 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.
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;
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
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.
Each Fund may also state total return performance for its Classes in
the form of an average annual return. This average annual return figure will be
computed by taking the sum of a Class' annual returns, then dividing that figure
by the number of years in the overall period indicated. The computation will
reflect the impact of the maximum front-end sales charge or CDSC, if any, paid
on the illustrated investment amount against the first year's return.
The average annual total return (and, as applicable, aggregate total
return) for Class A Shares at offer reflects the maximum front-end sales charge
of 4.75% paid on the purchase of shares. The average annual total return (and,
as applicable, aggregate total return) for Class A Shares at net asset value
(NAV) does not reflect the payment of any front-end sales charge.
Total return shown for the Delchester Fund Institutional Class for the
periods prior to the commencement of operations of such Class is calculated by
taking the performance of Class A Shares and adjusting it to reflect the
elimination of all sales charges and asset based charges.
<PAGE>
The average annual total return (and, as applicable, aggregate total
return) for Class B Shares and Class C Shares including deferred sales charge
reflects the deduction of the applicable CDSC that would have been paid if the
shares were redeemed at July 31, 1999. The average annual total return (and, as
applicable, aggregate total return) for Class B Shares and Class C Shares
excluding deferred sales charge assumes the shares were not redeemed at July 31,
1999 and therefore does not reflect the deduction of a CDSC.
Securities prices fluctuated during the periods covered and past
results should not be considered as representative of future performance.
<PAGE>
<TABLE>
<CAPTION>
Average Annual Total Return
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A (1) Class A (1) Institutional including excluding including excluding
at offer(2) at NAV Class CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception (Inception
Delchester Fund 8/20/70) 8/20/70) 6/1/92) 5/2/94) 5/2/94) 11/29/95) 11/29/95)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year ended 7/31/99 (12.02%) (7.65%) (7.42%) (11.67%) (8.34%) (9.18%) (8.34%)
- ------------------------------------------------------------------------------------------------------------------------------------
3 years ended 7/31//99 4.59% 6.32% 6.58% 4.71% 5.53% 5.53% 5.53%
- ------------------------------------------------------------------------------------------------------------------------------------
5 years ended 7/31/99 6.07% 7.10% 7.36% 6.03% 6.30% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
10 years ended 7/31/99 7.86% 8.39% 8.66% N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
15 years ended 7/31//99 10.13% 10.50% 10.70% N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Life of Fund 9.06% 9.25% 9.36% 5.54% 5.67% 5.95% 5.95%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception (Inception
Strategic Income Fund(2) 10/1/96) 10/1/96) 10/1/96) 10/1/96) 10/1/96) 0/1/96) 10/1/96)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year ended 7/31/99 (7.34%) (2.77%) (2.46%) (6.87%) (3.31%) (4.20%) (3.32%)
- ------------------------------------------------------------------------------------------------------------------------------------
Life of Fund 2.89% 4.65% 4.90% 3.05% 3.93% 3.93% 3.93%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
High-Yield (Inception (Inception (Inception (Inception (Inception (Inception (Inception
Opportunities Fund(2) 12/30/96) 12/30/96) 12/30/96) 2/17/98) 2/17/98) 2/17/98) 2/17/98)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year ended 7/31/99 (8.88%) (4.26%) (3.96%) (8.37%) (4.91%) (5.78%) (4.91%)
- ------------------------------------------------------------------------------------------------------------------------------------
Life of Fund 6.23% 8.21% 8.39% (3.50%) (1.06%) (1.08%) (1.08%)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Aggregate Total Return
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception (Inception
Corporate Bond Fund(2) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund (5.01%) (0.34%) (0.14%) (4.72%) (0.88%) (1.84%) (0.88%)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception (Inception
Extended Duration 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98)
Bond Fund(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Life of Fund (7.24%) (2.68%) (2.52%) (7.03%) (3.28%) (4.09%) (3.15%)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Performance figures for periods after May 31, 1992 reflect applicable Rule
12b-1 distribution expenses. Future performance will be affected by such
expenses.
(2) Total return reflects voluntary expense limitations in effect for the Fund.
Returns would be lower without the caps. See Investment Management
Agreements and Sub-Advisory Agreement
<PAGE>
Each Fund may also quote its current yield for each Class 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;
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 of
each Class, based on specified 30-day periods identified in advertising by the
Fund. The yields of Class A Shares, Class B Shares and Class C Shares of each
Fund as of July 31, 1999 using this formula were as follows:
<TABLE>
<CAPTION>
- ------------------------------------ --------------------- --------------------- --------------------- ------------------------
Class A Shares Class B Shares Class C Shares Institutional Class
Shares
- ------------------------------------ --------------------- --------------------- --------------------- ------------------------
<S> <C> <C> <C> <C>
Delchester Fund 9.78% 9.53% 9.53% 10.57%
- ------------------------------------ --------------------- --------------------- --------------------- ------------------------
Strategic Income Fund 8.32% 7.97% 7.97% 9.02%
- ------------------------------------ --------------------- --------------------- --------------------- ------------------------
High-Yield Opportunities Fund 8.01% 7.70% 7.70% 8.73%
- ------------------------------------ --------------------- --------------------- --------------------- ------------------------
Corporate Bond Fund 6.34% 5.89% 5.89% 6.91%
- ------------------------------------ --------------------- --------------------- --------------------- ------------------------
Extended Duration Bond Fund 6.82% 6.43% 6.41% 7.43%
- ------------------------------------ --------------------- --------------------- --------------------- ------------------------
</TABLE>
Yield calculations assume the maximum front-end sales charge, if any,
and does not reflect the deduction of any CDSC or Limited CDSC. The yields for
Strategic Income Fund, High-Yield Opportunities Fund, Corporate Bond Fund and
Extended Duration Bond Fund reflect the expense limitations in effect for the
Fund. Actual yield 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 the Fund in the future.
Investors should note that the income earned and dividends paid by a
Fund will vary with the fluctuation of interest rates and performance of the
portfolio. The net asset value of a Fund may change. Unlike money market funds,
each Fund invests in longer-term securities that fluctuate in value and do so in
a manner inversely correlated with changing interest rates. A Fund's net asset
value will tend to rise when interest rates fall. Conversely, a Fund's net asset
value 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 in a Fund will vary from day to day and investors
should consider the volatility of a Fund's net asset value as well as its yield
before making a decision to invest.
Total return performance of each Class will reflect the appreciation or
depreciation of principal, reinvestment of income and any capital gains
<PAGE>
distributions paid during any indicated period, and the impact of the maximum
front-end sales charge or CDSC, if any, paid on the illustrated investment
amount, annualized. The results will not reflect any income taxes, if
applicable, payable by shareholders on the reinvested distributions included in
the calculations. As securities prices fluctuate, an illustration of past
performance should not be considered as representative of future results.
From time to time, each Fund may also quote its Classes' actual total
return and/or yield performance, dividend results and other performance
information 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 a 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. A 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.
A Fund 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 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.
<PAGE>
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. A Fund 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 stocks,
and/or bonds, treasury bills and shares of that 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 planning 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 a Fund and may illustrate
how to find the listings of that Fund in newspapers and periodicals. Materials
may also include discussions of other Fund products and services.
Each Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, a Fund 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. Each 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.
The following tables present examples, for purposes of illustration
only, of cumulative total return performance for each Class of the Funds through
July 31, 1999. Comparative information on the Consumer Price Index is also
included. For these purposes, the calculations reflect maximum sales charges, if
any, and assume the reinvestment of any capital gains distributions and income
dividends paid during the indicated periods. The performance does not reflect
any income taxes payable by shareholders on the reinvested distributions
included in the calculations. The performance of Class A Shares as shown below,
reflects maximum front-end sales charge paid on the purchase of shares but may
also be shown without reflecting the impact on any front-end sales charge. Total
return shown for the Delchester Fund Institutional Class for the periods prior
to the commencement of operations of such Class is calculated by taking the
performance of Class A Shares and adjusting it to reflect the elimination of all
sales charges and asset based charges. The performance of Class B Shares and
Class C Shares is calculated both with the applicable CDSC included and
excluded. The net asset value of a Class fluctuates so shares, when redeemed,
may be worth more or less than the original investment, and a Class' results
should not be considered as representative of future performance.
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Return
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Class B Class B Class C Class C
Class A (1) Class A (1) Institutional including excluding including excluding
at offer(2) at NAV Class CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception (Inception
Delchester Fund 8/20/70) 8/20/70) 6/1/92) 5/2/94) 5/2/94) 11/29/95) 11/29/95)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3 months ended 7/31/99 (8.65%) (4.02%) (3.96%) (7.94%) (4.20%) (5.14%) (4.20%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
6 months ended 7/31/99 (5.61%) (0.96%) (0.83%) (5.09%) (1.32%) (2.20%) (1.32%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
9 months ended 7/31/99 (1.32%) 3.64% 3.84% (0.77%) 3.07% 2.11% (3.07%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
1 year ended 7/31/99 (12.02%) (7.65%) (7.42%) (11.67%) (8.34%) (9.18%) (8.34%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
3 years ended 7/31/99 14.41% 20.18% 21.08% 14.82% 17.53% 17.52% 17.52%
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
5 years ended 7/31/99 34.25% 40.91% 42.66% 34.03% 35.75% N/A N/A
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
10 years ended 7/31/99 113.18% 123.72% 129.41% N/A N/A N/A N/A
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
15 years ended 7/31/99 325.43% 346.86% 359.59% N/A N/A N/A N/A
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Life of Fund 1,132.61% 1,194.58% 1,231.45% 32.73% 33.55% 23.63% 23.63%
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception (Inception
Strategic Income Fund(2) 10/1/96) 10/1/96) 10/1/96) 10/1/96) 10/1/96) 10/1/96) 10/1/96)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
3 months ended 7/31/99 (7.27%) (2.73%) (2.65%) (6.73%) (2.92%) (3.97%) (2.92%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
6 months ended 7/31/99 (7.34%) (2.73%) (2.57%) (6.82%) (3.10%) (4.03%) (3.10%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
9 months ended 7/31/99 (7.73%) (3.08%) (2.84%) (7.25%) (3.62%) (4.53%) (3.62%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
1 year ended 7/31/99 (7.34%) (2.77%) (2.46%) (6.87%) (3.31%) (4.20%) (3.32%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Life of Fund 8.41% 13.73% 14.50% 8.89% 11.54% 11.53% 11.53%
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total
Return
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
High-Yield (Inception (Inception (Inception (Inception (Inception (Inception (Inception
Opportunities Fund(2) 12/30/96) 12/30/96) 12/30/96) 2/17/98) 2/17/98) 2/17/98) 3/17/98)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3 months ended 7/31/99 (6.10%) (1.49%) (1.41%) (5.52%) (1.66%) (2.62%) (1.66%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
6 months ended 7/31/99 (4.55%) 0.12% 0.28% (4.07%) (0.21%) (1.17%) (0.21%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
9 months ended 7/31/99 (3.24%) (1.65%) (1.89%) (2.70%) 1.14% 0.18% 1.14%
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
1 year ended 7/31/99 (8.88%) (4.26%) (3.96%) (8.37%) (4.91%) (5.78%) (4.91%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Life of Fund 16.97% 22.71% 23.26% (5.03%) (1.54%) (1.56%) (1.56%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
(Inception (Inception (Inception (Inception (Inception (Inception (Inception
Corporate Bond Fund(2) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
3 months ended 7/31/99 (7.06%) (2.49%) (2.43%) (6.52%) (2.68%) (3.64%) (2.68%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
6 months ended 7/31/99 (8.88%) (4.40%) (4.28%) (8.47%) (4.76%) (5.68%) (4.75%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
9 months ended 7/31/99 (7.10%) (2.47%) (2.28%) (6.76%) (3.00%) (3.94%) (3.00%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Life of Fund (5.01%) (0.34%) (0.14%) (4.72%) (0.88%) (1.84%) (0.88%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Class B Class B Class C Class C
Class A Class A Institutional including excluding including excluding
at offer at NAV Class CDSC CDSC CDSC CDSC
Extended Duration (Inception (Inception (Inception (Inception (Inception (Inception (Inception
Bond Fund(2) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98) 9/15/98)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
3 months ended 7/31/99 (8.31%) (3.76%) (3.71%) (7.74%) (3.95%) (4.90%) (3.95%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
6 months ended 7/31/99 (11.20%) (6.84%) (6.74%) (10.80%) (7.19%) (8.10%) (7.19%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
9 months ended 7/31/99 (9.28%) (4.76%) (4.60%) (9.01%) (5.35%) (6.13%) (5.22%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
Life of Fund (7.24%) (2.68%) (2.52%) (7.03%) (3.28%) (4.09%) (3.15%)
- ----------------------------- -------------- --------------- --------------- ------------ ------------ ------------- ------------
</TABLE>
(1) Performance figures for periods after May 31, 1992 reflect applicable Rule
12b-1 distribution expenses. Future performance will be affected by such
expenses.
(2) Total return reflects expense limitations in effect for the Fund. Returns
would be lower without the caps. See Investment Management Agreements and
Sub-Advisory Agreement.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Funds and other mutual funds available from
Delaware Investments, will provide general information about investment
alternatives and scenarios that will allow investors to assess their personal
goals. This information will include general material about investing as well as
materials reinforcing various industry-accepted principles of prudent and
responsible personal financial planning. One typical way of addressing these
issues is to compare an individual's goals and the length of time the individual
has to attain these goals to his or her risk threshold. In addition, the
Distributor will provide information that discusses the Manager's overriding
investment philosophy and how that philosophy impacts the Funds', and other
<PAGE>
Delaware Investments funds', investment disciplines employed in seeking their
objectives. The Distributor may also from time to time cite general or specific
information about the institutional clients of the Manager, including the number
of such clients serviced by 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 Program, Direct Deposit
Program 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, Automatic Investing Plan and Wealth Builder Option under
Investment Plans for a complete description of these services, including
restrictions or limitations.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number of
Investment Price Per Shares
Amount Share Purchased
---------- --------- ---------
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $ 5.00 12
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 available from
Delaware Investments.
<PAGE>
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.
<PAGE>
TRADING PRACTICES AND BROKERAGE
Brokers, dealers and banks are selected to execute transactions for the
purchase or sale of portfolio securities on the basis of the Manager's judgment
of their professional capability to provide the service. The primary
consideration is to have brokers, dealers or banks execute transactions at best
execution. Best 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 nearly all instances, trades are made on a net basis where
securities are either bought or sold directly from or to a broker, dealer or
bank. 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, a Fund pays reasonably competitive
brokerage commission rates based upon the professional knowledge of the
Manager's trading department 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.
The Manager 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 in connection with its
investment decision-making process 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.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") and
each Fund's Investment Management Agreement, 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, a Fund believes 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 which constitute in some part brokerage and research services used
by the Manager in connection with its investment decision-making process and
constitute in some part services used by the Manager in connection with
administrative or other functions not related to its investment decision-making
process. In such cases, the Manager 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 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 a Fund 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 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
<PAGE>
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 and the Board of
Trustees that the advantages of combined orders outweigh the possible
disadvantages of separate transactions.
Consistent with the Conduct Rules of the NASD Regulation, Inc. (the
"NASD"), and subject to seeking best 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 such funds' shares as a factor
in the selection of brokers and dealers to execute Fund portfolio transactions.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish a Fund's
objective in relation to anticipated movements in the general level of interest
rates. A Fund is free to dispose of portfolio securities at any time, subject to
complying with the Internal Revenue Code of 1986, as amended, (the "Code") and
the 1940 Act, when changes in circumstances or conditions make such a move
desirable in light of the investment objective. A Fund will not attempt to
achieve or be limited to a predetermined rate of portfolio turnover, such a
turnover always being incidental to transactions undertaken with a view to
achieving a Fund's investment objective. Portfolio transactions will be
undertaken only to accomplish a Fund's objectives and not for the purpose of
realizing capital gains, although capital gains may be realized on certain
portfolio transactions. For example, capital gains may be realized when a
security is sold: (1) so that, provided capital is preserved or enhanced,
another security can be purchased to obtain a higher yield; (2) to take
advantage of what the Manager believes to be a temporary disparity in the normal
yield relationship between the two securities to increase income or improve the
quality of the portfolio; (3) to purchase a security which the Manager believes
is of higher quality than its rating or current market value would indicate; or
(4) when the Manager anticipates a decline in value due to market risk or credit
risk. Each Fund anticipates that its annual portfolio turnover may exceed 100%.
During the past two fiscal years, each Fund's portfolio turnover rates
were as follows:
July 31,
---------------------------------------------- --------- ---------
1998 1999
---------------------------------------------- --------- ---------
Delchester Fund 117% 85%
---------------------------------------------- --------- ---------
Strategic Income Fund 175% 156%
---------------------------------------------- --------- ---------
High-Yield Opportunities Fund 317% 382%
---------------------------------------------- --------- ---------
Corporate Bond Fund (1) N/A 175%*
---------------------------------------------- --------- ---------
Extended Duration Bond Fund (1) N/A 201%*
---------------------------------------------- --------- ---------
(1) Date of initial public offering was September 15, 1998.
* Annualized.
Each Fund's portfolio turnover rate 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.
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for each Fund's
classes of shares, 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 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, trustees and
employees of any fund in the Delaware Investments family, the Manager or any of
the its 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 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 reserves the right to reject any order for the purchase of shares
of a Fund if in the opinion of management such rejection is in such Fund's best
interests. If a purchase is canceled because your check is returned unpaid, you
are responsible for any loss incurred. A Fund can redeem shares from your
account(s) to reimburse itself for any loss, and you may be restricted from
making future purchases in any of the funds in the Delaware Investments family.
Each Fund reserves the right to reject purchase orders paid by third-party
checks or checks that are not drawn on a domestic branch of a United States
financial institution. If a check drawn on a foreign financial institution is
accepted, you may be subject to additional bank charges for clearance and
currency conversion.
Each Fund also reserves the right, following shareholder notification,
to charge a service fee on non-retirement accounts that, as a result of
redemption, have remained below the minimum stated account balance for a period
of three or more consecutive months. Holders of such accounts may be notified of
their insufficient account balance and advised that they have until the end of
the current calendar quarter to raise their balance to the stated minimum. If
the account has not reached the minimum balance requirement by that time, the
Fund will charge a $9 fee for that quarter and each subsequent calendar quarter
until the account is brought up to the minimum balance. The service fee will be
deducted from the account during the first week of each calendar quarter for the
previous quarter, and will be used to help defray the cost of maintaining
low-balance accounts. No fees will be charged without proper notice, and no CDSC
will apply to such assessments.
Each Fund also reserves the right, upon 60 days' written notice, to
involuntarily redeem accounts that remain under the minimum initial purchase
amount as a result of redemptions. An investor making the minimum initial
investment may be subject to involuntary redemption without the imposition of a
CDSC or Limited CDSC if he or she redeems any portion of his or her account.
The NASD has adopted Conduct Rules, as amended, relating to investment
company sales charges. Income Funds and the Distributor intend to operate in
compliance with these rules.
<PAGE>
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 in the Fund Classes' Prospectuses.
Class A Shares are also subject to annual 12b-1 Plan expenses for the life of
the investment.
Class B Shares are subject to a CDSC of: (i) 4% if shares are redeemed
within two years of purchase; (ii) 3% if shares are redeemed during the third or
fourth year following purchase; (iii) 2% if shares are redeemed during the fifth
year following purchase; and (iv) 1% if shares are redeemed during the sixth
year following purchase. Class B Shares are subject to annual 12b-1 Plan
expenses for approximately eight years after purchase. See Automatic Conversion
of Class B Shares, below.
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 under that Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued in
the case of Class A Shares or Institutional Class shares, unless 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 account 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 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 the Funds 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 Shares, Class B Shares
and Class C Shares 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 and incur a
front-end sales charge and annual 12b-1 Plan expenses of up to a maximum of
0.30% (currently no more than 0.25% in the case of Strategic Income Fund,
pursuant to Board action) of the average daily net assets of Class A Shares, or
to purchase either Class B or Class C Shares and have the entire initial
purchase amount invested in the Fund with the investment thereafter subject to a
CDSC and annual 12b-1 Plan expenses. Class B Shares are subject to a CDSC if the
shares are redeemed within six years of purchase, and Class C Shares are subject
to a CDSC if the shares are redeemed within 12 months of purchase. Class B and
Class C Shares are each subject to annual 12b-1 Plan expenses of up to a maximum
of 1% (0.25% of which are service fees to be paid to the Distributor, dealers or
others for providing personal service and/or maintaining shareholder accounts)
of average daily net assets of the respective Class. Class B Shares will
automatically convert to Class A Shares at the end of approximately eight years
after purchase and, thereafter, be subject to annual 12b-1 Plan expenses of up
to a maximum of 0.30% of average daily net assets of such shares. Unlike Class B
Shares, Class C Shares do not convert to another Class.
<PAGE>
The higher 12b-1 Plan expenses on Class B Shares and Class C Shares
will be offset to the extent a return is realized on the additional money
initially invested upon the purchase of such shares. However, there can be no
assurance as to the return, if any, that will be realized on such additional
money. In addition, the effect of any return earned on such additional money
will diminish over time. In comparing Class B Shares to Class C Shares,
investors should also consider the duration of the annual 12b-1 Plan expenses to
which each of the Classes is subject and the desirability of an automatic
conversion feature, which is available only for Class B Shares.
For the distribution and related services provided to, and the expenses
borne on behalf of, the Funds, the Distributor and others will be paid, in the
case of Class A Shares, from the proceeds of the front-end sales charge and
12b-1 Plan fees and, in the case of Class B Shares and Class C Shares, from the
proceeds of the 12b-1 Plan fees and, if applicable, the CDSC incurred upon
redemption. Financial advisers may receive different compensation for selling
Class A Shares, Class B Shares and Class C Shares. Investors should understand
that the purpose and function of the respective 12b-1 Plans and the CDSCs
applicable to Class B Shares and Class C Shares are the same as those of the
12b-1 Plan and the front-end sales charge applicable to Class A Shares in that
such fees and charges are used to finance the distribution of the respective
Classes. See Plans under Rule 12b-1 for the Fund Classes.
Dividends, if any, paid on Class A Shares, Class B Shares, Class C
Shares and Institutional Class Shares will be calculated in the same manner, at
the same time and on the same day and will be in the same amount, except that
the amount of 12b-1 Plan expenses relating to Class B Shares and Class C Shares
will be borne exclusively by such shares. See Determining Offering Price and Net
Asset Value.
Class A Shares
Purchases of $100,000 or more of Class A Shares at the offering price
carry reduced front-end sales charges as shown in the table in the Fund Classes'
Prospectuses, and may include a series of purchases over a 13-month period under
a Letter of Intention signed by the purchaser. See Special Purchase Features -
Class A Shares, below for more information on ways in which investors can avail
themselves of reduced front-end sales charges and other purchase features.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which the
Distributor may reallow to dealers up to the full amount of the front-end sales
charge. In addition, certain dealers who enter into an agreement to provide
extra training and information on Delaware Investments products and services and
who increase sales of Delaware Investments funds may receive an additional
commission of up to 0.15% of the offering price in connection with sales of
Class A Shares. Such dealers must meet certain requirements in terms of
organization and distribution capabilities and their ability to increase sales.
The Distributor should be contacted for further information on these
requirements as well as the basis and circumstances upon which the additional
commission will be paid. Participating dealers may be deemed to have additional
responsibilities under the securities laws. Dealers who receive 90% or more of
the sales charge may be deemed to be underwriters under the 1933 Act.
Dealer's Commission
As described in the Prospectuses, 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.
For accounts with assets over $1 million, the dealer commission resets
annually to the highest incremental commission rate on the anniversary of the
first purchase. In determining a financial adviser's eligibility for the
dealer's commission, purchases of Class A Shares of other Delaware Investments
funds as to which a Limited CDSC applies (see Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange) may be aggregated with those of the Class A Shares of a
Fund. Financial advisers also may be eligible for a dealer's commission in
<PAGE>
connection with certain purchases made under a Letter of Intention or pursuant
to an investor's Right of Accumulation. Financial advisers should contact the
Distributor concerning the applicability and calculation of the dealer's
commission in the case of combined purchases.
An exchange from other Delaware Investments funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth 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. For purposes of this formula, the "net asset value at the time of
purchase" will be the net asset value at purchase of Class B Shares or Class C
Shares of a Fund, even if those shares are later exchanged for shares of another
Delaware Investments fund. In the event of an exchange of the shares, the "net
asset value of such shares at the time of redemption" will be the net asset
value of the shares that were acquired in the exchange. See Waivers of
Contingent Deferred Sales Charge-- under Redemption and Exchange 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 below. Such conversion will
constitute a tax-free exchange for federal income tax purposes. Investors are
reminded that the Class A Shares into which Class B Shares will convert are
subject to ongoing annual 12b-1 Plan expenses of up to a maximum of 0.30%
(currently no more than 0.25% in the case of Strategic Income Fund) of average
daily net assets of such shares.
In determining whether a CDSC applies to a redemption of Class B
Shares, it will be assumed that shares held for more than six years are redeemed
first, followed by shares acquired through the reinvestment of dividends or
distributions, and finally by shares held longest during the six-year period.
With respect to Class C Shares, it will be assumed that shares held for more
than 12 months are redeemed first followed by shares acquired through the
reinvestment of dividends or distributions, and finally by shares held for 12
months or less.
All investments made during a calendar month, regardless of what day of
the month the investment occurred, will age one month on the last day of that
month and each subsequent month.
Deferred Sales Charge Alternative - Class B Shares
Class B Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class B Shares at the time of purchase from its
own assets in an amount equal to no more than 4% of the dollar amount purchased.
In addition, from time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which the
Distributor may pay additional compensation to dealers or brokers for selling
Class B Shares at the time of purchase. As discussed below, however, Class B
Shares are subject to annual 12b-1 Plan expenses and, if redeemed within six
years of purchase, a CDSC.
<PAGE>
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class B Shares. These
payments support the compensation paid to dealers or brokers for selling Class B
Shares. Payments to the Distributor and others under the Class B 12b-1 Plan may
be in an amount equal to no more than 1% annually. The combination of the CDSC
and the proceeds of the 12b-1 Plan fees makes it possible for a Fund to sell
Class B Shares without deducting a front-end sales charge at the time of
purchase.
Holders of Class B Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class B Shares
described in this Part B, even after the exchange. Such CDSC schedule may be
higher than the CDSC schedule for Class B Shares acquired as a result of the
exchange. See Redemption and Exchange.
Automatic Conversion of Class B Shares
Class B Shares, other than shares acquired through reinvestment of
dividends, held for eight years after purchase are eligible for automatic
conversion into Class A Shares. Conversions of Class B Shares into Class A
Shares will occur only four times in any calendar year, on the 18th day (or next
business day) of March, June, September and December (each, a "Conversion
Date"). If the eighth anniversary after a purchase of Class B Shares falls on a
Conversion Date, an investor's Class B Shares will be converted on that date. If
the eighth anniversary occurs between Conversion Dates, an investor's Class B
Shares will be converted on the next Conversion Date after such anniversary.
Consequently, if a shareholder's eighth anniversary falls on the day after a
Conversion Date, that shareholder will have to hold Class B Shares for as long
as three additional months after the eighth anniversary of purchase before the
shares will automatically convert into Class A Shares.
Class B Shares of a fund acquired through a reinvestment of dividends
will convert to the corresponding Class A Shares of that fund (or, in the case
of Delaware Group Cash Reserve, Inc., the Delaware Cash Reserve Fund Consultant
Class) pro-rata with Class B Shares of that fund not acquired through dividend
reinvestment.
All such automatic conversions of Class B Shares will constitute
tax-free exchanges for federal income tax purposes. See Taxes.
Level Sales Charge Alternative - Class C Shares
Class C Shares may be purchased at net asset value without a front-end
sales charge and, as a result, the full amount of the investor's purchase
payment will be invested in Fund shares. The Distributor currently compensates
dealers or brokers for selling Class C Shares at the time of purchase from its
own assets in an amount equal to no more than 1% of the dollar amount purchased.
As discussed below, Class C Shares are subject to annual 12b-1 Plan expenses
and, if redeemed within 12 months of purchase, a CDSC.
Proceeds from the CDSC and the annual 12b-1 Plan fees are paid to the
Distributor and others for providing distribution and related services, and
bearing related expenses, in connection with the sale of Class C Shares. These
payments support the compensation paid to dealers or brokers for selling Class C
Shares. Payments to the Distributor and others under the Class C 12b-1 Plan may
be in an amount equal to no more than 1% annually.
Holders of Class C Shares who exercise the exchange privilege described
below will continue to be subject to the CDSC schedule for Class C Shares as
described in this Part B. See Redemption and Exchange.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Income Funds has adopted a
separate plan for each of the Class A Shares, Class B Shares and Class C Shares
of each Fund (the "Plans"). Each Plan permits the relevant Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the class of shares to which the Plan applies. The Plans do not apply to
Institutional Classes of shares. Such shares are not included in calculating the
Plans' fees, and the Plans are not used to assist in the distribution and
marketing of shares of the Institutional Classes. Shareholders of the
Institutional Classes may not vote on matters affecting the Plans.
<PAGE>
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'
Board of Trustees 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.
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 Trustees has determined that the annual fee, payable on a monthly
basis, under the Plan relating to Delchester Fund A Class, will be equal to the
sum of: (i) the amount obtained by multiplying 0.10% by the average daily net
assets represented by Delchester Fund A Class that were originally purchased
prior to June 1, 1992 in Delchester I class (which was converted into what is
now referred to as Class A Shares on June 1, 1992 pursuant to a Plan of
Recapitalization approved by shareholders of Delchester I class), and (ii) the
amount obtained by multiplying 0.30% by the average daily net assets represented
by all other Delchester Fund A Class shares. While this is the method to be used
to calculate the 12b-1 fees to be paid by Delchester Fund A Class under its
Plan, the fee is a Class A Shares' expense so that all shareholders of
Delchester Fund A Class, regardless of whether they originally purchased or
received shares in Delchester I class, or in one of the other classes that is
now known as Class A Shares, will bear 12b-1 expenses at the same rate. In
addition, pursuant to Board action, the maximum aggregate fee payable by Class A
Shares of Strategic Income Fund is 0.25%. While this describes the current basis
for calculating the fees which will be payable under the Delchester Fund A
Class' and Strategic Income Fund A Class' Plans, such Plans permit a full 0.30%
on all Class A Shares' assets to be paid at any time following appropriate Board
approval.
All of the distribution expenses incurred by the Distributor and
others, such as broker/dealers, in excess of the amount paid on behalf of Class
A, Class B and Class C Shares would be borne by such persons without any
reimbursement from such Fund Classes. Subject to seeking best price and
execution, a Fund may, from time to time, buy or sell portfolio securities from
or to firms which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from its
own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
<PAGE>
The Plans and the Distribution Agreements, have all been approved by
the Board of Trustees of Income Funds, including a majority of the trustees who
are not "interested persons" (as defined in the 1940 Act) of Income Funds 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 Trustees in the same manner
as specified above.
Each year, the trustees 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 may be terminated with respect
to a Class at any time without penalty by a majority of those trustees 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 trustees 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 trustees including a
majority of the noninterested trustees of Income Funds having no interest in the
Plans. In addition, in order for the Plans to remain effective, the selection
and nomination of trustees who are not "interested persons" of Income Funds must
be effected by the trustees 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 Trustees for their review.
44
<PAGE>
For the fiscal year ended July 31, 1999, payments from Class A Shares,
Class B Shares and Class C Shares of each Fund were as follows:
<TABLE>
<CAPTION>
- ---------------------- -------------------------------------- --------------------------------- --------------------------------
Delchester Fund Strategic Income Fund High-Yield Opportunities Fund
-------------------------------------- --------------------------------- --------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C>
Advertising $11,368 --- --- $131.00 --- --- $14 --- ---
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Annual/Semi Annual $61,994 --- --- --- --- $5,892 --- ---
Reports
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Broker Trails $2,058,971 $908,467 $193,223 $44,387 $47,986 $25,589 $12,709 $8,524 $628
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Broker Sales Charges --- $1,392,227 $159,589 --- $55,554 $31,711 --- $14,463 $8,605
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Dealer Service --- --- --- --- --- --- --- --- ---
Expenses
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Interest on Broker --- $1,159,548 $13,552 --- $70,506 $1,381 --- $9,443 $499
Sales Charges
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Commissions to $164,343 $184,894 $39,101 $1,140 $9,040 $4,590 $4,740 $1,720 $1,162
Wholesalers
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Promotional- Broker $10,526 $258 --- --- --- $48 $139 --- ---
Meetings
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C>
Promotional-Other $128,258 --- --- --- --- --- $2,929 --- ---
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Prospectus Printing $65,350 --- --- $436 --- --- $5,505 --- ---
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Telephone --- --- --- --- --- --- --- --- ---
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Other $27,132 --- $6,040 --- --- --- $1,731 --- ---
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
Total $2,527,942 $3,645,394 $411,505 $46,094 $183,086 $63,319 $33,659 $34,150 $10,894
- ---------------------- ------------- ------------ ----------- ---------- ----------- ---------- ---------- ---------- ----------
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
- --------------------- -------------------------------------- ---------------------------------
Corporate Bond Fund Extended Duration Bond Fund
-------------------------------------- ---------------------------------
Class A Class B Class C Class A Class B Class C
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Advertising --- --- --- --- --- ---
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Annual/Semi Annual --- --- --- --- --- ---
Reports
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Broker Trails $2,066 $891 $431 $1,261 $40 $39
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Broker Sales Charges --- $1,040 $1,029 --- $69 $145
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Dealer Service --- --- --- --- --- ---
Expenses
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Interest on Broker --- $1,590 $49 --- $55 $8
Sales Charges
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Commissions to --- $254 $14 --- $14 ---
Wholesalers
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Promotional- Broker --- --- --- --- --- ---
Meetings
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Promotional-Other --- --- --- --- --- ---
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Prospectus Printing --- --- --- --- --- ---
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Telephone --- --- --- --- --- ---
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Other --- --- --- --- --- ---
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
Total $2,066 $3,775 $1,523 $1,261 $178 $192
- --------------------- ------------ ------------- ----------- ---------- ----------- ----------
</TABLE>
Other Payments to Dealers - Class A Shares, Class B Shares and Class C Shares
From time to time, at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of Fund Classes exceed certain limits as
set by the Distributor, may receive from the Distributor an additional payment
of up to 0.25% of the dollar amount of such sales. The Distributor may also
provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Investments family of funds. In some instances, these
incentives or payments may be offered only to certain dealers who maintain, have
sold or may sell certain amounts of shares. The Distributor may also pay a
portion of the expense of preapproved dealer advertisements promoting the sale
of Delaware Investments fund shares.
Special Purchase Features - Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares of the Fund may be purchased at net asset value under the
Delaware Investments Dividend Reinvestment Plan and, under certain
circumstances, the Exchange Privilege and the 12-Month Reinvestment Privilege.
Purchases of Class A Shares may be made at net asset value by current
and former officers, trustees and employees (and members of their families) of
the Manager, any affiliate, any of the funds in the Delaware Investments family,
certain of their agents and registered representatives and employees of
authorized investment dealers and by employee benefit plans for such entities.
Individual purchases, including those in retirement accounts, must be for
accounts in the name of the individual or a qualifying family member. Class A
Shares may also be purchased at net asset value by current and former officers,
trustees 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, trustees and key employees of
institutional clients of the Manager or any of its affiliates may purchase Class
A Shares at net asset value. Moreover, purchases may be effected at net asset
value for the benefit of the clients of brokers, dealers and registered
investment advisers affiliated with a broker or dealer, if such broker, dealer
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or investment adviser has entered into an agreement with the Distributor
providing specifically for the purchase of Class A Shares in connection with
special investment products, such as wrap accounts or similar fee based
programs. Investors may be charged a fee when effecting transactions in Class A
Shares through a broker or agent that offers these special investment products.
Purchases of Class A Shares of each Fund at net asset value may also be
made by the following: financial institutions investing for the account of their
trust customers if they are not eligible to purchase shares of the Institutional
Class of a Fund; any group retirement plan (excluding defined benefit pension
plans), or such plans of the same employer, for which plan participant records
are maintained on the Retirement Financial Services, Inc. (formerly known as
Delaware Investment & Retirement Services, Inc.) proprietary record keeping
system that (i) has in excess of $500,000 of plan assets invested in Class A
Shares of funds in the Delaware Investments family and any stable value account
available to investment advisory clients of the Manager or its affiliates; 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 in
writing to Retirement Financial Services, Inc. that it has the requisite number
of employees and received written confirmation back from Retirement Financial
Services, Inc. See Group Investment Plans for information regarding the
applicability of the Limited CDSC.
Investments in Class A Shares made by plan level and/or participant
retirement accounts that are for the purpose of repaying a loan taken from such
accounts will be made at net asset value. Loan repayments made to a fund account
in connection with loans originated from accounts previously maintained by
another investment firm will also be invested at net asset value.
Income Funds must be notified in advance that the trade qualifies for
purchase at net asset value.
Allied Plans
Class A Shares are available for purchase by participants in certain
401(k) Defined Contribution Plans ("Allied Plans") which are made available
under a joint venture agreement between the Distributor and another institution
through which mutual funds are marketed and which allow investments in Class A
Shares of designated Delaware Investments funds ("eligible Delaware Investments
fund shares"), as well as shares of designated classes of non-Delaware
Investments funds ("eligible non-Delaware Investments fund shares"). Class B
Shares and Class C Shares are not eligible for purchase by Allied Plans.
With respect to purchases made in connection with an Allied Plan, the
value of eligible Delaware Investments and eligible non-Delaware Investments
fund shares held by the Allied Plan may be combined with the dollar amount of
new purchases by that Allied Plan to obtain a reduced front-end sales charge on
additional purchases of eligible Delaware Investments fund shares. See Combined
Purchases Privilege, below.
Participants in Allied Plans may exchange all or part of their eligible
Delaware Investments fund shares for other eligible Delaware Investments fund
shares or for eligible non-Delaware Investments fund shares at net asset value
without payment of a front-end sales charge. However, exchanges of eligible fund
shares, both Delaware Investments and non-Delaware Investments, which were not
subject to a front end sales charge, will be subject to the applicable sales
charge if exchanged for eligible Delaware Investments fund shares to which a
sales charge applies. No sales charge will apply if the eligible fund shares
were previously acquired through the exchange of eligible shares on which a
sales charge was already paid or through the reinvestment of dividends.
See Investing by Exchange under Investment Plans.
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A dealer's commission may be payable on purchases of eligible Delaware
Investments fund shares under an Allied Plan. In determining a financial
adviser's eligibility for a dealer's commission on net asset value purchases of
eligible Delaware Investments fund shares in connection with Allied Plans, all
participant holdings in the Allied Plan will be aggregated. See Class A Shares,
above.
The Limited CDSC is applicable to redemptions of net asset value
purchases from an Allied Plan on which a dealer's commission has been paid.
Waivers of the Limited CDSC, as described under Waiver of Limited Contingent
Deferred Sales Charge - Class A Shares under Redemption and Exchange, apply to
redemptions by participants in Allied Plans except in the case of exchanges
between eligible Delaware Investments and non-Delaware Investments fund shares.
When eligible Delaware Investments fund shares are exchanged into eligible
non-Delaware Investments fund shares, the Limited CDSC will be imposed at the
time of the exchange, unless the joint venture agreement specifies that the
amount of the Limited CDSC will be paid by the financial adviser or selling
dealer. See Contingent Deferred Sales Charge for Certain Redemptions of Class A
Shares Purchased at Net Asset Value under Redemption and Exchange.
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, 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 of 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 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
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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 in any
stable value product available through Delaware Investments 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 funds 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 $60,000 and subsequently purchases $40,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $40,000 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 and Class B Shares of a Fund (and of the
Institutional Class 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 the same
Class of the Fund or in the same Class of any of the other funds in the Delaware
Investments family. In the case of Class A Shares, the reinvestment will not be
assessed a front-end sales charge and in the case of Class B Shares, the amount
of the CDSC previously charged on the redemption will be reimbursed by the
Distributor. The reinvestment will be subject to applicable eligibility and
minimum purchase requirements and must be in states where shares of such other
funds may be sold. This reinvestment privilege does not extend to Class A Shares
where the redemption of the shares triggered the payment of a Limited CDSC.
Persons investing redemption proceeds from direct investments in mutual funds in
the Delaware Investments family, offered without a front-end sales charge will
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be required to pay the applicable sales charge when purchasing Class A Shares.
The reinvestment privilege does not extend to a redemption of 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. In the case of
Class B Shares, the time that the previous investment was held will be included
in determining any applicable CDSC due upon redemptions as well as the automatic
conversion into Class A Shares.
A redemption and reinvestment of Class B Shares could have income tax
consequences. Shareholders will receive from the Distributor the amount of the
CDSC paid at the time of redemption as part of the reinvested shares, which may
be treated as a capital gain to the shareholder for tax purposes. 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 Fund's shareholder servicing agent, about the
applicability of the Class A Limited CDSC in connection with the features
described above.
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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, 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 Limited CDSC is applicable to any redemptions of net asset value
purchases made on behalf of any group retirement plan on which a dealer's
commission has been paid only if such redemption is made pursuant to a
withdrawal of the entire plan from a fund in the Delaware Investments family.
See Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value under Redemption and Exchange.
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 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.
The Institutional Class of each of Corporate Bond Fund and Extended
Duration Bond Fund is also available for purchase by clients of brokers or
dealers affiliated with a broker or dealer, if such broker or dealer has entered
into an agreement with the Distributor providing specifically for the purchase
of shares of the Classes in connection with special investment products, such as
wrap accounts or similar fee based programs. Investors may be charged a fee when
effecting transactions in shares of the Classes through a broker or agent that
offers these special products.
Shares of the Institutional Classes are available for purchase at net
asset value, without the imposition of a front-end or contingent deferred sales
charge and are not subject to Rule 12b-1 expenses.
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INVESTMENT PLANS
Reinvestment Plan/Open Account
Unless otherwise designated by shareholders in writing, dividends from
net investment income and distributions from realized securities profits, if
any, will be automatically reinvested in additional shares of the respective
Fund Class in which an investor has an account (based on the net asset value in
effect on the reinvestment date) and will be credited to the shareholder's
account on that date. All dividends and distributions of the Institutional
Classes are reinvested in the accounts of the holders of such shares (based on
the net asset value in effect on the reinvestment date). A confirmation of each
distribution from realized securities profits, if any, will be mailed to
shareholders in the first quarter of the fiscal year.
Under the Reinvestment Plan/Open Account, shareholders may purchase and
add full and fractional shares to their plan accounts at any time either through
their investment dealers or by sending a check or money order to the specific
Fund and Class in which shares are being purchased. Such purchases, which must
meet the minimum subsequent purchase requirements set forth in the Prospectuses
and this Part B, are made, for Class A Shares at the public offering price, and
for Class B Shares, Class C Shares and 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.
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 for 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.
Investing by Exchange
If you have an investment in another mutual fund in the Delaware
Investments family, you may write and authorize an exchange of part or all of
your investment into shares of a Fund. If you wish to open an account by
exchange, call the Shareholder Service Center for more information. All
exchanges are subject to the eligibility and minimum purchase requirements set
forth in each Fund's prospectus. See Redemption and Exchange for more complete
information concerning your exchange privileges.
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Holders of Class A Shares of a Fund may exchange all or part of their
shares for certain of the shares of other funds in the Delaware Investments
family, including other Class A Shares, but may not exchange their Class A
Shares for Class B Shares or Class C Shares of the Fund or of any other fund in
the Delaware Investments family. Holders of Class B Shares of a Fund are
permitted to exchange all or part of their Class B Shares only into Class B
Shares of other Delaware Investments funds. Similarly, holders of Class C Shares
of a Fund are permitted to exchange all or part of their Class C Shares only
into Class C Shares of other Delaware Investments funds. Class B Shares of a
Fund and Class C Shares of a Fund acquired by exchange will continue to carry
the CDSC and, in the case of Class B Shares, the automatic conversion schedule
of the fund from which the exchange is made. The holding period of Class B
Shares of a Fund acquired by exchange will be added to that of the shares that
were exchanged for purposes of determining the time of the automatic conversion
into Class A Shares of the Fund.
Permissible exchanges into Class A Shares of a Fund will be made
without a front-end sales charge, except for exchanges of shares that were not
previously subject to a front-end sales charge (unless such shares were acquired
through the reinvestment of dividends). Permissible exchanges into Class B
Shares or Class C Shares of a Fund will be made without the imposition of a CDSC
by the fund from which the exchange is being made at the time of the exchange.
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.
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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 for proper
instructions.
MoneyLine (SM) On Demand
You or your investment dealer may request purchases of Fund Class shares
by phone using MoneyLine (SM) On Demand. When you authorize a Fund to accept
such requests from you or your investment dealer, funds will be withdrawn from
(for share purchases) your predesignated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine (SM) On Demand transactions.
It may take up to four business days for the transactions to be
completed. You can initiate this service by completing an Account Services form.
If your name and address are not identical to the name and address on your Fund
account, you must have your signature guaranteed. The Funds do not charge a fee
for this service; however, your bank may charge a fee.
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
Investments family through the Wealth Builder Option. See Wealth Builder Option
and Redemption and Exchange in the Prospectuses for the Fund Classes.
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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 Redemption and Exchange for a brief summary of the tax consequences
of exchanges. Shareholders can terminate their participation at any time by
giving written notice to their Fund.
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 the funds in the Delaware Investments family 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 funds in the Delaware Investments family. 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. Also see
Buying Class A Shares at Net Asset Value. 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 may be used in the same Strategy with consultant
class shares that are offered by certain other Delaware Investments funds.
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.
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Investors will receive a customized quarterly Strategy Report
summarizing all 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 that 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 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. See
Institutional Classes, above. For additional information on any of the Plans and
Delaware's retirement services, call the Shareholder Service Center telephone
number.
It is advisable for an investor considering any one of the retirement
plans described below to consult with an attorney, accountant or a qualified
retirement plan consultant. For further details, including applications for any
of these plans, contact your investment dealer or the Distributor.
Taxable distributions from the retirement plans described below may be
subject to withholding.
Please contact your investment dealer or the Distributor for the
special application forms required for the plans described below.
Prototype Profit Sharing or Money Purchase Pension Plans
Prototype Plans are available for self-employed individuals,
partnerships, 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.
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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 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 income 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
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:
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(1) 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;
(2) Substantially equal installment payments for a period certain of
10 or more years;
(3) A distribution, all of which represents a required minimum
distribution after attaining age 70 1/2;
(4) 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
(5) 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. The $2,000
annual limit is 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.
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.
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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 a 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 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 Classes is available for investment by a
SEP/IRA.
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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 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 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.
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.
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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 Agreement. 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 Trustees. 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 Trustees.
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' 12b-1 Plans and Class A, Class B and Class C Shares alone will
bear the 12b-1 Plan expenses payable under their respective Plans. Due to the
specific distribution expenses and other costs that may be allocable to each
Class of a Fund, the dividends paid to each Class of the Fund may vary. The net
asset value per share of each Class of a Fund is expected to be equivalent.
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REDEMPTION AND EXCHANGE
You can redeem or exchange your shares in a number of different ways.
The exchange service is useful if your investment requirements change and you
want an easy way to invest in other equity funds, tax-advantaged funds, bond
funds or money market funds. This service is also useful if you are anticipating
a major expenditure and want to move a portion of your investment into a fund
that has the checkwriting feature. Exchanges are subject to the requirements of
each fund and all exchanges of shares constitute taxable events. Further, in
order for an exchange to be processed, shares of the fund being acquired must be
registered in the state where the acquiring shareholder resides. You may want to
consult your financial adviser or investment dealer to discuss which funds in
Delaware Investments will best meet your changing objectives, and the
consequences of any exchange transaction. You may also call the Delaware
Investments directly for fund information.
Your shares will be redeemed or exchanged at a price based on the net
asset value next determined after a Fund receives your request in good order,
subject, in the case of a redemption, to any applicable CDSC or Limited CDSC.
For example, redemption or exchange requests received in good order after the
time the offering price and net asset value of shares are determined will be
processed on the next business day. A shareholder submitting a redemption
request may indicate that he or she wishes to receive redemption proceeds of a
specific dollar amount. In the case of such a request, and in the case of
certain redemptions from retirement plan accounts, a Fund will redeem the number
of shares necessary to deduct the applicable CDSC in the case of Class B Shares
and Class C Shares, and, if applicable, the Limited CDSC in the case of Class A
Shares and tender to the shareholder the requested amount, assuming the
shareholder holds enough shares in his or her account for the redemption to be
processed in this manner. Otherwise, the amount tendered to the shareholder upon
redemption will be reduced by the amount of the applicable CDSC or Limited CDSC.
Redemption proceeds will be distributed promptly, as described below, but not
later than seven days after receipt of a redemption request.
Except as noted below, for a redemption request to be in "good order,"
you must provide your account number, account registration, and the total number
of shares or dollar amount of the transaction. For exchange requests, you must
also provide the name of the fund in which you want to invest the proceeds.
Exchange instructions and redemption requests must be signed by the record
owner(s) exactly as the shares are registered. You may request a redemption or
an exchange by calling the Shareholder Service Center at 800-523-1918. Each Fund
may suspend, terminate, or amend the terms of the exchange privilege upon 60
days' written notice to shareholders.
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 authorized persons, subject to 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.
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 the Fund or certain other authorized persons (see
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Distribution and Service under Investment Management Agreements and Sub-Advisory
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 and telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. Each Fund will honor redemption requests as to shares for which a check
was tendered as payment, but a Fund will not mail or wire the proceeds until it
is reasonably satisfied that the purchase check has cleared, which may take up
to 15 days from the purchase date. You can avoid this potential delay if you
purchase shares by wiring Federal Funds. Each Fund reserves the right to reject
a written or telephone redemption request or delay payment of redemption
proceeds if there has been a recent change to the shareholder's address of
record.
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 a 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
has elected to be governed by Rule 18f-1 under the 1940 Act 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.
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, below.
Class B Shares are subject to a CDSC of: (i) 4% if shares are redeemed during
the first two years following 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; (v) and 0% thereafter. Class C Shares are
subject to a CDSC of 1% if shares are redeemed within 12 months following
purchase. See Contingent Deferred Sales Charge - Class B Shares and Class C
Shares under Purchasing Shares. 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 Distributor charges a fee for redemptions or
repurchases, but such fees could be charged at any time in the future.
Holders of Class B Shares or Class C Shares that exchange their shares
("Original Shares") for shares of other funds in the Delaware Investments (in
each case, "New Shares") in a permitted exchange, will not be subject to a CDSC
that might otherwise be due upon redemption of the Original Shares. However,
such shareholders will continue to be subject to the CDSC and, in the case of
Class B Shares, the automatic conversion schedule of the
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Original Shares as described in this Part B and any CDSC assessed upon
redemption will be charged by the fund from which the Original Shares were
exchanged. In an exchange of Class B Shares from a Fund, the Fund's CDSC
schedule may be higher than the CDSC schedule relating to the New Shares
acquired as a result of the exchange. For purposes of computing the CDSC that
may be payable upon a disposition of the New Shares, the period of time that an
investor held the Original Shares is added to the period of time that an
investor held the New Shares. With respect to Class B Shares, the automatic
conversion schedule of the Original Shares may be longer than that of the New
Shares. Consequently, an investment in New Shares by exchange may subject an
investor to the higher 12b-1 fees applicable to Class B Shares of a Fund for a
longer period of time than if the investment in New Shares were made directly.
Written Redemption
You can write to each Fund at 1818 Market Street, Philadelphia, PA 19103
to redeem some or all of your shares. The request must be signed by all owners
of the account or your investment dealer of record. For redemptions of more than
$50,000, or when the proceeds are not sent to the shareholder(s) at the address
of record, the Funds require a signature by all owners of the account and a
signature guarantee for each owner. A signature guarantee can be obtained from a
commercial bank, a trust company or a member of a Securities Transfer
Association Medallion Program ("STAMP"). Each Fund reserves the right to reject
a signature guarantee supplied by an eligible institution based on its
creditworthiness. The Funds may require further documentation from corporations,
executors, retirement plans, administrators, trustees or guardians.
Payment is normally mailed the next business day after receipt of your
redemption request. If your Class A Shares are in certificate form, the
certificate(s) must accompany your request and also be in good order.
Certificates are issued for Class A Shares only if a shareholder submits a
specific request. Certificates are not issued for Class B Shares or Class C
Shares.
Written Exchange
You may also write to each Fund (at 1818 Market Street, Philadelphia, PA
19103) to request an exchange of any or all of your shares into another mutual
fund in Delaware Investments, subject to the same conditions and limitations as
other exchanges noted above and in the Prospectuses.
Telephone Redemption and Exchange
To get the added convenience of the telephone redemption and exchange
methods, you must have the Transfer Agent hold your shares (without charge) for
you. If you choose to have your Class A Shares in certificate form, you may
redeem or exchange only by written request and you must return your
certificates.
The Telephone Redemption - Check to Your Address of Record service and
the Telephone Exchange service, both of which are described below, are
automatically provided unless you notify the Fund in which you have your account
in writing that you do not wish to have such services available with respect to
your account. Each Fund reserves the right to modify, terminate or suspend these
procedures upon 60 days' written notice to shareholders. It may be difficult to
reach the Funds by telephone during periods when market or economic conditions
lead to an unusually large volume of telephone requests.
Neither the Funds nor their Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, 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 the
Fund Classes are generally tape recorded, and a written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone. By exchanging shares by telephone, you are acknowledging prior
receipt of a prospectus for the fund into which your shares are being exchanged.
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Telephone Redemption--Check to Your Address of Record
The Telephone Redemption feature is a quick and easy method to redeem
shares. You or your investment dealer of record can have redemption proceeds of
$50,000 or less mailed to you at your address of record. Checks will be payable
to the shareholder(s) of record. Payment is normally mailed the next business
day after receipt of the redemption request. This service is only available to
individual, joint and individual fiduciary-type accounts.
Telephone Redemption--Proceeds to Your Bank
Redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check. You should authorize this
service when you open your account. If you change your predesignated bank
account, you must complete an Authorization Form and have your signature
guaranteed. For your protection, your authorization must be on file. If you
request a wire, your funds will normally be sent the next business day. 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. First Union Bank's fee (currently
$7.50) will be deducted from Fund Class redemption proceeds. If you ask for a
check, it will normally be mailed the next business day after receipt of your
redemption request to your predesignated bank account. There are no separate
fees for this redemption method, but the mail time may delay getting funds into
your bank account. Simply call the Shareholder Service Center prior to the time
the offering price and net asset value are determined, as noted above.
Telephone Exchange
The Telephone Exchange feature is a convenient and efficient way to
adjust your investment holdings as your liquidity requirements and investment
objectives change. You or your investment dealer of record can exchange your
shares into other funds in Delaware Investments under the same registration,
subject to the same conditions and limitations as other exchanges noted above.
As with the written exchange service, telephone exchanges are subject to the
requirements of each fund, as described above and in the Prospectuses. Telephone
exchanges may be subject to limitations as to amounts or frequency.
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 each Fund reserve
the right to record exchange instructions received by telephone and to reject
exchange requests at any time in the future.
MoneyLine (SM) On Demand
You or your investment dealer may request redemptions of your Fund
shares by phone using MoneyLine (SM) On Demand. When you authorize a Fund to
accept such requests from you or your investment dealer, funds will be deposited
to (for share redemptions) your predesignated bank account. Your request will be
processed the same day if you call prior to 4 p.m., Eastern time. There is a $25
minimum and $50,000 maximum limit for MoneyLine (SM) On Demand transactions. See
MoneyLine (SM) On Demand under Investment Plans.
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"), the Funds will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Investments funds from Timing Firms. A 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
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accounts administered so as to redeem or purchase shares based upon certain
predetermined market indicators, will be aggregated for purposes of the exchange
limits.
Restrictions on Timed Exchanges
Timing Accounts operating under existing timing agreements may only
execute exchanges between the following eight Delaware Investments funds: (1)
Delaware Decatur Equity Income Fund, (2) Delaware Growth and Income Fund, (3)
Delaware Balanced Fund, (4) Delaware Limited-Term Government Fund, (5) Delaware
USA Fund, (6) Delaware Cash Reserve, Fund (7) Delaware Delchester Fund and (8)
Delaware Tax-Free Pennsylvania Fund. No other Delaware Investments funds 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
time 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.
Systematic Withdrawal Plans
Shareholders of Class A Shares, Class B Shares and Class C Shares who
own or purchase $5,000 or more of shares at the offering price, or net asset
value, as applicable, for which certificates have not been issued may establish
a Systematic Withdrawal Plan for monthly withdrawals of $25 or more, or
quarterly withdrawals of $75 or more, although a Fund does not recommend any
specific amount of withdrawal. This is particularly useful to shareholders
living on fixed incomes, since it can provide them with a stable supplemental
amount. This $5,000 minimum does not apply for the 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.
Shareholders should not purchase additional shares while participating in a
Systematic Withdrawal Plan.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated. Premature withdrawals from
retirement plans may have adverse tax consequences.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a Fund
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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. The applicable Limited CDSC for Class A Shares and CDSC
for Class B and C Shares redeemed via a Systematic Withdrawal Plan will be
waived if the annual amount withdrawn in each year is less than 12% of the
account balance on the date that the Plan is established. If the annual amount
withdrawn in any year exceeds 12% of the account balance on the date that the
Systematic Withdrawal Plan is established, all redemptions under the Plan will
be subjected to the applicable contingent deferred sales charge, including an
assessment for previously redeemed amounts under the Plan. Whether a waiver of
the contingent deferred sales charge is available or not, the first shares to be
redeemed for each Systematic Withdrawal Plan payment will be those not subject
to a contingent deferred sales charge because they have either satisfied the
required holding period or were acquired through the reinvestment of
distributions. See Waiver of Contingent Deferred Sales Charges, below.
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. Each Fund reserves 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.
Systematic Withdrawal Plan payments are normally made by check. In the
alternative, you may elect to have your payments transferred from your Fund
account to your predesignated bank account through the MoneyLine (SM) Direct
Deposit Service. Your funds will normally be credited to your bank account up to
four business days after the payment date. There are no separate fees for this
redemption method. It may take up to four business days for the transactions to
be completed. You can initiate this service by completing an Account Services
form. If your name and address are not identical to the name and address on your
Fund account, you must have your signature guaranteed. The Funds do not charge a
fee for any this service; however, your bank may charge a fee. This service is
not available for retirement plans.
The Systematic Withdrawal Plan is not available for the Institutional
Classes. Shareholders should consult with their financial advisers to determine
whether a Systematic Withdrawal Plan would be suitable for them.
Contingent Deferred Sales Charge for Certain Redemptions of Class A Shares
Purchased at Net Asset Value
For purchases of $1,000,000 or more made on or after July 1, 1998, a
Limited CDSC will be imposed on certain redemptions of Class A Shares (or shares
into which such Class A Shares are exchanged) according to the following
schedule: (1) 1.00% if shares are redeemed during the first year after the
purchase; and (2) 0.50% if such shares are redeemed during the second year after
the purchase, if such purchases were made at net asset value and triggered the
payment by the Distributor of the dealer's commission described above.
The Limited CDSC will be paid to the Distributor and will be assessed
on an amount equal to the lesser of : (1) the net asset value at the time of
purchase of the Class A Shares being redeemed or (2) the net asset value of such
Class A Shares at the time of redemption. For purposes of this formula, the "net
asset value at the time of purchase" will be the net asset value at purchase of
the Class A Shares even if those shares are later exchanged for shares of
another Delaware Investments fund and, in the event of an exchange of Class A
Shares, the "net asset value of such shares at the time of redemption" will be
the net asset value of the shares acquired in the exchange.
Redemptions of such Class A Shares held for more than two years will
not be subjected to the Limited CDSC and an exchange of such Class A Shares into
another Delaware Investments fund will not trigger the imposition of the Limited
CDSC at the time of such exchange. The period a shareholder owns shares into
which
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Class A Shares are exchanged will count towards satisfying the two-year
holding period. The Limited CDSC is assessed if such two year period is not
satisfied irrespective of whether the redemption triggering its payment is of
Class A Shares of a Fund or Class A Shares acquired in the exchange.
In determining whether a Limited CDSC is payable, it will be assumed
that shares not subject to the Limited CDSC are the first redeemed followed by
other shares held for the longest period of time. The Limited CDSC will not be
imposed upon shares representing reinvested dividends or capital gains
distributions, or upon amounts representing share appreciation. All investments
made during a calendar month, regardless of what day of the month the investment
occurred, will age one month on the last day of that month and each subsequent
month.
Waivers of Contingent Deferred Sales Charges
Waiver of Limited Contingent Deferred Sales Charge - Class A Shares
The Limited CDSC for Class A Shares on which a dealer's commission has
been paid will be waived in the following instances: (i) redemptions that result
from a Fund's right to liquidate a shareholder's account if the aggregate net
asset value of the shares held in the account is less than the then-effective
minimum account size; (ii) distributions to participants from a retirement plan
qualified under section 401(a) or 401(k) of the Internal Revenue Code of 1986,
as amended (the "Code"), or due to death of a participant in such a plan; (iii)
redemptions pursuant to the direction of a participant or beneficiary of a
retirement plan qualified under section 401(a) or 401(k) of the Code with
respect to that retirement plan; (iv) periodic distributions from an IRA, SIMPLE
IRA, or 403(b)(7) or 457 Deferred Compensation Plan due to death, disability, or
attainment of age 59 1/2, and IRA distributions qualifying under Section 72(t)
of the Internal Revenue Code; (v) returns of excess contributions to an IRA;
(vi) distributions by other employee benefit plans to pay benefits; (vii)
distributions described in (ii), (iv), and (vi) above pursuant to a systematic
withdrawal plan; (viii) distributions form an account if the redemption results
from a death of a registered owner, or a registered joint owner, of the account
(in the case of accounts established under the Uniform Gifts to Minors or
Uniform transfers to Minors Acts or trust accounts, the waiver applies upon the
death of all beneficial owners) or a total disability (as defined in Section 72
of the Code) of all registered owners occurring after the purchase of the shares
being redeemed; and (ix) redemptions by the classes of shareholders who are
permitted to purchase shares at net asset value, regardless of the size of the
purchase (see Buying Class A Shares at Net Asset Value under Purchasing Shares).
Waiver of Contingent Deferred Sales Charge - Class B Shares
The CDSC is waived on certain redemptions of Class B Shares in
connection with the following redemptions: (i) redemptions that result from a
Fund's right to liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the then-effective minimum
account size; (ii) returns of excess contributions to an IRA, SIMPLE IRA,
SEP/IRA, or 403(b)(7) or 457 Deferred Compensation Plan; (iii) periodic
distributions from an IRA, SIMPLE IRA, SAR/SEP, SEP/IRA, or 403(b)(7) or 457
Deferred Compensation Plan due to death, disability or attainment of age 59 1/2,
and IRA distributions qualifying under Section 72(t) of the Internal Revenue
Code; and (iv) distributions from an account if the redemption results from the
death of a registered owner, or a registered joint owner, of the account (in the
case of accounts established under the Uniform Gifts to Minors or Uniform
Transfers to Minors Acts or trust accounts, the waiver applies upon the death of
all beneficial owners) or a total and permanent disability (as defined in
Section 72 of the Code) of all registered owners occurring after the purchase of
the shares being redeemed.
Waiver of Contingent Deferred Sales Charge -Class C Shares
The CDSC on Class C Shares is waived in connection with the following
redemptions: (i) redemptions that result from the Fund's right to liquidate a
shareholder's account if the aggregate net asset value of the shares held in the
account is less than the then-effective minimum account size; (ii) returns of
excess contributions to an IRA, SIMPLE IRA, 403(b)(7) or 457 Deferred
Compensation Plan, Profit Sharing Plan, Money Purchase Pension Plan, or 401(k)
Defined Contribution plan; (iii) periodic distributions from a 403(b)(7) or 457
Deferred Compensation Plan upon attainment of age 59 1/2, Profit Sharing Plan,
Money Purchase Plan, 401(k) Defined Contribution Plan
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upon attainment of age 70 1/2, and IRA distributions qualifying under Section
72(t) of the Internal Revenue Code; (iv) distributions from a 403(b)(7) or 457
Deferred Compensation Plan, Profit Sharing Plan, or 401(k) Defined Contribution
Plan, under hardship provisions of the plan; (v) distributions from a 403(b)(7)
or 457 Deferred Compensation Plan, Profit Sharing Plan, Money Purchase Pension
Plan or a 401(k) Defined Contribution Plan upon attainment of normal retirement
age under the plan or upon separation from service; (vi) periodic distributions
from an IRA or SIMPLE IRA on or after attainment of age 59 1/2; and (vii)
distributions from an account if the redemption results from the death of a
registered owner, or a registered joint owner, of the account (in the case of
accounts established under the Uniform Gifts to Minors or Uniform Transfers to
Minors Acts or trust accounts, the waiver applies upon the death of all
beneficial owners) or a total and permanent disability (as defined in Section 72
of the Code) of all registered owners occurring after the purchase of the shares
being redeemed.
* * *
In addition, the CDSC will be waived on Class A Shares, Class B Shares
and Class C Shares redeemed in accordance with a Systematic Withdrawal Plan if
the annual amount selected to be withdrawn under the Plan does not exceed 12% of
the value of the account on the date that the Systematic Withdrawal Plan was
established or modified.
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DIVIDENDS AND REALIZED SECURITIES PROFITS DISTRIBUTIONS
Each Fund declares 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 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
$100,669,876 at July 31, 1999, which for federal income tax purposes may be
carried forward and applied against future capital gains. The capital loss
carryforward expires as follows: 2002--$3,628,131, 2003--$87,593,579 and
2007--$9,448,166.
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 $117,111,332
as of July 31, 1999.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), as revised by
the Internal Revenue Service Restructuring and Reform Act of 1998 (the "1998
Act") and the Omnibus Consolidated and Emergency Supplemental Appropriations
Act, a Fund is required to track its sales of portfolio securities and to report
its capital gain distributions to you according to the following categories:
"Long-term capital gains": gains on securities sold after December 31,
1997 and held for more than 12 months as capital assets in the hands of
the holder are taxed at the 20% rate when distributed to shareholders
(15% for individual investors in the 15% tax bracket.
"Short -term capital gains": Gains on securities sold by a Fund that do
not meet the long-term holdings period are considered short term
capital gains and are taxable as ordinary income.
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"Qualified 5-year gains": For individuals in the 15% bracket, qualified
five-year gains are net gains on securities held for more than 5 years
which are sold after December 31, 2000. For individual who are subject
to tax at higher rate brackets, qualified five-year gains are net gains
on securities which are purchased after December 31, 2000 and are held
for more than five years. Taxpayers subject to tax at a higher rate
brackets may also make an election for shares held on January 1, 2001
to recognize gain on their shares in order to qualify such shares as
qualified five-year property. 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 five-year
holding period.
Any loss incurred on the redemption or exchange of shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
distributed to you with respect to your Fund shares and any remaining loss will
be treated as a long-term capital loss to the extent of any long-term capital
gains distributed to you by the Fund on those shares.
All or a portion of any loss that you realize upon the redemption of
your Fund shares will be disallowed to the extent that you buy other shares in
the Fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will be
added to your tax basis in the new shares you buy.
If you redeem some or all of yours shares in a Fund, and then reinvest
the sales proceeds in such Fund or in another Delaware Investments fund within
90 days of buying the original shares, the sales charge that would otherwise
apply to your reinvestment may be reduced or eliminated. The IRS will require
you to report gain or loss on the redemption of your original shares in a Fund.
In doing so, all or a portion of the sales charge that you paid for your
original shares in a Fund will be excluded from your tax basis in the shares
sold (for the purpose of determining gain or loss upon the sale of such shares).
The portion of the sales charge excluded will equal the amount that the sales
charge is reduced on your reinvestment. Any portion of the sales charge excluded
from your tax basis in the shares sold will be added to the tax basis of the
shares you acquire from your reinvestment.
Shareholders will be notified annually by Income Funds as to the federal
income tax status of dividends and distributions paid by the Fund.
The automatic conversion of Class B Shares into Class A Shares at the end
of approximately eight years after purchase will be tax-free for federal tax
purposes.
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INVESTMENT MANAGEMENT AGREEMENTS AND SUB-ADVISORY AGREEMENT
The Manager, located at One Commerce Square, Philadelphia, PA 19103,
furnishes investment management services to each Fund, subject to the
supervision and direction of the Board of Trustees of Income Funds.
The Manager and its predecessors have been managing the funds in the
Delaware Investments family since 1938. On July 31, 1999, the Manager and its
affiliates within Delaware Investments, including Delaware International
Advisers Ltd., were managing in the aggregate more than $46 billion in assets in
the various institutional or separately managed (approximately $27,865,360,000)
and investment company ($19,110,740,000) accounts.
The Investment Management Agreement for the Funds is dated September
29, 1999 and was approved by the initial shareholder on that date. The 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 Trustees 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 trustees
of Income Funds or by the Manager. The Agreement will terminate automatically in
the event of its assignment.
The management fee rate schedule for each Fund is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Management Fee Schedule
(as a percentage of average daily net
Fund Name assets)
Annual Rate
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Bond Fund 0.50% on first $500 million
0.475% on next $500 million
0.45% on next $1,500 million
0.425% on assets in excess of $2,500 million
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Delchester Fund 0.65% on first $500 million
0.60% on next $500 million
0.55% on next $1,500 million
0.50% on assets in excess of $2,500 million
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Extended Duration Bond Fund 0.55% on first $500 million
0.50% on next $500 million
0.45% on next $1,500 million
0.425% on assets in excess of $2,500 million
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
High-Yield Opportunities Fund 0.65% on first $500 million
0.60% on next $500 million
0.55% on next $1,500 million
0.50% on assets in excess of $2,500 million
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Strategic Income Fund 0.65% on first $500 million
0.60% on next $500 million
0.55% on next $1,500 million
0.50% on assets in excess of $2,500 million
-------------------------------------------------------------------------------------
</TABLE>
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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 fiscal year ended July
31, 1999, no fees were paid to Delaware International as a result of the 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 June 30, 2000.
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 1.00% (exclusive of taxes,
interest, brokerage commissions, extraordinary expenses and 12b-1 expenses) from
April 12, 1999 through September 30, 1999.
The Manager has contracted to waive fees and pay expenses of High-Yield
Opportunities Fund from October 1, 1999 through September 30, 2000 in order to
prevent total operating expenses (excluding any 12b-1 plan expenses, taxes,
interest, brokerage fees and extraordinary expenses) from exceeding 1.00% of
average daily net assets.
The Manager has elected voluntarily to waive that portion, if any, of
the annual management fees payable by Corporate Bond Fund and Extended Duration
Bond 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 0.55%
(exclusive of taxes, interest, brokerage commissions, extraordinary expenses and
12b-1 expenses) during the commencement of the public offering of the Fund
through September 30, 1999.
The Manager has contracted to waive fees and pay expenses of Corporate
Bond Fund and Extended Duration Bond Fund from October 1, 1999 through September
30, 2000 in order to prevent total operating expenses (excluding any 12b-1 plan
expenses, taxes, interest, brokerage fees and extraordinary expenses) from
exceeding 0.55% of average daily net assets.
On July 31, 1999, the total net assets of Income Funds were
$1,453,441,440, broken down as follows:
Delchester Fund $1,265,047,623
Strategic Income Fund $ 48,973,288
High-Yield Opportunities Fund $ 24,457,793
Corporate Bond Fund $ 58,117,139
Extended Duration Bond Fund $ 56,845,597
76
<PAGE>
On July 31, 1999, the total net assets for each Fund and investment
management fees paid for each Fund for the past three fiscal years were as
follows:
<TABLE>
<CAPTION>
Fund July 31, 1999 July 31, 1998 July 31, 1997
---- ------------- ------------- -------------
<S> <C> <C> <C>
Delchester Fund $8,019,247 paid $8,245,496 paid $7,362,089 paid
Strategic Income Fund(1) $307,418 earned $212,472 earned $73,164 earned
$49,230 paid $-0- paid $-0- paid
$258,188 waived $212,472 waived $73,164 waived
High-Yield Opportunities Fund(2) $ 131,019 earned $70,555 earned $30,869 earned
$4,056 paid $28,057 paid $6,031 paid
$126,963 waived $42,498 waived $24,838 waived
Corporate Bond Fund(3) $175,448 earned N/A N/A
$10,850 paid N/A N/A
$164,598 waived N/A N/A
Extended Duration Bond Fund(3) $178,398 earned N/A N/A
$24,290 paid N/A N/A
$154,108 waived N/A N/A
</TABLE>
(1) Commenced operations on October 1, 1996.
(2) Commenced operations on December 30, 1996.
(3) Commenced operations on September 15, 1998.
Under the general supervision of the Board of Trustees, the Manager
makes all investment decisions which are implemented by the Funds. The Manager
pays the salaries of all trustees, officers and employees of each Fund who are
affiliated with the Manager. Each Fund pays all of its other expenses, including
its proportionate share of rent and certain other administrative expenses. The
Manager is a series of Delaware Management Business Trust. The Manager changed
its form of organization from a corporation to a business trust on March 1,
1998.
Distribution and Service
The Distributor, Delaware Distributors, L.P. (which formerly conducted
business as Delaware Distributors, Inc.), located at 1818 Market Street,
Philadelphia, PA 19103, serves as the national distributor for the Funds under
Distribution Agreements dated September 29, 1999. The Distributor is an
affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by each Fund on behalf of the Class A Shares,
Class B Shares and Class C Shares under their respective 12b-1 Plans. Delaware
Distributors, Inc. ("DDI") is the corporate general partner of Delaware
Distributors, L.P. and both DDI and Delaware Distributors, L.P. are indirect,
wholly owned subsidiaries of Delaware Management Holdings, Inc.
77
<PAGE>
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
each Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to an agreement dated September 29, 1999. The Transfer Agent also
provides accounting services to each Fund 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 effecting transactions through a broker or
agent.
78
<PAGE>
OFFICERS AND TRUSTEES
The business and affairs of Income Funds are managed under the
direction of its Board of Trustees.
Certain officers and trustees of Income Funds hold identical positions
in each of the other funds available from the Delaware Investments family. As of
August 31, 1999, the Trust's officers and trustees, as a group, owned less than
1% of each of the Institutional Class, Class A Shares, B Shares and C Shares of
Delchester Fund, Strategic Opportunities Fund, Corporate Bond Fund and Extended
Duration Bond Fund. As of August 31, 1999, the Trust's officers and trustees, as
a group, owned 50% of the Class A Shares and less than 1% of the Class B Shares,
Class C Shares and Institutional Class Shares of High-Yield Opportunities Fund.
As of August 31, 1999, management believes the following accounts held
5% or more of the outstanding shares of Class A Shares, Class B Shares, Class C
Shares, and Institutional Class Shares of each Fund. With the exception of
Delaware Management Company Employee Profit Sharing Trust, Management does not
have knowledge of beneficial owners. As of August 31, 1999, no one account held
25% or more of the outstanding shares of Income Funds.
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Delchester Fund Merrill Lynch, Pierce, Fenner & Smith 8,145,552.790 12.99%
Class B Shares For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Dear Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Delchester Fund Merrill Lynch, Pierce, Fenner & Smith 2,555,846.780 22.55%
Class C Shares For the Sole Benefit of its Customers
SEC #97HO2
Attn: Fund Administration
4800 Dear Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Delchester Fund Nationwide Life Insurance Co. 1,908,460.360 26.46%
Institutional Class Shares National QPVA
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
RS DMC Employee Profit Sharing Plan 1,140,443.840 15.81%
Delaware Management Company
Employee Profit Sharing Trust
c/o Rick Seidel
1818 Market Street
Philadelphia, PA 19103-3682
Bear Stearns Securities Corp 1,136,145.760 15.75%
FBO 220-47681-19
1 Metrotech Center North
Brooklyn, NY 11201-3870
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Delchester Fund Ogden Financial Services, Inc. 622,864.160 8.77%
Institutional Class Shares Attn: George Warren
3411 Silverside Street
103 Springer Building
Wilmington, DE 19810-4812
Chase Manhattan Bank C/F 509,335.280 7.06%
Delaware Group Foundation Funds
Income Portfolio
Attn: Marisol Gordon
Global Investment Services
3 Metrotech Center 8th Floor
Brooklyn, NY 11201-3800
Chase Manhattan Bank C/F 381,676.770 5.29%
Delaware Group Foundation Funds
Income Portfolio
Attn: Marisol Gordon
Global Investment Services
3 Metrotech Center 8th Floor
Brooklyn, NY 11201-3800
Strategic Income Fund Merrill Lynch, Pierce, Fenner & Smith 431,190.180 10.71%
Class B Shares For the Sole Benefit of its Customers
SEC #97LM7
Attn: Fund Administration
4800 Dear Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Strategic Income Fund Merrill Lynch Pierce Fenner & Smith 192,020.140 14.44%
Class C Shares For the sole benefit of its customers
SEC #97LM8
Attn: Fund Administration
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-66484
Strategic Income Fund Chicago Trust Company 711,922.440 77.84%
Institutional Class Shares FBO Lincoln National Corporation
Employees Retirement Trust
1000 N. Water Street TR 14
Milwaukee, WI 53202-6648
RS DMC Employee Profit Sharing Plan 59,216.060 6.47%
Delaware Management Company
Employee Profit Sharing Trust
c/o Rick Seidel
1818 Market Street
Philadelphia, PA 19103-3682
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Strategic Income Fund RS 401(k) Plan 53,660.510 5.86%
Institutional Class Shares Waterfield Group 401(k) Plan
Attn: Machelle Thomas
P.O. Box 128
Fort Wayne, IN 46804
RS 401(k) Plan 47,516.170 5.19%
Beam Pines, Inc.
Attn: Judith Pines
600 Third Avenue
New York, NY 10016
High-Yield Opportunities Fund Wayne A. Stork 1,189,138.240 49.84%
Class A Shares 5727 Twin Silo Road
Doylestown, PA 18901
Merrill Lynch Pierce Fenner & Smith 132,534.520 5.55%
For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive, 3rd Floor
Jacksonville, FL 32246-6484
High-Yield Opportunities Fund Merrill Lynch Pierce Fenner & Smith 512,193.900 43.78%
Class B Shares For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive, 3rd Floor
Jacksonville, FL 32246-6484
High-Yield Opportunities Merrill Lynch Pierce Fenner & Smith 140,838.610 38.32%
Fund Class C Shares For the sole benefit of its customers
Attn: Fund Administration
4800 Deer Lake Drive, 3rd Floor
Jacksonville, FL 32246-6484
33,318.380 9.18%
NFSC FEBO
Duncan Fife
Dale Fife
632 Teal Street
Foster City, CA 94404
NFSC FEBO
NFSC/FMTC IRA Rollover
FBO Rebecca Amidt
31 Doubling Road
Greenwich, CT 06830
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
High-Yield Opportunities Chicago Trust Company 725,966.220 99.97%
Fund Institutional Class FBO Lincoln National Corp.
Employee Retirement Plan
c/o Marshall & Ilsley Trust Company
P.O. Box 2977
Milwaukee, WI 53201-2977
Corporate Bond Fund RS DMTC Money Purchase 23,347.290 7.64%
Class A Shares Pension Plan
J. Rex Burner Co., Inc.
Attn: Barbara Burner
3148 U.S. Highway BSN 340
Luray, VA 22835
NFSC/FMTC IRA 16,644.570 5.45%
FBO Earl J. Stewart
5178 Lukens Road, Rt. 2
Grove City, OH 43123
Merrill Lynch Pierce Fenner & Smith 16,274.550 5.33%
For the sole benefit of its customers
Attn: Fund Administration
SEC #97YN5
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
DMTC Custodian for the IRA of 15,998.590 5.24%
Norman Myricks IRA
2337 Reno Dr.
San Jose, CA 95148-1738
Corporate Bond Fund Merrill Lynch Pierce Fenner & Smith 103,241.330 35.14%
Class B Shares For the sole benefit of its customers
Attn: Fund Administration
SEC #97YN7
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Corporate Bond Fund Raymond James and Assoc., Inc. CSDN 35,180.100 11.97%
Class B Shares Geoffrey Ryan IRA
2102 N. Bissell St.
Chicago, IL 60614-4202
Dain Rauscher, Inc. FBO 20,720.270 7.05%
Carolyn L. Mercer Pers. Rep.
Estate of Robert Lloyd Wilbur
12705 SE River Road, Apt. 603D
Portland, OR 97222
Donaldson Lufkin Jenrette 16,620.650 5.65%
Securities Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303
Corporate Bond Fund Merrill Lynch Pierce Fenner & Smith 38,541.140 72.79%
Class C Shares For the sole benefit of its customers
Attn: Fund Administration
SEC #97YN8
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
DMTC Custodian for the IRA of 5,085.540 9.60%
Gaile Rider IRA
P.O. Box 432
Darby, MT 59829-0432
Extended Duration Bond Fund DMTC Custodian for the IRA of 16,307.410 7.69%
Class A Shares Norman Myricks IRA
2337 Reno Dr.
San Jose, CA 95148-1738
Merrill Lynch Pierce Fenner & Smith 13,432.170 6.33%
For the sole benefit of its customers
Attn: Fund Administration
SEC #97YJ4
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
William A. Stern 10,920.260 5.15%
Meredyth J. Stern JTTEN
TOD Michael and Gina Stern
9830 Colorado Road
Bloomington, MN 55438-1743
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Extended Duration Bond Fund Merrill Lynch Pierce Fenner & Smith 37,167.980 74.79%
Class B Shares For the sole benefit of its customers
Attn: Fund Administration
SEC #97YJ5
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
NFSC FEBO #APX-389447 4,626.290 9.31%
NFSC/FMTC IRA
FBO Antonio Ramirez Shearer
144-77 41st Ave.
Flushing, NY 11355-1465
Donaldson Lufkin Jenrette 4,061.470 8.17%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
Extended Duration Bond Fund Merrill Lynch Pierce Fenner & Smith 6,672.060 55.11%
Class C Shares For the sole benefit of its customers
Attn: Fund Administration
SEC #97YN4
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
Wexford Clearing Services Corp. 4,195.260 34.65%
John S. Walkenhorst
P.O. Box 1141
Blue Hill, ME 04614-1141
</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 Retirement
Financial Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") was completed. DMH and the Manager are now indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National. Lincoln
National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services industry,
including insurance and investment management.
84
<PAGE>
Trustees and principal officers of the Funds are noted below along with
their ages and their business experience for the past five years. Unless
otherwise noted, the address of each officer and trustee is One Commerce Square,
Philadelphia, PA 19103.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee and Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
*Wayne A. Stork (62) Chairman, Trustee/Director of Income Funds and each of the other 32
investment companies in the Delaware Investments family.
Chairman and Director of Delaware Management Holdings, Inc.
Director of Delaware International Advisers Ltd.
Prior to January 1, 1999, Mr. Stork was Director of Delaware Capital
Management, Inc.; Chairman, President and Chief Executive Officer and
Director/Trustee 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 and Chief Executive
Officer of Delaware International Advisers Ltd.; Chairman, Chief Executive
Officer and Director of Delaware International Holdings Ltd.; Chief
Executive Officer of 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.
In addition, during the five years prior to January 1, 1999, Mr. Stork has
served in various executive capacities at different times within Delaware
Investments.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
* Trustee affiliated with Income Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
- --------------------------------------------------------------------------------
85
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee and Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
*David K. Downes (59) President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer and Trustee/Director of Income Funds and each of the other 32
investment companies in the Delaware Investments family.
President and Director of Delaware Management Company, Inc.
President of Delaware Management Company (a series of Delaware Management
Business Trust)
President, Chief Executive Officer and Director of Delaware Capital
Management, Inc.
Chairman, President, Chief Executive Officer and Director of Delaware
Service Company, Inc.
President, Chief Operating Officer, Chief Financial Officer and Director of
Delaware International Holdings Ltd.
Chairman and Director of Delaware Management Trust Company and Retirement
Financial Services, Inc.
Executive Vice President, Chief Operating Officer, Chief Financial Officer
of Delaware Management Holdings, Inc., Founders CBO Corporation, Delaware
Investment Advisers (a series of Delaware Management Business Trust) and
Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial Officer
and Director of DMH Corp., Delaware Distributors, Inc., Founders Holdings,
Inc. and Delvoy, Inc.
Executive Vice President and Trustee of Delaware Management Business Trust
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Downes has served in various executive
capacities at different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------
* Trustee affiliated with Income Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
- --------------------------------------------------------------------------------
86
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Walter P. Babich (72) Trustee/Director Income Funds and each of the other 32 investment companies
in the Delaware Investments family
460 North Gulph Road, King of Prussia, PA 19406
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and from
1988 to 1991, he was a partner of I&L Investors.
- ---------------------------------------------------------------------------------------------------------------------------
John H. Durham (62) Trustee/Director of Income Funds and 18 other investment companies in the
Delaware Investments family
Private Investor.
P.O. Box 819, Gwynedd Valley, PA 19437
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. He was also a Partner of Complete Care
Services from 1995 to 1999.
- ---------------------------------------------------------------------------------------------------------------------------
Anthony D. Knerr (60) Trustee/Director of Income Funds and each of the other 32 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 (59) Trustee/Director of Income Funds and each of the other 32 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.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Trustee Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Thomas F. Madison (63) Trustee/Director of Income Funds and each of the other 32 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.
- ---------------------------------------------------------------------------------------------------------------------------
Charles E. Peck (73) Trustee/Director of Income Funds and each of the other 32 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.
- ---------------------------------------------------------------------------------------------------------------------------
Janet L. Yeomans (51) Trustee/Director of Income Funds and each of the other 32 investment
companies in the Delaware Investments family.
Building 220-13W-37, St. Paul, MN 55144
Vice President and Treasurer, 3M Corporation.
From 1987-1994, Ms. Yeomans was Director of Benefit Funds and Financial
Markets for the 3M Corporation; Manager of Benefit Fund Investments for the
3M Corporation, 1985-1987; Manager of Pension Funds for the 3M Corporation,
1983-1985; Consultant--Investment Technology Group of Chase Econometrics,
1982-1983; Consultant for Data Resources, 1980-1982; Programmer for the
Federal Reserve Bank of Chicago, 1970-1974.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard G. Unruh, Jr. (60) Executive Vice President and Chief Investment Officer, Equity of Income
Funds and each of the other 32 investment companies in the Delaware
Investments family
Chief Executive Officer/Chief Investment Officer of Delaware Investment
Advisers (a series of Delaware Management Business Trust)
Executive Vice President of Delaware Management Holdings, Inc. and Delaware
Capital Management, Inc.
Executive Vice President/Chief Investment Officer of Delaware Management
Company (a series of Delaware Management Business Trust)
Executive Vice President and Trustee of 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 Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
H. Thomas McMeekin (46) Executive Vice President and Chief Investment Officer, Fixed Income of
Income Funds and each of the other 32 investment companies in the Delaware
Investments family.
Director of Delaware Management Holdings, Inc. and Founders CBO Corporation.
Executive Vice President/Chief Investment Officer, DMC-Fixed Income of
Delaware Management Company (a series of Delaware Management Business Trust)
Executive Vice President/Chief Investment Officer, DIA-Fixed Income of
Delaware Investment Advisers (a series of Delaware Management Business
Trust)
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Management Business Trust and Delaware
Capital Management, Inc.
Mr. McMeekin joined Delaware Investments in 1999. During the past five
years, he has also served in various executive capacities for Lincoln
National Corporation.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Richard J. Flannery (42) Executive Vice President/General Counsel of Income Funds and each of the
other 32 investment companies in the Delaware Investments family, Delaware
Management Holdings, Inc., 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
Founders CBO Corporation.
Executive Vice President/General Counsel and Director of Delaware
International Holdings Ltd., Founders Holdings, Inc., Delvoy, Inc., DMH
Corp., Delaware Management Company, Inc., Delaware Service Company, Inc.,
Delaware Capital Management, Inc., Retirement Financial Services, Inc.,
Delaware Distributors, Inc. and Delaware Management Trust Company.
Executive Vice President and Trustee of Delaware Management Business Trust.
Director of Delaware International Advisers Ltd.
Director of HYPPCO Finance Company Ltd.
During the past five years, Mr. Flannery has served in various executive
capacities at different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
Eric E. Miller (46) Senior Vice President/Deputy General Counsel and Secretary of Income Funds
and each of the other 32 investment companies in Delaware Investments.
Senior Vice President/Deputy General Counsel and Assistant Secretary of
Delaware Management Holdings, Inc., DMH Corp., Delvoy, Inc., Delaware
Management Company, Inc., Delaware Management Business Trust, Delaware
Management Company (a series of Delaware Management Business Trust),
Delaware Investment Advisers (a series of Delaware Management Business
Trust), Delaware Service Company, Inc., Delaware Capital Management, Inc.,
Retirement Financial Services, Inc., Delaware Distributors, Inc., Delaware
Distributors, L.P. and Founders Holdings, Inc.
During the past five years, Mr. Miller has served in various executive
capacities at different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Joseph H. Hastings (49) Senior Vice President/Corporate Controller of Income Funds and each of the
other 32 investment companies in the Delaware Investments family and
Delaware Investment Advisers (a series of Delaware Management Business
Trust)
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delvoy , Inc., Delaware Management
Company, Inc., Delaware Management Business Trust, 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., Founders Holdings, Inc. and Delaware Management Business Trust
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company
Senior Vice President/Assistant Treasurer of Founders CBO Corporation
Chief Financial Officer of Retirement Financial Services, Inc.
During the past five years, Mr. Hastings has served in various executive
capacities at different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
Michael P. Bishof (37) Senior Vice President and Treasurer of Income Funds and each of the other 32
investment companies in the Delaware Investments family.
Senior Vice President/Investment Accounting of Delaware Management Company
(a series of Delaware Management Business Trust), Delaware Service Company,
Inc. and Delaware Capital Management, Inc. and Founders Holdings, Inc.
Senior Vice President and Treasurer/ Investment Accounting of Delaware
Distributors, L.P. and Delaware Investment Advisers (a series of Delaware
Management Business Trust)
Senior Vice President/Manager of Investment Accounting of Delaware
International Holdings, Inc.
Senior Vice President and 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.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Officer Business Experience
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Gary A. Reed (45) Vice President/Senior Portfolio Manager of Income Funds and each of the
other 32 investment companies in the Delaware Investments family, Delaware
Management Company (a series of Delaware Management Business Trust),
Delaware Investment Advisers (a series of series of Delaware Management
Business Trust) and Delaware Capital Management, Inc.
During the past five years, Mr. Reed has served in such capacities within
Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
Gerald T. Nichols (41) Vice President/Senior Portfolio Manager of Income Funds and each of the
other 32 investment companies in the Delaware Investments family, Delaware
Management Company (a series of Delaware Management Business Trust) and
Delaware Investment Advisers (a series of series of Delaware Management
Business Trust).
Vice President/Senior Portfolio Manager of Founders Holdings, Inc.
Treasurer/Assistant Secretary and Director of Founders CBO Corporation.
During the past five years, Mr. Nichols has served in various capacities at
different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
Paul A. Matlack (40) Vice President/Senior Portfolio Manager of Income Funds and each of the
other 32 investment companies in the Delaware Investments family, Delaware
Management Company (a series of Delaware Management Business Trust) and
Delaware Investment Advisers (a series of series of Delaware Management
Business Trust).
Vice President/Senior Portfolio Manager of Founders Holdings, Inc.
President and Director of Founders CBO Corporation.
During the past five years, Mr. Matlack has served in various capacities at
different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
Paul Grillo (40) Vice President/Portfolio Manager of Income Funds and each of the other 32
investment companies in the Delaware Investments family, Delaware Management
Company (a series of Delaware Management Business Trust), Delaware
Investment Advisers (a series of series of Delaware Management Business
Trust) and Delaware Capital Management, Inc.
During the past five years, Mr. Grillo has served in various capacities at
different times within Delaware Investments.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE>
The following is a compensation table listing for each trustee entitled
to receive compensation, the aggregate compensation received from Income Funds
and the total compensation received from all investment companies in the
Delaware Investments family for which he or she serves as a trustee or director
for the fiscal year ended July 31, 1999 and an estimate of annual benefits to be
received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of July 31, 1999. Only the independent trustees of Income
Funds receive compensation from Income Funds.
<TABLE>
<CAPTION>
Pension Retirement
Aggregate Benefits Accrued as Estimated Annual Total Compensation from
Compensation from Part of Trust Benefits Upon Delaware Investments
Name (3) the Trust Expenses Retirement(1) Investment Companies(2)
--------- -------- ------------- -----------------------
<S> <C> <C> <C> <C>
Walter B. Babich $4,040 None $38,500 $59,983
John H. Durham $3,788 None $32,180 $50,015
Anthony D. Knerr $4,302 None $38,500 $65,210
Ann R. Leven $4,387 None $38,500 $66,209
Thomas F. Madison $4,376 None $38,500 $66,043
Charles E. Peck $4,051 None $38,500 $62,292
Janet L. Yeomans(4) $1,403 None $38,500 $25,238
</TABLE>
(1) Under the terms of the Delaware Group Retirement Plan for
Directors/Trustees, each disinterested trustee/director who, at the time of
his or her retirement from the Board, has attained the age of 70 and served
on the Board for at least five continuous years, is entitled to receive
payments from each investment company in the Delaware Investments family for
which he or she serves as a trustee or director for a period equal to the
lesser of the number of years that such person served as a trustee or
director for 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 trustees/directors of each investment company at
the time of such person's retirement. If an eligible trustee/director
retired as of July 31, 1999, 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 trustee or director, based on the number of investment companies
in the Delaware Investments family as of that date.
(2) Each independent trustee/director (other than John H. Durham) currently
receives a total annual retainer fee of $38,000 for serving as a trustee or
director for all 33 investment companies in Delaware Investments, plus
$3,145 for each Board Meeting attended. John H. Durham currently receives a
total annual retainer fee of $32,180 for serving as a trustee or director
for 19 investment companies in Delaware Investments, plus $1,810 for each
Board Meeting attended. Ann R. Leven, Anthony D. Knerr, Thomas F. Madison
and Charles E. Peck 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) W. Thacher Longstreth served as an independent trustee of Income Fund during
its last fiscal year for the period August 1, 1998 through March 17, 1999,
the date on which he retired. For this period, Mr. Longstreth received
$3,598 from Income Funds and $50,780 from all investment companies in the
Delaware Investments family.
(4) Janet L. Yeomans joined the Board of Trustees of all investment companies in
the Delaware Investments family in March 1999 for some funds and in April
1999 for other funds.
93
<PAGE>
GENERAL INFORMATION
The Trust is an open-end management investment company. Each Fund's
portfolio of assets is diversified as defined by the 1940 Act. Income Funds was
originally organized as a Delaware corporation in 1970. It was subsequently
reorganized as a Maryland corporation, Delaware Group Income Funds on March 4,
1983 and as a Delaware business trust on September 29, 1999.
The Manager is the investment manager of Income Funds. The Manager also
provides investment management services to certain of the other funds in the
Delaware Investments family. An affiliate of the Manager 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 and its affiliate Delaware International Advisers Ltd.,
manage the investment options for Delaware-Lincoln Choice Plus and Delaware
Medallion (SM) III Variable Annuities. Choice Plus is issued and distributed by
Lincoln National Life Insurance Company. Choice Plus offers a variety of
different investment styles managed by leading money managers. 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 various investment series ranging from domestic equity funds,
international equity and bond funds and domestic fixed income funds. Each
investment series available through Choice Plus and Medallion utilizes an
investment strategy and discipline the same as or similar to one of the Delaware
Investments mutual funds available outside the annuity. The Manager or Delaware
International Advisers Ltd. also manages many of the investment options for the
Delaware-Lincoln Choice Plus Variable Annuity. Choice Plus is issued and
distributed by Lincoln National Life Insurance Company. Choice Plus offers a
variety of different investment styles managed by ten leading money managers.
See Delaware Group Premium Fund, in Appendix B.
Access persons and advisory persons of the Delaware Investments family
of funds, as those terms are defined in SEC Rule 17j-1 under the 1940 Act, who
provide services to the Manager, Delaware International Advisers Ltd. 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 by certain covered persons in certain securities 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 the Funds 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 Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP
- ----------------- --------------- ---------- ----------
7/31/99 $2,539,387 $2,118,309 $421,078
7/31/98 $3,072,617 $2,540,252 $532,365
7/31/97 $2,938,512 $2,431,253 $507,259
94
<PAGE>
Strategic Income Fund Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP
- ----------------- --------------- ---------- ----------
7/31/99 $177,248 $148,658 $28,590
7/31/98 $288,045 $257,495 $30,551
7/31/97* $281,015 $266,705 $14,310
*Date of initial public offering of Strategic Income Fund Class A Shares was
October 1, 1996.
High-Yield Opportunities Fund Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP
- ----------------- --------------- ---------- ----------
7/31/99 $99,895 $84,602 $15,293
7/31/98 $43,825 $40,025 $3,799
7/31/97* -0- -0- -0-
*Date of initial public offering of High-Yield Opportunities Fund Class A Shares
was December 30, 1996.
Corporate Bond Fund Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP
- ----------------- --------------- ---------- ----------
7/31/99* $7,108 $5,881 $1,227
*Date of initial public offering of Corporate Bond Fund Class A Shares was
September 15, 1998.
Extended Duration Bond Fund Class A Shares
Total Amount Amounts Net
of Underwriting Reallowed Commission
Fiscal Year Ended Commissions to Dealers to DDLP
- ----------------- --------------- ---------- ----------
7/31/99* $594 $508 $86
*Date of initial public offering of Extended Duration Bond Fund Class A Shares
was September 15, 1998.
95
<PAGE>
The Distributor received in the aggregate Limited CDSC payments with
respect to Class A Shares of each Fund as follows:
<TABLE>
<CAPTION>
Strategic High-Yield Corporate Extended Duration
Delchester Income Fund Opportunities Fund Bond Fund Bond Fund
Fiscal Year Ended Class A Shares Class A Shares Class A Shares Class A Shares Class A Shares
- ----------------- -------------- -------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
7/31/99* $41 $-0- $-0- $-0- $-0-
7/31/98 $2,671 $-0- $-0- N/A N/A
7/31/97** $563 $-0- $-0- N/A N/A
</TABLE>
* Date of initial public offering of Corporate Bond Fund and Extended Duration
Bond Fund Class A Shares was September 15, 1998.
** Date of initial public offering of Strategic Income Fund Class A Shares was
October 1, 1996. Date of initial public offering of High-Yield Opportunities
Fund Class A Shares was December 30, 1996.
The Distributor received in the aggregate CDSC payments with respect to
Class B Shares of each Fund as follows:
<TABLE>
<CAPTION>
Strategic High-Yield Corporate Extended Duration
Delchester Income Fund Opportunities Fund Bond Fund Bond Fund
Fiscal Year Ended Class A Shares Class A Shares Class A Shares Class A Shares Class A Shares
- ----------------- -------------- -------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
7/31/99* $1,199,675 $67,645 $12,138 $1,060 $-0-
7/31/98 $818,163 $34,503 $-0- N/A N/A
7/31/97** $596,357 $2,376 $2,376 N/A N/A
</TABLE>
* Date of initial public offering of Corporate Bond Fund and Extended Duration
Bond Fund Class A Shares was September 15, 1998.
** Date of initial public offering of Strategic Income Fund Class A Shares was
October 1, 1996. Date of initial public offering of High-Yield Opportunities
Fund Class A Shares was December 30, 1996.
The Distributor received CDSC payments with respect to each Fund as
follows:
<TABLE>
<CAPTION>
Strategic High-Yield Corporate Extended Duration
Delchester Income Fund Opportunities Fund Bond Fund Bond Fund
Fiscal Year Ended Class A Shares Class A Shares Class A Shares Class A Shares Class A Shares
- ----------------- -------------- -------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C> <C>
7/31/99* $40,611 $2,192 $2,831 $6 $-0-
7/31/98 $22,000 $3,440 $0 N/A N/A
7/31/97** $9,434 $384 $0 N/A N/A
</TABLE>
* Date of initial public offering of Corporate Bond Fund and Extended Duration
Bond Fund Class A Shares was September 15, 1998.
** Date of initial public offering of Strategic Income Fund Class A Shares was
October 1, 1996. Date of initial public offering of High-Yield Opportunities
Fund Class A Shares was December 30, 1996.
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for the Funds and for the
other mutual funds in the Delaware Investments family. The Transfer Agent is
paid a fee by the Funds for providing these services consisting of an annual per
account charge of $11.00 plus transaction charges for particular services
according to a schedule. Compensation is fixed each year and approved by the
Board of Trustees, including a majority of the unaffiliated trustees. The
Transfer Agent also provides accounting services to the Funds. Those services
include performing all functions related to calculating a Fund's net asset value
96
<PAGE>
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 the Funds, on an aggregate
pro-rata basis. The asset-based fee payable to the Transfer Agent is subject to
a minimum fee calculated by determining the total number of investment
portfolios and associated classes.
The Manager and its affiliates own the name "Delaware Group." Under
certain circumstances, including the termination of the Trust's advisory
relationship with the Manager or its distribution relationship with the
Distributor, the Manager and its affiliates could cause Income Funds to delete
the words "Delaware Group" from a Fund'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 has an unlimited authorized number of shares of beneficial
interest with no par value allocated to each Class. Each fund offers four
classes of shares, each representing a proportionate interest in the assets of
that Fund, and each having the same voting and other rights and preferences as
the other classes, except that shares of a fund's Institutional Class may not
vote on matters affecting 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.
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 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 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. Beginning August 16,
1999, Delchester Fund changed its name and its classes' names to Delaware
Delchester Fund; Strategic Income Fund changed it name and its classes' names to
Delaware Strategic Income Fund; High-Yield Opportunities Fund changed it name
and its classes' names to Delaware High-Yield Opportunities Fund; Corporate Bond
Fund changed it name and its classes' names to Delaware Corporate Bond Fund; and
Extended Duration Bond Fund changed it name and its classes' names to Delaware
Extended Duration Bond Fund. Beginning September 29, 1999, Delaware Group Income
Funds changed its name to Delaware Group Income Funds.
97
<PAGE>
Noncumulative Voting
Income Funds' shares have noncumulative voting rights which means that
the holders of more than 50% of the shares of Income Funds voting for the
election of trustees can elect all the trustees if they choose to do so, and, in
such event, the holders of the remaining shares will not be able to elect any
trustees.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
98
<PAGE>
APPENDIX A--RATINGS
General Rating Information
Bonds
The ratings list below can be further described as follows. For all
categories lower than Aaa, Moody's Investors Service, Inc. includes a "1", "2"
or "3" following the rating to designate a high, medium or low rating,
respectively. Similarly, for all categories lower than AAA, Standard & Poor's
Ratings Group and Fitch IBCA, Inc. may add a "+" or "-" following the rating to
characterize a higher or lower rating, respectively.
<TABLE>
<CAPTION>
<S> <C> <C>
Moody's Investors Aaa Highest quality, smallest degree of investment risk.
Service, Inc.
Aa High quality; together with Aaa bonds, they compose the
high-grade bond group.
A Upper-medium-grade obligations; many favorable investment
attributes.
Baa Medium-grade obligations; neither highly protected nor
poorly secured. Interest and principal appear adequate for
the present, but certain protective elements may be
lacking or may be unreliable over any great length of
time.
Ba More uncertain with speculative elements. Protective of
interest and principal payments not well safeguarded in
good and bad times.
B Lack characteristics of desirable investment; potentially
low assurance of timely interest and principal payments or
maintenance of other contract terms over time.
Caa Poor standing, may be in default; elements of danger with
respect to principal or interest payments.
Ca Speculative in high degree; could be in default or have
other marked shortcomings.
C Lowest rated. Extremely poor prospects of ever attaining
investment standing.
Standard & Poor's AAA Highest rating; extremely strong capacity to pay principal
and Ratings Group interest.
AA High quality; very strong capacity to pay principal and
interest.
A Strong capacity to pay principal and interest; somewhat
more susceptible to the adverse effects of changing
circumstances and economic conditions.
BBB Adequate capacity to pay principal and interest; normally
exhibit adequate protection parameters, but adverse
economic conditions or changing circumstances more likely
to lead to weakened capacity to pay principal and interest
than for higher-rated bonds.
BB, B Predominantly speculative with respect to the issuer's
capacity to meet required interest and principal payments.
BB-lowest degree of speculation; CC-the highest degree of
CCC, CC speculation. Quality and protective characteristics
outweighed by large uncertainties or major risk exposure
to adverse conditions.
D In default.
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Fitch IBCA, Inc. AAA Highest quality; obligor has exceptionally strong ability
to pay interest and repay principal, which is unlikely to
be affected by reasonably foreseeable events.
AA Very high quality; obligor's ability to pay interest and
repay principal is very strong. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A High quality; obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than higher-rated bonds.
BBB Satisfactory credit quality; obligor's ability to pay
interest and repay principal is considered adequate.
Unfavorable changes in economic conditions and
circumstances are more likely to adversely affect these
bonds and impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for higher-rated bonds.
BB, Not investment grade; predominantly speculative with
respect to the issuer's capacity to repay interest and
CCC, repay principal in accordance with the terms of the
obligation for bond issues not in default. BB is the least
CC, C speculative. C is the most speculative.
</TABLE>
Commercial Paper
<TABLE>
<CAPTION>
Moody's S&P Fitch
<S> <C> <C>
P-1 Superior quality A-1+ Extremely strong quality F-1+ Exceptionally strong quality
P-2 Strong quality A-1 Strong quality F-1 Very strong quality
P-3 Acceptable quality A-2 Satisfactory quality F-2 Good credit quality
A-3 Adequate quality F-3 Fair quality
B Speculative quality F-S Weak credit quality
C Doubtful quality
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
State and Municipal Notes
Moody's S&P Fitch
<S> <C> <C>
MIG1/
VMIG1 Best quality SP1+ Very strong quality F-1+ Exceptionally strong quality
MIG2/ SP1 Strong grade F-1 Very strong quality
VMIG2 High quality SP2 Satisfactory grade F-2 Good credit quality
MIG3/ SP3 Speculative grade F-3 Fair credit quality
VMIG3 Favorable quality F-S Weak credit quality
MIG4/
VMIG4 Adequate quality
SG Speculative quality
</TABLE>
Earnings and Dividend Rankings for Common Stocks
Standard & Poor's Ratings Group. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, S&P believes that
earnings and dividend performance is the end result of the interplay of these
factors and that, over the long run, the record of this performance has a
considerable bearing on relative quality. The rankings, however, do not pretend
to reflect all of the factors, tangible or intangible, that bear on stock
quality.
Relative quality of bonds or other debt, that is, degrees of
protection for principal and interest, called creditworthiness, cannot be
applied to common stocks, and therefore rankings are not to be confused with
bond quality ratings which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key
elements in establishing Standard & Poor's earnings and dividend rankings for
common stocks, which are designed to capsulize the nature of this record in a
single symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.
The point of departure in arriving at these rankings is a
computerized scoring system based on per-share earnings and dividend records of
the most recent ten years -- a period deemed long enough to measure significant
time segments of secular growth, to capture indications of basic change in trend
as they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
101
<PAGE>
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
Preferred Stock Rating
- ----------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Moody's Investors Aaa Considered to be a top-quality preferred stock. This
Service, Inc. rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred
stocks.
Aa Considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well
maintained in the foreseeable future.
A Considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset
protection are, nevertheless, expected to be maintained at
adequate levels.
Baa Considered to be medium-grade, neither highly protected
nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great
length of time.
Ba Considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded
during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
B Generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance
of other terms of the issue over any long period of time
may be small.
Caa Likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status
of payments.
Ca Speculative in a high degree and is likely to be in
arrears on dividends with little likelihood of eventual
payment.
C The lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Standard & Poor's AAA Has the highest rating that may be assigned by S&P to a
Ratings Group preferred stock issue andindicates an extremely strong
capacity to pay the preferred stock obligations.
AA Qualifies as a high-quality fixed income security. The
capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated
"AAA."
A Backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to
the adverse effects of changes in circumstances and
economic conditions.
BBB Regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to
lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the
"A" category.
BB,B, Regarded, on balance, as predominantly speculative with
respect to
CCC the issuer's capacity to pay preferred stock obligations.
"BB" indicates the lowest degree of speculation and "CCC"
the highest degree of speculation. While such issues will
likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CC Reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently
paying.
C A non-paying issue.
D A non-paying issue with the issuer in default on debt
instruments.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or
that S&P does not rate a particular type of obligation as
a matter of policy.
</TABLE>
103
<PAGE>
APPENDIX B--INVESTMENT OBJECTIVES OF THE OTHER FUNDS IN THE DELAWARE INVESTMENTS
FAMILY
Following is a summary of the investment objectives of the funds in the
Delaware Investments family:
Delaware Balanced 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. Delaware 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.
Delaware Trend Fund seeks long-term growth by investing in common
stocks issued by emerging growth companies exhibiting strong capital
appreciation potential.
Delaware 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.
Delaware 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.
Delaware Decatur Equity 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. Delaware Growth
and Income Fund seeks long-term growth by investing primarily in securities that
provide the potential for income and capital appreciation without undue risk to
principal. Delaware 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. Delaware Social Awareness 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.
Delaware Delchester Fund seeks as high a current income as possible by
investing principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Delaware Strategic Income Fund seeks
to provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities. Delaware High-Yield Opportunities Fund seeks to provide
investors with total return and, as a secondary objective, high current income.
Delaware Corporate Bond Fund seeks to provide investors with total return by
investing primarily in corporate bonds. Delaware Extended Duration Bond Fund
seeks to provide investors with total return by investing primarily in corporate
bonds.
Delaware 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 American Government Bond 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.
Delaware Cash Reserve Fund 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.
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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 engaged in the real estate
industry.
Delaware Tax-Free USA Fund seeks high current income exempt from
federal income tax by investing in municipal bonds of geographically-diverse
issuers. Delaware 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. Delaware 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.
Delaware 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.
Delaware 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. Delaware 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. Delaware
Tax-Free Pennsylvania Fund seeks a high level of current interest income exempt
from federal income tax and Pennsylvania state and local taxes, consistent with
the preservation of capital.
Delaware Foundation Funds are "fund of funds" which invest in other
funds in the Delaware Investments family (referred to as "Underlying Funds").
Delaware Foundation Funds Income Portfolio seeks a combination of current income
and preservation of capital with capital appreciation by investing primarily in
a mix of fixed income and domestic equity securities, including fixed income and
domestic equity Underlying Funds. Delaware 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. Delaware 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 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.
Delaware 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.
Delaware Global Equity Fund seeks to achieve long-term total return by investing
in global securities that provide the potential for capital appreciation and
income. Delaware Emerging Markets Fund seeks long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries.
Delaware 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. Delaware Overseas Equity Fund seeks to maximize total return (capital
appreciation and income), principally through investments in an internationally
diversified portfolio of equity securities. Delaware New Pacific Fund seeks
long-term capital appreciation by investing primarily in companies which are
domiciled in or have their principal business activities in the Pacific Basin.
Delaware Group Premium Fund, Inc. offers various funds available
exclusively as funding vehicles for certain insurance company separate accounts.
Growth and Income Series seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. Delchester Series seeks as high a
current income as possible by investing in rated and unrated corporate bonds,
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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 Balanced Series seeks a balance of
capital appreciation, income and preservation of capital. It uses a
dividend-oriented valuation strategy to select securities issued by established
companies that are believed to demonstrate potential for income and capital
growth. International Equity Series seeks long-term growth without undue risk to
principal by investing primarily in equity securities of foreign issuers that
provide the potential for capital appreciation and income. 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. Aggressive Growth
Series seeks long-term capital appreciation. The Series attempts to achieve its
investment objective by investing primarily in equity securities of companies
which the manager believes have the potential for high earnings growth.
Delaware U. S. 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 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 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 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 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 Tax-Free
Florida Insured Fund seeks to provide a high level of current income exempt from
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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 Tax-Free Florida Fund seeks
to provide a high level of current income exempt from federal income tax,
consistent with the preservation of capital. The Fund will seek to select
investments that will enable its shares to be exempt from the Florida intangible
personal property tax. Delaware 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 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 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 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 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 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 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 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
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. Delaware 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 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 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 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.
Delaware 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 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.
Delaware Select 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. Delaware 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. Delaware Tax-Efficient
Equity Fund seeks to obtain for taxable investors a high total return on an
after-tax basis. The Fund will attempt to achieve this objective by seeking to
provide a high long-term after-tax total return through managing its portfolio
in a manner that will defer the realization of accrued capital gains and
minimize dividend income.
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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FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditor for Income Funds
and, in its capacity as such, audits the annual financial statements contained
in the Funds' Annual Reports. Each Fund's Statement of Net Assets (and Statement
of Assets and Liabilities, as applicable), Statement of Operations, Statements
of Changes in Net Assets, Financial Highlights and Notes to Financial
Statements, as well as the report of Ernst & Young LLP, independent auditors,
for the fiscal year ended July 31, 1999, are included in the Funds' 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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