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The Delaware Group includes funds
with a wide range of investment objectives.
Stock funds, income funds, tax-free funds,
money market funds, global and international
funds and closed-end equity funds give
investors the ability to create a portfolio
that fits their personal financial goals.
For more information, contact
your financial adviser or call
Delaware Group at 800-523-4640,
in Philadelphia call 215-988-1333.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
Morgan Guaranty Trust Company of New York
60 Wall Street
New York, NY 10260
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TAX-FREE USA FUND
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TAX-FREE INSURED FUND
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TAX-FREE USA
INTERMEDIATE FUND
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DELAWARE GROUP TAX-FREE FUND, INC.
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PART B
STATEMENT OF
ADDITIONAL INFORMATION
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NOVEMBER 29, 1995
GROUP
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 1
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PART B--STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 29, 1995
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DELAWARE GROUP
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TAX-FREE FUND, INC.
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1818 MARKET STREET
PHILADELPHIA, PA 19103
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FOR PROSPECTUS AND PERFORMANCE:
NATIONWIDE 800-523-4640
PHILADELPHIA 215-988-1333
INFORMATION ON EXISTING ACCOUNTS:
(SHAREHOLDERS ONLY)
NATIONWIDE 800-523-1918
PHILADELPHIA 215-988-1241
DEALER SERVICES:
(BROKER/DEALERS ONLY)
NATIONWIDE 800-362-7500
PHILADELPHIA 215-988-1050
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TABLE OF CONTENTS
<TABLE>
<S> <C>
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COVER PAGE 1
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INVESTMENT OBJECTIVES AND POLICIES 2
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MUNICIPAL BOND INSURANCE 7
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PERFORMANCE INFORMATION 7
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TRADING PRACTICES AND BROKERAGE 11
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PURCHASING SHARES 13
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INVESTMENT PLANS 18
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DETERMINING OFFERING PRICE AND
NET ASSET VALUE 20
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REDEMPTION AND REPURCHASE 20
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DIVIDENDS AND REALIZED SECURITIES PROFITS
DISTRIBUTIONS 23
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TAXES 24
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INVESTMENT MANAGEMENT AGREEMENT 25
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OFFICERS AND DIRECTORS 27
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EXCHANGE PRIVILEGE 30
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GENERAL INFORMATION 32
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APPENDIX A--DESCRIPTION OF RATINGS 34
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APPENDIX B--EQUIVALENT YIELDS:
TAX-EXEMPT VS. TAXABLE SECURITIES 35
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FINANCIAL STATEMENTS 36
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</TABLE>
Delaware Group Tax-Free Fund, Inc. (the "Fund") is a professionally managed
mutual fund of the series type currently offering three Series: the Tax-Free USA
Fund ("USA Fund"), the Tax-Free USA Intermediate Fund ("USA Intermediate Fund")
and the Tax-Free Insured Fund ("Insured Fund") (collectively or, as relevant
separately, the "Series"). Each Series currently offers three classes of shares.
The USA Fund offers Tax-Free USA Fund A Class, Tax-Free USA Fund B Class and
Tax-Free USA Fund C Class. The USA Intermediate Fund offers Tax-Free USA
Intermediate Fund A Class, Tax-Free USA Intermediate Fund B Class and Tax-Free
USA Intermediate Fund C Class. The Insured Fund offers Tax-Free Insured Fund A
Class, Tax-Free Insured Fund B Class and Tax-Free Insured Fund C Class. Each
class is individually referred to as a "Class" and collectively referred to as
the "Classes"; and "Class A Shares," "Class B Shares" or "Class C Shares" refer
to such shares of all three Series, unless otherwise noted. This Part B
describes each Series and each Class, except where noted. Class B Shares and
Class C Shares may be purchased at a price equal to the next determined net
asset value per share. Class A Shares may be purchased at the public offering
price, which is equal to the next determined net asset value per share, plus a
front-end sales charge. Class A Shares are subject to a maximum front-end sales
charge of 4.75% with respect to the USA Fund and Insured Fund and 3.00% with
respect to the USA Intermediate Fund. Class A Shares are subject to annual 12b-1
Plan expenses of up to .30%. Class B Shares are subject to a contingent deferred
sales charge ("CDSC") which may be imposed on redemptions made within three
years of purchase with respect to the USA Intermediate Fund and six years of
purchase with respect to the USA Fund and Insured Fund. Class B Shares are
subject to annual 12b-1 Plan expenses of 1%, which are assessed against Class B
Shares for approximately five years after purchase with respect to the USA
Intermediate Fund and approximately eight years after purchase with respect to
the USA Fund and Insured Fund. See Automatic Conversion of Class B Shares under
Buying Shares in the Classes' Prospectuses. Class C Shares of each Series are
subject to a CDSC which may be imposed on redemptions made within twelve months
of purchase and annual 12b-1 Plan expenses of 1%, which are assessed against the
Class C Shares for the life of the investment. All references to "shares" in
this Statement of Additional Information ("Part B" of the registration
statement) refer to all Classes of shares of the Series, except where noted.
This Part B supplements the information contained in the current Prospectuses
of the Series dated November 29, 1995, as they may be amended from time to time.
It should be read in conjunction with the Series' Prospectuses. Part B is not
itself a prospectus but is, in its entirety, incorporated by reference into the
Prospectuses. The Prospectuses for the Series may be obtained by writing or
calling your investment dealer or by contacting the Fund's national distributor,
Delaware Distributors, Inc. (the "Distributor"), 1818 Market Street,
Philadelphia, PA 19103.
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 2
INVESTMENT OBJECTIVES
AND POLICIES
The objective of the USA Fund and of the USA Intermediate Fund is to seek as
high a level of current interest income exempt from federal income tax as is
available from municipal bonds and as is consistent with prudent investment
management and preservation of capital. The USA Intermediate Fund pursues its
investment objective by investing in municipal bonds with a dollar weighted
average maturity of between three and ten years and utilizing various investment
strategies, as described below, which differ from the strategies utilized by the
USA Fund and the Insured Fund.
The objective of the Insured Fund is to seek as high a level of current
interest income exempt from federal income tax as is available from municipal
bonds and as is consistent with prudent investment management and preservation
of capital. The Insured Fund seeks to achieve its objective by investing
primarily in municipal bonds that are protected by insurance guaranteeing the
payment of principal and interest, when due.
The investment objective of each Series, described above, is a matter of
fundamental policy and may not be changed without shareholder approval of the
affected Series. There is no assurance that the objective of each Series can be
achieved. Bond insurance reduces the risk of loss due to default by an issuer,
but such bonds remain subject to the risk that market value may shift for other
reasons. Also, there is no assurance that any insurance company will meet its
obligations.
Appendix A contains excerpts describing ratings of municipal obligations from
Standard & Poor's Rating Group ("S&P") and Moody's Investors Service, Inc.
("Moody's").
The USA Fund and the Insured Fund seek to achieve their respective objectives
by investing their assets in a nondiversified portfolio consisting primarily of
intermediate obligations up to ten years and long-term obligations up to 50
years in maturity, and the USA Intermediate Fund seeks to achieve its objective
by investing its assets in a nondiversified portfolio consisting primarily of
intermediate obligations, issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest income from
which, in the opinion of each issuer's Counsel, is exempt from federal income
tax. A Series may invest in other debt obligations, but if it does, at least 80%
of its assets will be invested in the types of securities listed above.
The portfolio of the USA Intermediate Fund will typically have a dollar
weighted average maturity of between three and ten years. The USA Intermediate
Fund may, from time to time, employ certain techniques to shorten or lengthen
the dollar weighted average maturity of the portfolio, including futures
transactions, options on futures and the purchase of debt securities at a
premium or a discount. Although the dollar weighted average maturity of the USA
Intermediate Fund's portfolio will be between three and ten years, the USA
Intermediate Fund may purchase individual securities with any maturity.
The principal risk to which a Series is subject is price fluctuation due to
changes in interest rates caused by government policies and economic factors
which are beyond the control of the investment manager. In addition, although
some municipal bonds are government obligations backed by the issuer's full
faith and credit, others are only secured by a specific revenue source and not
by the general taxing power. Each Series may invest in both types of bonds.
The USA Fund will normally invest at least 80% of its assets in debt
obligations, as stated above, which are rated by S&P or Moody's at the time of
purchase as being within their top four grades. The fourth grade is considered a
medium grade and has speculative characteristics. The USA Fund may, however,
invest up to 20% of its assets in securities with a rating lower than the top
four and in unrated securities. These securities are speculative and may involve
greater risks and have higher yields. They will only be purchased when the
investment manager considers them particularly attractive and their purchase to
be consistent with the objective of preserving capital. The USA Intermediate
Fund intends to invest at least 90% of its portfolio in debt obligations that
are either rated in the top four grades by Moody's or S&P at the time of
purchase or unrated, but in the opinion of Delaware Management Company, Inc.
(the "Manager"), similar in credit quality to obligations so rated. The fourth
grade is considered medium grade and may have speculative characteristics. The
USA Intermediate Fund may invest up to 10% of its assets in securities that are
rated lower than the top four grades or unrated, but in the Manager's opinion
similar in credit quality to obligations so rated. These securities are
speculative and may involve greater risks and have higher yields. Investing in
debt obligations which are not rated in the top four grades (or which have
credit qualities similar to such rated obligations) entails certain risks,
including the risk of loss of principal, which may be greater than the risks
involved in investment grade obligations, and which should be considered by
investors contemplating an investment in the Series. Such obligations are
sometimes sold by issuers whose earnings at the time of issuance are less than
the projected debt service on the obligations. The Manager will evaluate the
creditworthiness of the issuer and the issuer's ability to meet its obligations
to pay interest and repay principal.
The Insured Fund will normally invest at least 80% of its assets in debt
obligations which are insured by various insurance companies which undertake to
pay to a holder, when due, the interest or principal amount of an obligation if
the interest or principal is not paid by the issuer when due. See Municipal Bond
Insurance.
Each Series may also invest in "when-issued securities" for which the Fund
will maintain a segregated account which it will mark to market daily.
When-issued securities involve commitments to purchase new issues of securities
which are offered on a when-issued basis which usually involve delivery and
payment up to 45 days after the date of the transaction. During this period
between the date of
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 3
commitment and the date of delivery, the Series does not accrue interest on the
investment, but the market value of the bonds could fluctuate. This can result
in a Series having unrealized appreciation or depreciation which could affect
the net asset value of its shares.
Each Series will invest its assets in securities of varying maturities,
without limitation, depending on market conditions. Typically, the remaining
maturity of municipal bonds purchased by the USA Fund and the Insured Fund will
range between five and 30 years. Each Series may also invest in short-term,
tax-free instruments such as tax-exempt commercial paper and general obligation,
revenue and project notes. The Series may also invest in variable and floating
rate demand obligations (longer-term instruments with an interest rate that
fluctuates and a demand feature that allows the holder to sell the instruments
back to the issuer from time to time) but neither Series intends to invest more
than 5% of its assets in these instruments. Short-term securities will be rated
in the top two grades by a nationally-recognized statistical rating agency. The
Manager will attempt to adjust the maturity structure of the portfolios to
provide a high level of tax-exempt income consistent with preservation of
capital.
Under abnormal conditions, each Series may invest in taxable instruments for
temporary defensive purposes. These would include obligations of the U.S.
Government, its agencies and instrumentalities, commercial paper, certificates
of deposit of domestic banks and other debt instruments. In connection with
defensive portfolio investments, the Fund may invest more than 20% of the assets
of the Insured Fund in uninsured securities which may be lower rated or unrated.
Such securities may involve increased risks or may generate taxable income, and
each Series will only exceed 20% of its assets in such investments for temporary
defensive purposes.
Notwithstanding the above limitations, no Series presently intends to invest
more than 5% of its assets in securities rated below investment grade.
The Fund is registered as an open-end management investment company and each
Series' portfolio of assets is nondiversified. Each Series has the ability to
invest as much as 50% of its assets in as few as two issuers provided that no
single issuer accounts for more than 25% of the portfolio. The remaining 50%
must be diversified so that no more than 5% is invested in the securities of a
single issuer. Because the Series may invest their assets in fewer issuers, the
value of Series shares may fluctuate more rapidly than if the Series were fully
diversified. In the event a Series invests more than 5% of its assets in a
single issuer, it would be affected more than a fully-diversified fund if that
issuer were to encounter difficulties in satisfying its financial obligations.
Except as set forth below, each Series may invest without limitation in U.S.
Government securities or government agency securities backed by the U.S.
Government or its agencies or instrumentalities. Percentage limitations outlined
above are determined at the time an investment is made.
Each Series may invest more than 25% of its assets in municipal obligations
relating to similar types of projects or with other similar economic, business
or political characteristics (such as bonds of housing finance agencies or
health care facilities). In addition, each Series may invest more than 25% of
its assets in industrial development bonds or pollution control bonds which may
be backed only by the assets and revenues of a nongovernmental issuer. A Series
will not, however, invest more than 25% of its total assets in bonds issued for
companies in the same industry.
Set forth below are other more specific investment restrictions, some of which
limit the percentage of assets which may be invested in certain types of
securities. While the Fund is permitted, it normally does not borrow money or
invest in repurchase agreements. Up to 20% of each Series' assets may be
invested in securities whose interest is subject to federal income tax. From
time to time, a substantial portion of the assets of a Series may be invested in
municipal bonds insured as to payment of principal and interest by a single
insurance company, which is believed by the Fund to be consistent with its
policies and restrictions.
MUNICIPAL BONDS
The term "municipal bonds" is generally understood to include debt obligations
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as airports, bridges, highways,
housing, hospitals, mass transportation, schools, streets and water and sewer
works. Other public purposes for which municipal bonds may be issued include the
refunding of outstanding obligations, obtaining funds for general operating
expenses and the obtaining of funds to lend to other public institutions and
facilities. In addition, certain types of industrial development bonds are
issued by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposals. Such obligations are included
within the term "municipal bonds" provided that the interest paid thereon
qualifies as exempt from federal income tax in the opinion of bond counsel to
the issuer. In addition, the interest paid on industrial development bonds, the
proceeds from which are used for the construction, equipment, repair or
improvement of privately-operated industrial or commercial facilities, may be
exempt from federal income tax, although current federal tax laws place
substantial limitations on the size of such issues.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source, but not from the
general taxing power. Tax-exempt industrial development bonds are in most cases
revenue bonds and do not generally carry the pledge of the credit of the issuer
of such bonds. There are, of course, variations in the security of municipal
bonds, both within a particular classification and among classifications.
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 4
The yields on municipal bonds are dependent on a variety of factors, including
general money market conditions, general conditions of the municipal bond
market, size of a particular offering, maturity of the obligation and rating of
the issue. The imposition of the Series' management fee, as well as other
operating expenses, will have the effect of reducing the yield to investors.
The Tax Reform Act of 1986 (the "Act") limits the amount of new "private
purpose" bonds that each state can issue and subjects interest income from these
bonds to the federal alternative minimum tax. "Private purpose" bonds are issues
whose proceeds are used to finance certain nongovernment activities, and could
include some types of industrial revenue bonds such as privately-owned sports
and convention facilities. The Act also makes the tax-exempt status of certain
bonds depend on the issuer's compliance with specific requirements after the
bonds are issued.
Each Series intends to seek to achieve a high level of tax-exempt income.
However, if a Series invests in newly-issued private purpose bonds, a portion of
that Series' distributions would be subject to the federal alternative minimum
tax.
USA INTERMEDIATE FUND
ADDITIONAL INVESTMENT STRATEGIES
In addition to the investment policies described above, the USA Intermediate
Fund seeks to achieve its objective by pursuing the following investment
strategies:
PORTFOLIO LOAN TRANSACTIONS--The USA Intermediate Fund may loan up to 25% of
its assets to qualified broker/dealers or institutional investors for their use
relating to short sales or other security transactions.
It is the understanding of the Manager that the staff of the Securities and
Exchange Commission 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, U.S. Treasury Bills
and Notes, or irrevocable letters of credit payable by banks acceptable to the
Series 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 Series; 3) the Series must be able to terminate the
loan after notice, at any time; 4) the Series 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
Series may pay reasonable custodian fees in connection with the loan; and 6) the
voting rights on the lent securities may pass to the borrower; however, if the
directors of the Fund know that a material event will occur affecting an
investment loan, they must either terminate the loan in order to vote the proxy
or enter into an alternative arrangement with the borrower to enable the
directors to vote the proxy.
The major risk to which the Series would be exposed on a loan transaction is
the risk that the borrower would go bankrupt at a time when the value of the
security goes up. Therefore, the Series will only enter into loan arrangements
after a review of all pertinent facts by the Manager, under the supervision of
the Board of Directors, including the creditworthiness of the borrowing broker,
dealer or institution and then only if the consideration to be received from
such loans would justify the risk. Creditworthiness will be monitored on an
ongoing basis by the Manager.
REPURCHASE AGREEMENTS--These are instruments under which securities are
purchased from a bank or securities dealer with an agreement by the seller to
repurchase the securities. Under a repurchase agreement, the purchaser acquires
ownership of the security but the seller agrees, at the time of sale, to
repurchase it at a mutually agreed-upon time and price. The USA Intermediate
Fund will take custody of the collateral under repurchase agreements. Repurchase
agreements may be construed to be collateralized loans by the purchaser to the
seller secured by the securities transferred. The resale price is in excess of
the purchase price and reflects an agreed-upon market rate unrelated to the
coupon rate or maturity of the purchased security. Such transactions afford an
opportunity for the Series to invest temporarily available cash on a short-term
basis. The Series' risk is limited to the seller's ability to buy the security
back at the agreed-upon sum at the agreed-upon time, since the repurchase
agreement is secured by the underlying obligation. Should such an issuer
default, the Manager believes that, barring extraordinary circumstances, the
Series will be entitled to sell the underlying securities or otherwise receive
adequate protection for its interest in such securities, although there could be
a delay in recovery. The Series considers the creditworthiness of the bank or
dealer from whom it purchases repurchase agreements. The Series will monitor
such transactions to assure that the value of the underlying securities subject
to repurchase agreements is at least equal to the repurchase price. The
underlying securities will be limited to those described above.
The ratings of S&P, Moody's and other rating services represent their opinion
as to the quality of the money market instruments which they undertake to rate.
It should be emphasized, however, that ratings are general and are not absolute
standards of quality. These ratings are the initial criteria for selection of
portfolio investments, but the Series will further evaluate these securities.
See Appendix A--Description of Ratings.
FUTURES--The USA Intermediate Fund may enter into contracts for the purchase
or sale for future delivery of securities. While futures contracts provide for
the delivery of securities, deliveries usually do not occur. Contracts are
generally terminated by entering into an offsetting transaction. When the Series
enters into a futures transaction, it must deliver to the futures commission
merchant selected by the Series an amount referred to as "initial margin." This
amount is maintained by the futures commission merchant in an account at the
Series' Custodian Bank. Thereafter, a "variation margin" may be paid by the
Series to, or drawn by the Series from, such account in accordance with controls
set for such accounts, depending upon changes in the price of the underlying
securities subject to the futures contract.
In addition, when the Series engages in futures transactions, to the extent
required by the SEC, it will
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 5
maintain with its custodian, 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 Series with
respect to such futures contracts.
The Series may enter into such futures contracts to protect against the
adverse effects of fluctuations in interest rates without actually buying or
selling the securities. For example, if interest rates are expected to increase,
the Series 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 Series. 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 Series would increase at approximately the same
rate, thereby keeping the net asset value of the Series 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 Series 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 Series could then buy
debt securities on the cash market.
With respect to options on futures contracts, when the Series 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 purchase of a call option on
a futures contract is similar in some respects to the purchase of a call option
on an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based, or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when the Series 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 the declining price of the security which is deliverable upon exercise
of the futures contract. If the futures price at the expiration of the option is
below the exercise price, the Series will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Series' portfolio holdings. The writing of a put option on a
futures contract constitutes a partial hedge against the increasing price of the
security which is deliverable upon exercise of the futures contract. If the
futures price at the expiration of the option is higher than the exercise price,
the Series will retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities which the Series
intends to purchase.
If a put or call option the Series has written is exercised, the Series will
incur a loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures positions, the
Series' losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The purchase of a
put option on a futures contract is similar in some respects to the purchase of
protective puts on portfolio securities. For example, the Series will purchase a
put option on a futures contract to hedge the Series' portfolio against the risk
of rising interest rates.
To the extent that interest rates move in an unexpected direction, the Series
may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize a loss. For example, if the Series is hedged
against the possibility of an increase in interest rates which would adversely
affect the price of securities held in its portfolio and interest rates decrease
instead, the Series will lose part or all of the benefit of the increased value
of its securities which it has because it will have offsetting losses in its
futures position. In addition, in such situations, if the Series had
insufficient cash, it may be required to sell 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. The
Series 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, the Series 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.
VARIABLE OR FLOATING RATE DEMAND NOTES--Variable or floating rate demand notes
("VRDNs") are tax-exempt obligations which contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period (generally up to 30 days) prior to specified dates, either from
the issuer or by drawing on a bank letter of credit, a guarantee or insurance
issued with respect to such instrument. The interest rates are adjustable at
intervals ranging from daily to up to six months to some prevailing market rate
for similar investments, such adjustment formula being calculated to maintain
the market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments are typically based upon the price rate of a
bank or some other appropriate interest rate adjustment index. The Manager will
decide which variable or floating rate demand instruments the USA Intermediate
Fund will purchase in accordance with procedures prescribed by its Board of
Directors to minimize credit risks. Any VRDN
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 6
must be of high quality as determined by the Manager and subject to review by
the Board of Directors, with respect to both its long-term and short-term
aspects, except where credit support for the instrument is provided even in the
event of default on the underlying security, the Series may rely only on the
high quality character of the short-term aspect of the demand instrument, i.e.,
the demand feature. A VRDN which is unrated must have high quality
characteristics similar to those rated in accordance with policies and
guidelines determined by the Fund's Board of Directors. If the quality of any
VRDN falls below the quality level required by the Board of Directors and any
applicable rules adopted by the Securities and Exchange Commission, the Series
must dispose of the instrument within a reasonable period of time by exercising
the demand feature or by selling the VRDN in the secondary market, whichever is
believed by the Manager to be in the best interests of the Fund and its
shareholders.
MUNICIPAL LEASES--As stated in the Series' Prospectus, a portion of the USA
Intermediate Fund's assets may be invested in municipal lease obligations,
primarily through certificates of participation ("COPs"). COPs function much
like installment purchase agreements and are widely used by state and local
governments to finance the purchase of property. The lease format is generally
not subject to constitutional limitations on the issuance of state debt, and
COPs enable a governmental issuer to increase government liabilities beyond
constitutional debt limits. A principal distinguishing feature separating COPs
from municipal debt is the lease, which contains a "nonappropriation" or
"abatement" clause. This clause provides that, although the municipality will
use its best efforts to make lease payments, it may terminate the lease without
penalty if its appropriating body does not allocate the necessary funds. The
Series will invest only in COPs rated within the four highest rating categories
of Moody's, S&P or Fitch Investors Service, Inc., or in unrated COPs believed to
be of comparable quality.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions and fundamental policies which
are applied to each Series except as noted. Fundamental objectives and
restrictions cannot be changed without approval by the holders of a majority of
the outstanding voting securities of a Series, which is the lesser of more than
50% of the outstanding voting securities, or 67% of the voting securities
present at a shareholder meeting if 50% or more of the voting securities are
present in person or represented by proxy of a Series which proposes to change
its fundamental policy. Investment restrictions 4, 6 and 8 listed below apply
only to USA Fund and Insured Fund.
A Series may not under any circumstances:
1. Invest more than 20% of its assets in securities whose interest is subject
to federal income tax.
2. Borrow money in excess of 10% of the value of its assets and then only as
a temporary measure for extraordinary purposes. Any borrowing will be done from
a bank and to the extent that such borrowing exceeds 5% of the value of a
Series' assets, asset coverage of at least 300% is required. In the event that
such asset coverage shall at any time fall below 300%, the Series shall, within
three days thereafter (not including Sunday or holidays) or such longer period
as the Securities and Exchange Commission may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. A Series will not
issue senior securities as defined in the Investment Company Act of 1940 (the
"1940 Act"), except for notes to banks. (The issuance of three series of shares
is not deemed to be the issuance of senior securities so long as such series
comply with the appropriate provisions of the 1940 Act.) Investment securities
will not normally be purchased while there is an outstanding borrowing.
3. Sell securities short.
4. Write or purchase put or call options.
5. Underwrite the securities of other issuers, except that a Series may
participate as part of a group in bidding for the purchase of municipal bonds
directly from an issuer for its own portfolio in order to take advantage of the
lower purchase price available to members of such a group; nor invest more than
10% of the value of a Series' net assets in illiquid assets.
6. Purchase or sell commodities or commodity contracts.
7. Purchase or sell real estate, but this shall not prevent a Series from
investing in municipal bonds secured by real estate or interests therein.
8. Make loans to other persons except through the use of repurchase
agreements or the purchase of commercial paper. For these purposes, the purchase
of a portion of debt securities which is part of an issue to the public shall
not be considered the making of a loan.
9. With respect to 50% of the value of its assets, invest more than 5% of its
assets in the securities of any one issuer or invest in more than 10% of the
outstanding voting securities of any one issuer, except that U.S. Government and
government agency securities backed by the U.S. Government, or its agencies or
instrumentalities may be purchased without limitation. For the purpose of this
limitation, the Series will regard each state and political subdivision, agency
or instrumentality of a state and each multistate agency of which a state is a
member as a separate issuer.
10. Invest in companies for the purpose of exercising control.
11. Invest in securities of other investment companies, except as they are
acquired as part of a merger, consolidation or acquisition of assets.
12. Invest more than 25% of its total assets in any particular industry or
industries, except that a Series may invest more than 25% of the value of its
total assets in municipal bonds and in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities.
The Fund has also adopted an additional restriction applicable only to the
Insured Fund. The Insured Fund will not:
13. Invest more than 20% of its assets in securities (other than U.S.
Government securities, securities of agencies of
- 6
<PAGE> 8
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 7
the U.S. Government and securities backed by the U.S. Government or its agencies
or instrumentalities) which are not covered by insurance guaranteeing the
payment, when due, of interest on and the principal of such securities, except
for defensive purposes.
The Fund also has determined that, from time to time, more than 10% of a
Series' assets may be invested in municipal bonds insured as to principal and
interest by a single insurance company. The Fund believes such investments are
consistent with the foregoing restrictions.
If a percentage restriction is adhered to at the time of investment, a later
increase or decrease in percentage resulting from a change in value of net
assets will not result in a violation of the restrictions.
Although not a fundamental investment restriction, the Fund currently does not
invest its assets in real estate limited partnerships or oil, gas and other
mineral leases.
The Series may invest in restricted securities, including unregistered
securities eligible for resale without registration pursuant to Rule 144A ("Rule
144A Securities") under the Securities Act of 1933 (the "1933 Act"). Rule 144A
Securities may be freely traded among qualified institutional investors without
registration under the 1933 Act.
Investing in Rule 144A Securities could have the effect of increasing the
level of a Series' illiquidity to the extent that qualified institutional buyers
become, for a time, uninterested in purchasing these securities. After the
purchase of a Rule 144A Security, however, the Board of Directors and the
Manager will continue to monitor the liquidity of that security to ensure that
the Series have no more than 10% of their net assets invested in illiquid
securities.
MUNICIPAL BOND INSURANCE
The practice has developed among municipal issuers of having their issues
insured by various companies. At the present time, the Municipal Bond Insurance
Association ("MBIA"), AMBAC Indemnity Corporation ("AMBAC Indemnity") and
Financial Guaranty Insurance Company ("FGIC") provide a substantial portion of
such insurance. Accordingly, at different times, a substantial portion of the
Series' portfolio may consist of municipal bonds of various issuers insured as
to payment of principal and interest when due by a single insurance company. It
is expected that other insurance companies or associations will enter this
field, and a substantial portion of municipal bond issues available for
investment by companies such as the Fund will be insured. In the event of a
default, the insurer is required to make payments of interest and principal when
due to the bondholders. While the insurance may affect the securities' ratings,
the Manager does not look to the creditworthiness of a private insurer. Instead,
the Manager reviews the creditworthiness of the actual issuer and its ability to
pay interest and principal. Insurance on municipal bonds that are purchased by
the Series will generally have been obtained by the bond issuer and attached to
the bonds for their lifetime, although the Series may obtain insurance on bonds
while they are held by the Series.
At the present time, obligations which are subject to such insurance generally
receive a high rating from S&P or Moody's, based upon a combination of the
issuer's creditworthiness and the insurer's obligation under the insurance
policy. While such insurance reduces the risk that principal or interest will
not be paid when due, it is not a protection against market risks arising from
other factors, such as changes in prevailing interest rates. If the issuer
defaults on payment of interest or principal, the trustee and/ or payment agent
of the issuer will notify the insurer who will make payment to the bondholders.
There is no assurance that any insurance company will meet its obligations. The
Fund believes such investments are consistent with the Series' fundamental
investment policies and restrictions.
Similar insurance is available to the Fund for uninsured obligations, and the
Fund may acquire such obligations and purchase such insurance directly, but only
if that would result in a comparable benefit to the Fund from such a security.
As the bond insurance industry matures, the ownership and capital structures
of the insurers have evolved. Each of the municipal bond insurers has unique
ownership structures, some of which underwent significant changes in 1992.
MBIA moved to a greater percentage of public ownership during 1992 with the
sale of additional equity. MBIA Inc. is currently 88.7% publicly owned, while
the remaining ownership is distributed between Aetna Life & Casualty Company and
Credit Local de France. As of December 31, 1994, MBIA Inc. had qualified
statutory capital of $1,731,026,000; up 12.38% from December 31, 1993. For the
three months ended March 31, 1995, qualified statutory capital amounted to
$1,781,459,000 (unaudited).
FGIC, until 1993 the only bond insurer with one institutional owner,
experienced a slight shift in ownership. In early January 1993, GE Capital, the
parent of FGIC Corp., sold a 1% interest of the company to Sumitomo Marine and
Fire Insurance Company Limited. The sale was undertaken primarily to facilitate
joining business ventures in the future. As of December 31, 1994, FGIC's
qualified statutory capital was approximately $1,221,807,000; up 15.73% from
December 31, 1993. For the three months ended March 31, 1995, qualified
statutory capital amounted to $1,297,977,000 (unaudited).
AMBAC became the only insurer with 100% public ownership, when Citicorp
Financial Guaranty Holdings, Inc. (CFGH) sold its remaining 49.7% equity
interest in AMBAC Inc. during February 1992. As of December 31, 1994, AMBAC's
qualified statutory capital was approximately $1,218,204,000; up 7.93% from
December 31, 1993. For the three months ended March 31, 1995, qualified
statutory capital amounted to $1,237,000,000 (unaudited).
- 7
<PAGE> 9
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 8
PERFORMANCE INFORMATION*
From time to time, each Series may state total return for any Class in
advertisements and other types of literature. Any statements of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life of fund, if applicable) periods. The
Fund may also advertise aggregate and average total return information for each
Class over additional periods of time.
The average annual total rate of return for a 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
<TABLE>
<S> <C> <C>
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.
</TABLE>
*In the case of Class A Shares, the Limited CDSC applicable to only certain
redemptions of those shares will not be deducted from any computation of total
return. See the Prospectus for the Fund Classes for a description of the
Limited CDSC and the limited instances in which it applies. All references to
contingent deferred sales charges or a CDSC in this Performance Information
Section will apply to Class B Shares or 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 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, the Series may present total return information that does
not reflect the deduction of the maximum front-end sales charge or any
applicable CDSC.
The performance, as shown below, is the average annual total return quotations
of the Class A Shares of the USA Fund and Insured Fund for the one-, three-,
five- and ten-year periods ended August 31, 1995 and for the life of these
Classes, and for the one-year period ended August 31, 1995 and for the life of
the Class A Shares of the USA Intermediate Fund, computed as described above.
The average annual total return for Class A Shares at offer reflects the maximum
front-end sales charges paid on the purchase of shares. The average annual total
return for Class A Shares at net asset value (NAV) does not reflect the payment
of any front-end sales charge. The average annual total return is also shown
below for Class B Shares of each Series for the one-year period ended August 31,
1995 and for the life of these Classes. The average annual return for Class B
Shares including deferred sales charge reflects the deduction of the applicable
CDSC that would be paid if the shares were redeemed at August 31, 1995. The
average annual total return for Class B Shares excluding deferred sales charge
assumes the shares were not redeemed at August 31, 1995 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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
USA FUND--CLASS A SHARES
CLASS A SHARES CLASS A SHARES
(AT OFFER) (AT NAV)
<S> <C> <C>
1 year ended 8/31/95 1.68% 6.74%
3 years ended 8/31/95 4.85% 6.55%
5 years ended 8/31/95 7.61% 8.65%
10 years ended 8/31/95 8.88% 9.41%
Period 1/11/84(1) through
8/31/95 9.69% 10.16%
</TABLE>
<TABLE>
<CAPTION>
USA FUND--CLASS B SHARES
CLASS B SHARES CLASS B SHARES
(INCLUDING (EXCLUDING
DEFERRED DEFERRED
SALES CHARGE) SALES CHARGE)
<S> <C> <C>
1 year ended 8/31/95 1.88% 5.88%
Period 5/2/94(1) through 8/31/95 2.55% 5.51%
</TABLE>
<TABLE>
<CAPTION>
INSURED FUND--CLASS A SHARES
CLASS A SHARES CLASS A SHARES
(AT OFFER) (AT NAV)
<S> <C> <C>
1 year ended 8/31/95 1.28% 6.33%
3 years ended 8/31/95 3.70% 5.38%
5 years ended 8/31/95 6.45% 7.49%
10 years ended 8/31/95 7.89% 8.41%
Period 3/25/85(1) through
8/31/95 7.86% 8.37%
</TABLE>
<TABLE>
<CAPTION>
INSURED FUND--CLASS B SHARES
CLASS B SHARES CLASS B SHARES
(INCLUDING (EXCLUDING
DEFERRED DEFERRED
SALES CHARGE) SALES CHARGE)
<S> <C> <C>
1 year ended 8/31/95 1.47% 5.47%
Period 5/2/94(1) through 8/31/95 2.60% 5.56%
</TABLE>
<TABLE>
<CAPTION>
USA INTERMEDIATE FUND--
CLASS A SHARES(2)
CLASS A SHARES CLASS A SHARES
(AT OFFER) (AT NAV)
<S> <C> <C>
1 year ended 8/31/95 3.23% 6.43%
Period 1/7/93(1) through 8/31/95 5.64% 6.87%
</TABLE>
- 8
<PAGE> 10
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 9
<TABLE>
<CAPTION>
USA INTERMEDIATE FUND--
CLASS B SHARES(2)
CLASS B SHARES CLASS B SHARES
(INCLUDING (EXCLUDING
DEFERRED DEFERRED
SALES CHARGE) SALES CHARGE)
<S> <C> <C>
1 year ended 8/31/95 3.53% 5.53%
Period 5/2/94(1) through 8/31/95 4.44% 5.92%
</TABLE>
(1)Date of initial public offering.
(2)The Manager elected to waive voluntarily the portion of its annual
compensation under its Investment Management Agreement with the USA
Intermediate Fund to limit operating expenses of the Series to .25%
(including 12b-1 expenses). That waiver has been modified effective May 2,
1994 to limit operating expenses to .10% exclusive of 12b-1 expenses, from
the commencement of the public offering of the Series through June 30, 1996.
In the absence of such voluntary waiver, performance would have been
affected negatively.
Information regarding the performance of Class C Shares is not shown because
such shares were not offered to the public prior to the date of this Part B.
As stated in the Series' Prospectuses, each Series may also quote their
respective Classes' current yield 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:
<TABLE>
<S> <C>
a -- b
------ 6
YIELD = 2[ (cd + 1) - 1]
</TABLE>
<TABLE>
<S> <C> <C>
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.
</TABLE>
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 the Class A Shares of the USA Fund, the Insured Fund and the USA
Intermediate Fund as of August 31, 1995 using this formula were 4.99%, 4.64% and
4.78%, respectively. The yields of the Class B Shares of the USA Fund, the
Insured Fund and the USA Intermediate Fund as of August 31, 1995 were 4.41%,
4.05% and 4.05%, respectively. The yields of each Class of the USA Intermediate
Fund reflect the voluntary fee waiver undertaken by the Manager described above.
Yield calculations assume the maximum front-end sales charge, if any, and do not
reflect the deduction of any contingent deferred sales charge. Actual yield on
Class A Shares may be affected by variations in front-end sales charges on
investments. Information regarding the performance of Class C Shares is not
shown because such shares were not offered to the public prior to the date of
this Part B.
The Fund may also publish a tax-equivalent yield for a Class based on federal
and, if applicable, state tax rates, which demonstrates the taxable yield
necessary to produce an after-tax yield equivalent to the Class' yield. For the
30-day period ended August 31, 1995, the tax-equivalent yields of the Class A
Shares and the Class B Shares of the USA Fund were 7.23% and 6.39%,
respectively, of the Class A Shares and the Class B Shares of the Insured Fund
were 6.72% and 5.87%, respectively, and of the Class A Shares and Class B Shares
of the USA Intermediate Fund were 6.93% and 5.87%, respectively, assuming a
federal income tax rate of 31%. These yields were computed by dividing that
portion of a Class' yield which is tax-exempt by one minus a stated income tax
rate (in this case, a federal income tax rate of 31%) and adding the product to
that portion, if any, of the yield that is not tax-exempt. In addition, a Series
may advertise a tax-equivalent yield assuming other income tax rates, when
applicable.
Investors should note that the income earned and dividends paid by the Series
will vary with the fluctuation of interest rates and performance of the
portfolio. The net asset value of the Fund may change. Unlike money market
funds, the Series invests in longer-term securities that fluctuate in value and
do so in a manner inversely correlated with changing interest rates. The Series'
net asset values will tend to rise when interest rates fall. Conversely, the
Series' net asset values will tend to fall as interest rates rise. Normally,
fluctuations in interest rates have a greater effect on the prices of
longer-term bonds. The value of the securities held in the Series will vary from
day to day and investors should consider the volatility of the Series' net asset
values as well as the yield before making a decision to invest.
Since the Series invest for the long term, their average effective weighted
average portfolio maturity at the end of the fiscal year was 22 years for the
USA Fund, 24 years for the Insured Fund and 7 years for the USA Intermediate
Fund.
See Appendix B for additional yield information.
From time to time, a Series may also quote for each Class an actual total
return and/or yield performance in advertising and other types of literature
compared to indices or averages of alternative financial products available to
prospective investors. For example, the performance comparisons may include the
average return of various bank instruments, some of which may carry certain
return guarantees offered by leading banks and thrifts as monitored by Bank Rate
Monitor.
Comparative information on the Consumer Price Index may also be included. The
Consumer Price Index, as prepared by the U.S. Bureau of Labor Statistics, is the
most commonly used measure of inflation. It indicates the cost fluctuations of a
representative group of consumer goods. It does not represent a return from an
investment.
A Series may also promote a Class' total return and/or yield performance and
use comparative performance information computed by and available from certain
industry and
- 9
<PAGE> 11
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 10
general market research and publications, such as Lipper Analytical Services,
Inc.
Statistical and performance information and various indices compiled and
maintained by organizations such as the following may also be used in preparing
exhibits comparing certain industry trends and competitive mutual fund
performance to comparable Fund activity and performance and in illustrating
general financial planning principles. From time to time, certain mutual fund
performance ranking information, calculated and provided by these organizations,
may also be used in the promotion of sales of the Series. Any indices used are
not managed for any investment goal.
CDA Technologies, Inc., Lipper Analytical Services, Inc. and Morningstar, Inc.
are performance evaluation services that maintain statistical performance
databases, as reported by a diverse universe of independently-managed mutual
funds.
Ibbotson Associates, Inc. is a consulting firm that provides a variety of
historical data including total return, capital appreciation and income on the
stock market as well as other investment asset classes, and inflation. With
their permission, this information will be used primarily for comparative
purposes and to illustrate general financial planning principles.
Interactive Data Corporation is a statistical access service that maintains a
database of various international industry indicators, such as historical and
current price/earning information, individual equity and fixed income price
and return information.
Compustat Industrial Databases, a service of Standard & Poor's, may also be
used in preparing performance and historical stock and bond market exhibits.
This firm maintains fundamental databases that provide financial, statistical
and market information covering more than 7,000 industrial and non-industrial
companies.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as well
as unmanaged indices compiled and maintained by these firms, will be used in
preparing comparative illustrations.
Current interest rate and yield information on government debt obligations of
various durations, as reported weekly by the Federal Reserve (Bulletin H.15),
may also be used. Also, current rate information on municipal debt obligations
of various durations, as reported daily by the Bond Buyer, may also be used. The
Bond Buyer is published daily and is an industry-accepted source for current
municipal bond market information.
The total return performance for each Class will reflect the appreciation or
depreciation of principal, reinvestment of income and any capital gains
distributions paid during any indicated period and the impact of the maximum
front-end sales charge, or contingent deferred sales charge, 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.
The following table, for purposes of illustration only, reflects the
cumulative total return performance of the Class A Shares of the USA Fund and
Insured Fund for the three-, six- and nine-month periods ended August 31, 1995,
for the one-, three-, five- and ten-year periods ended August 31, 1995 and for
the life of these Classes, and for the three-, six- and nine-month periods ended
August 31, 1995, the one-year period ended August 31, 1995 and for the life of
the Class A Shares and Class B Shares of the USA Intermediate Fund and the Class
B Shares of the USA Fund and Insured Fund. For this purpose, the calculations
assume the reinvestment of any realized securities profits distributions and
income dividends paid during the period. Comparative information on the Consumer
Price Index is also included. Information regarding the performance of Class C
Shares is not shown because such shares were not offered to the public prior to
the date of this Part B.
The performance of Class A Shares, as shown below, reflects maximum front-end
sales charges. The performance of Class B Shares is calculated both with the
applicable CDSC included and excluded. None of the calculations reflect any
income taxes payable by shareholders on the reinvested distributions included in
the calculations. The performance of Class B Shares is calculated both with the
applicable CDSC included and excluded. The net asset values fluctuate so shares,
when redeemed, may be worth more or less than the original investment, and past
performance should not be considered as representative of future results.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
USA FUND--CLASS A SHARES
CLASS A SHARES CONSUMER
(AT OFFER) PRICE INDEX(2)
<S> <C> <C>
3 months ended 8/31/95 (3.64%) 0.46%
6 months ended 8/31/95 (0.32%) 1.33%
9 months ended 8/31/95 5.13% 2.14%
1 year ended 8/31/95 1.68% 2.62%
3 years ended 8/31/95 15.26% 8.52%
5 years ended 8/31/95 44.28% 16.19%
10 years ended 8/31/95 134.14% 41.59%
Period 1/11/84(1)
through 8/31/95 193.51% 45.18%
</TABLE>
<TABLE>
<CAPTION>
USA FUND--CLASS B SHARES
CLASS B SHARES CLASS B SHARES
(INCLUDING (EXCLUDING CONSUMER
DEFERRED DEFERRED PRICE
SALES CHARGE) SALES CHARGE) INDEX(2)
<S> <C> <C> <C>
3 months ended 8/31/95 (3.06%) 0.92% 0.46%
6 months ended 8/31/95 0.20% 4.20% 1.33%
9 months ended 8/31/95 5.69% 9.69% 2.14%
1 year ended 8/31/95 1.88% 5.88% 2.62%
Period 5/2/94(1)
through 8/31/95 3.42% 7.42% 3.73%
</TABLE>
- 10
<PAGE> 12
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 11
<TABLE>
<CAPTION>
INSURED FUND--CLASS A SHARES
CLASS A SHARES CONSUMER
(AT OFFER) PRICE INDEX(2)
<S> <C> <C>
3 months ended 8/31/95 (3.79%) 0.46%
6 months ended 8/31/95 (0.73%) 1.33%
9 months ended 8/31/95 4.77% 2.14%
1 year ended 8/31/95 1.28% 2.62%
3 years ended 8/31/95 11.51% 8.52%
5 years ended 8/31/95 36.66% 16.19%
10 years ended 8/31/95 113.62% 41.59%
Period 3/25/85(1)
through 8/31/95 120.34% 43.67%
</TABLE>
<TABLE>
<CAPTION>
INSURED FUND--CLASS B SHARES
CLASS B SHARES CLASS B SHARES
(INCLUDING (EXCLUDING CONSUMER
DEFERRED DEFERRED PRICE
SALES CHARGE) SALES CHARGE) INDEX(2)
<S> <C> <C> <C>
3 months ended 8/31/95 (3.21%) 0.77% 0.46%
6 months ended 8/31/95 (0.25%) 3.75% 1.33%
9 months ended 8/31/95 5.29% 9.29% 2.14%
1 year ended 8/31/95 1.47% 5.47% 2.62%
Period 5/2/94(1)
through 8/31/95 3.49% 7.49% 3.73%
</TABLE>
<TABLE>
<CAPTION>
USA INTERMEDIATE FUND--CLASS A SHARES(3)
CLASS A SHARES CONSUMER
(AT OFFER) PRICE INDEX(2)
<S> <C> <C>
3 months ended 8/31/95 (1.03%) 0.46%
6 months ended 8/31/95 1.76% 1.33%
9 months ended 8/31/95 6.90% 2.14%
1 year ended 8/31/95 3.23% 2.62%
Period 1/7/93(1)
to 8/31/95 15.65% 7.75%
</TABLE>
<TABLE>
<CAPTION>
USA INTERMEDIATE FUND--CLASS B SHARES(3)
CLASS B SHARES CLASS B SHARES
(INCLUDING (EXCLUDING CONSUMER
DEFERRED DEFERRED PRICE
SALES CHARGE) SALES CHARGE) INDEX(2)
<S> <C> <C> <C>
3 months ended 8/31/95 (0.18%) 1.82% 0.46%
6 months ended 8/31/95 2.51% 4.51% 1.33%
9 months ended 8/31/95 7.46% 9.46% 2.14%
1 year ended 8/31/95 3.53% 5.53% 2.62%
Period 5/2/94(1)
through 8/31/95 5.97% 7.97% 3.73%
</TABLE>
(1)Date of initial public offering.
(2)Source--U.S. Department of Labor.
(3)The Manager elected to waive voluntarily the portion of its annual
compensation under its Investment Management Agreement with the USA
Intermediate Fund to limit operating expenses of the Series to .25%
(including 12b-1 expenses). That waiver was modified effective May 2, 1994
to limit operating expenses to .10%, exclusive of 12b-1 expenses, from the
commencement of the public offering of the Series through June 30, 1996. In
the absence of such voluntary waiver, performance would have been affected
negatively.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Fund and other mutual funds in the Delaware
Group, will provide general information about investment alternatives and
scenarios that will allow investors to assess their personal goals. This
information will include general material about investing as well as materials
reinforcing various industry-accepted principles of prudent and responsible
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 Fund's, and other Delaware Group funds',
investment disciplines employed in seeking their objectives. The Distributor may
also from time to time cite general or specific information about the
institutional clients of the Manager, including the number of such clients
serviced by the Manager.
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional Series shares,
your investment is given yet another opportunity to grow. It's called the Power
of Compounding and the following chart illustrates just how powerful it can be.
COMPOUNDED RETURNS
Results of various assumed fixed rates of return on a $10,000 investment
compounded monthly tax-free for 10 years:
<TABLE>
<CAPTION>
4% Rate of Return 6% Rate of Return 8% rate of Return
----------------- ----------------- -----------------
<S> <C> <C> <C>
12-'85 $10,407 $10,617 $10,830
12-'86 $10,831 $11,272 $11,729
12-'87 $11,273 $11,967 $12,702
12-'88 $11,732 $12,705 $13,757
12-'89 $12,210 $13,488 $14,898
12-'90 $12,707 $14,320 $16,135
12-'91 $13,225 $15,203 $17,474
12-'92 $13,764 $16,141 $18,924
12-'93 $14,325 $17,137 $20,495
12-'94 $14,908 $18,194 $22,196
</TABLE>
These figures are calculated assuming a fixed constant investment return and
assume no fluctuation in the value of principal. These figures, which do not
reflect payment of any sales charges, are not intended to be a projection of
investment results and do not reflect the actual performance results of any of
the Classes.
- 11
<PAGE> 13
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 12
TRADING PRACTICES AND BROKERAGE
Banks, brokers or dealers are selected to execute transactions on behalf of
the Series 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 banks, brokers or dealers execute transactions
at best price and execution. Best price and execution refers to many factors,
including the price paid or received for a security, the commission charged, the
promptness and reliability of execution, the confidentiality and placement
accorded the order and other factors affecting the overall benefit obtained by
the account on the transaction. In nearly all instances, trades are made on a
net basis where a Series either buys the securities directly from the dealer or
sells them to the dealer. In these instances, there is no direct commission
charged but there is a spread (the difference between the buy and sell price)
which is the equivalent of a commission. When a commission is paid, the Fund
pays reasonably competitive brokerage commission rates based upon the
professional knowledge of its trading department as to rates paid and charged
for similar transactions throughout the securities industry. In some instances,
a Series pays a minimal share transaction cost when the transaction presents no
difficulty.
During the fiscal years ended August 31, 1993, 1994 and 1995, no brokerage
commissions were paid by the Series.
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.
During the fiscal year ended August 31, 1995, there were no portfolio
transactions of the Fund resulting in brokerage commissions directed to brokers
for brokerage and research services.
As provided in the Securities Exchange Act of 1934 and the Investment
Management Agreement for each Series, higher commissions are permitted to be
paid to broker/ dealers who provide brokerage and research services than to
broker/dealers who do not provide such services if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the 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 the Fund and to other funds in the Delaware
Group. Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
The Manager may place a combined order for two or more accounts or funds
engaged in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in a
manner deemed equitable to each account or fund. When a combined order is
executed in a series of transactions at different prices, each account
participating in the order may be allocated an average price obtained from the
executing broker. It is believed that the ability of the accounts to participate
in volume transactions will generally be beneficial to the accounts and funds.
Although it is recognized that, in some cases, the joint execution of orders
could adversely affect the price or volume of the security that a particular
account or fund may obtain, it is the opinion of the Manager and the Board of
Directors that the advantages of combined orders outweigh the possible
disadvantages of separate transactions.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. (the "NASD"), and subject to seeking best price and
execution, the Manager may place orders with broker/dealers that have agreed to
defray certain Series expenses such as custodian fees, and may, at the request
of the Distributor, give consideration to sales of shares of the Series as a
factor in the selection of brokers and dealers to execute Series portfolio
transactions.
PORTFOLIO TURNOVER
The Fund anticipates that each Series' portfolio turnover rate will generally
be less than 100%. However, the Fund will not attempt to achieve or be limited
to a predetermined rate of portfolio turnover for a Series, such a turnover
always being incidental to transactions undertaken
- 12
<PAGE> 14
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 13
with a view to achieving each Series' investment objective in relation to
anticipated movements in the general level of interest rates. In investing for
liberal current income, a Series may hold securities for any period of time,
subject to complying with the Internal Revenue Code and the 1940 Act, when
changes in circumstances or conditions make such a move desirable in light of
the investment objective. To that extent, the Fund may realize gains or losses.
See Taxes. The turnover rate also may be affected by cash requirements for
redemptions and repurchases of Series' shares.
The portfolio turnover rate of each Series 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 Series during the particular fiscal year, exclusive of securities whose
maturities at the time of acquisition are one year or less.
For the fiscal years ended August 31, 1994 and 1995, the portfolio turnover
rates for the USA Fund were 10% and 27%, respectively, for the Insured Fund were
56% and 68%, respectively, and for the USA Intermediate Fund were 81% and 63%.
PURCHASING SHARES
The Distributor serves as the national distributor for the Series' shares and
has agreed to use its best efforts to sell shares of each Series of the Fund.
See the Prospectuses for additional information on how to invest. Shares of each
Series are offered on a continuous basis and may be purchased through authorized
investment dealers or directly by contacting the Fund or its agent.
The minimum initial investment generally is $1,000 for each Class of each
Series. Subsequent purchases generally must be at least $100. The initial and
subsequent investment minimums for Class A Shares will be waived for purchases
by officers, directors and employees of any Delaware Group fund, the Manager or
any of the Manager's affiliates if the purchases are made pursuant to a payroll
deduction program. Accounts opened under the Delaware Group Asset Planner
service are subject to a minimum initial investment of $2,000 per Asset Planner
Strategy selected.
There is a maximum purchase limitation of $250,000 on each purchase of Class B
Shares; for Class C Shares, each purchase must be in an amount that is less than
$1,000,000. The Fund will reject any order for purchase of more than $250,000 of
Class B Shares and $1,000,000 or more for Class C Shares. An investor may exceed
these limitations by making cumulative purchases over a period of time. In doing
so, an investor should keep in mind, however, that reduced front-end sales
charges apply to investments of $100,000 or more of Class A Shares, which are
subject to lower annual 12b-1 Plan expenses than Class B Shares and Class C
Shares and generally are not subject to a CDSC.
Selling dealers have the responsibility of transmitting orders promptly. The
Fund reserves the right to reject any order for the purchase of a Series' shares
if in the opinion of management such rejection is in the Series' best interest.
The NASD has adopted Rules of Fair Practice relating to investment company
sales charges. The Fund and the Distributor intend to operate in compliance with
these rules.
Class A Shares of the USA Fund and the Insured Fund are purchased at the
offering price which reflects a maximum front-end sales charge of 4.75%; lower
sales charges apply for larger purchases. Class A Shares of the USA Intermediate
Fund are purchased at the offering price which reflects a maximum front-end
sales charge of 3.00%. See the table below. Class A Shares are also subject to
annual 12b-1 Plan expenses. See Determining Offering Price and Net Asset Value
and Plans Under Rule 12b-1.
Class B Shares of the USA Fund and the Insured Fund are purchased at net asset
value and are subject to a CDSC of: (i) 4% if shares are redeemed within two
years of purchase; (ii) 3% if shares are redeemed during the third or fourth
year following purchase; (iii) 2% if shares are redeemed during the fifth year
following purchase; and (iv) 1% if shares are redeemed during the sixth year
following purchase. Class B Shares of the USA Fund and Insured Fund are also
subject to annual 12b-1 Plan expenses which are higher than those to which Class
A Shares are subject and are assessed against Class B Shares for approximately
eight years after purchase. Class B Shares of the USA Intermediate Fund are
purchased at net asset value and are subject to a CDSC of: (i) 2% if shares are
redeemed within two years of purchase; and (ii) 1% if shares are redeemed during
the third year following purchase. Such shares are also subject to annual 12b-1
Plan expenses which are higher than those to which Class A Shares are subject
and are assessed against the Class B Shares for approximately five years after
purchase.
Class C Shares of each Series are purchased at net asset value and are subject
to a CDSC of 1% if shares are redeemed within twelve 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.
See Automatic Conversion of Class B Shares under Buying Shares in the Classes'
Prospectuses and Determining Offering Price and Net Asset Value and Plans Under
Rule 12b-1 in this Part B.
Certificates representing shares purchased are not
ordinarily issued unless a shareholder submits a specific request with respect
to Class A Shares. Certificates are not issued in the case of Class B Shares or
Class C Shares. However, purchases not involving the issuance of certificates
are confirmed to the investor and credited to the shareholder's account on the
books maintained by Delaware Service Company, Inc. (the "Transfer Agent"). The
investor will have the same rights of ownership with respect to such shares as
if certificates had been issued. An investor that is permitted to obtain a
certificate may receive a certificate representing shares purchased by sending a
letter to the Transfer Agent requesting the certificate. No charge is made for
any certificate issued. Investors who hold certificates representing any of
their shares may only redeem those shares by written request. The investor's
certificate(s) must accompany such request.
- 13
<PAGE> 15
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 14
ALTERNATIVE PURCHASE ARRANGEMENTS
The alternative purchase arrangements of Class A, Class B and Class C Shares
permit investors to choose the method of purchasing shares that is most suitable
for his or her 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 .30% of the average daily net assets of
Class A Shares, or to purchase either Class B Shares or Class C Shares and have
the entire initial purchase amount invested in the Series with the investment
thereafter subject to a CDSC and annual 12b-1 expenses. Class B Shares of the
USA Fund and Insured Fund are subject to a CDSC if the shares are redeemed
within six years of purchase. Class B Shares of the USA Intermediate Fund are
subject to a CDSC if the shares are redeemed within three years of purchase.
Class C Shares of each Series are subject to a CDSC if the shares are redeemed
within twelve months of purchase. Class B and Class C Shares are each subject to
annual 12b-1 Plan expenses of 1% (.25% of which are service fees to be paid by
the Fund to the Distributor, dealers and others, for providing personal service
and/or maintaining shareholder accounts) of average daily net assets of the
respective Class. Class B Shares of the USA Fund and Insured Fund will
automatically convert to Class A Shares of the respective Series at the end of
approximately eight years after purchase and Class B Shares of the USA
Intermediate Fund will automatically convert to the Class A Shares of this
Series at the end of approximately five years after purchase and, thereafter, be
subject to annual 12b-1 Plan expenses of up to a maximum of .30% of average
daily net assets of such shares. Unlike Class B Shares, Class C Shares do not
convert to another class.
CLASS A SHARES
Purchases of $100,000 or more of Class A Shares at the offering price carry
reduced front-end sales charges as shown in the accompanying table, and may
include a series of purchases over a 13-month period under a Letter of Intention
signed by the purchaser. See Special Purchase Features--Class A Shares, below
for more information on ways in which investors can avail themselves of reduced
front-end sales charges and other purchase features.
Class A Shares
USA Fund and Insured Fund
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Front-End Sales Dealer's
Charge as % of Concession***
Offering Amount as % of
Amount of Purchase Price Invested** Offering Price
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
USA Insured
Fund Fund
Less than $100,000 4.75% 4.97% 4.98% 4.00%
$100,000 but under $250,000 3.75 3.89 3.89 3.00
$250,000 but under $500,000 2.50 2.57 2.53 2.00
$500,000 but under $1,000,000* 2.00 2.07 2.08 1.60
</TABLE>
Class A Shares
USA Intermediate Fund
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Front-End Sales Dealer's
Charge as % of Concession***
Offering Amount as % of
Amount of Purchase Price Invested** Offering Price
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.00% 3.08% 2.50%
$100,000 but under $250,000 2.50 2.59 2.00
$250,000 but under $500,000 2.00 2.02 1.60
$500,000 but under $1,000,000* 1.50 1.54 1.20
</TABLE>
*There is no front-end sales charge on purchases of Class A Shares of $1
million or more but, under certain limited circumstances, a 1% contingent
deferred sales charge may apply upon redemption of such shares. The
contingent deferred sales charge ("Limited CDSC") that may be applicable
arises only in the case of certain net asset value purchases which have
triggered the payment of a dealer's commission.
**Based on the net asset value per share of the Class A Shares as of the end of
the Fund's most recent fiscal year.
***Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
- ----------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify for the
reduced front-end sales charge on the basis of previous or current purchases.
The reduced front-end sales charge will be granted upon confirmation of the
shareholder's holdings by the Fund. Such reduced front-end sales charges are not
retroactive.
From time to time, upon written notice to all of its dealers, the Distributor
may hold special promotions for specified periods during which the Distributor
may reallow to dealers up to the full amount of the front-end sales charge shown
above. Dealers who receive 90% or more of the sales charge may be deemed to be
underwriters under the 1933 Act.
- ----------------------------------------------------------------
Certain dealers who enter into an agreement to provide extra training and
information on Delaware Group products and services and who increase sales of
Delaware Group funds may receive an additional concession of up to .15% of the
offering price in connection with the 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 concession will be paid. Participating dealers may be
deemed to have additional responsibilities under the securities laws.
DEALER'S COMMISSION
For initial purchases of Class A Shares of $1,000,000 or more, a dealer's
commission may be paid by the Distributor to financial advisers through whom
such purchases are effected in accordance with the following schedules:
USA FUND AND INSURED FUND
<TABLE>
<CAPTION>
AMOUNT OF PURCHASE DEALER'S COMMISSION
- --------------------------------- -------------------
(as a percentage of
amount purchased)
<S> <C>
Up to $2 million 1.00%
Next $1 million up to $3 million .75
Next $2 million up to $5 million .50
Amount over $5 million .25
</TABLE>
- 14
<PAGE> 16
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 15
USA INTERMEDIATE FUND
<TABLE>
<CAPTION>
AMOUNT OF PURCHASE DEALER'S COMMISSION
- --------------------------------- -------------------
(as a percentage of
amount purchased)
<S> <C>
Up to $3 million .60%
Next $2 million up to $5 million .40
Amount over $5 million .20
</TABLE>
In determining a financial adviser's eligibility for the dealer's commission,
purchases of Class A Shares of other Delaware Group funds as to which a Limited
CDSC (see Redemption and Repurchase) applies may be aggregated with those of
Class A Shares of the Series. Financial advisers also may be eligible for a
dealer's commission in connection with certain purchases made under a Letter of
Intention or pursuant to an investor's Right of Accumulation. Financial advisers
should contact the Distributor concerning the applicability and calculation of
the dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for payment of
the dealer's commission, unless such exchange is from a Delaware Group fund with
assets as to which a dealer's commission or similar payment has not been
previously paid. The schedule and program for payment of the dealer's commission
are subject to change or termination at any time by the Distributor in its
discretion.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES AND CLASS C SHARES
Class B and Class C Shares are purchased without the imposition of a
front-end sales charge. Class B Shares redeemed within prescribed periods after
purchase may be subject to a CDSC imposed at the rates and within the time
periods set forth below, and Class C Shares redeemed within twelve months of
purchase may be subject to a CDSC of 1%. CDSC fees 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
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. In addition, no CDSC will be assessed on redemption of
shares received through the reinvestment of dividends or capital gains
distributions. See the Prospectuses for the respective Classes under the
heading Redemption and Exchange--Waiver of CDSC--Class B and Class C Shares for
a list of the instances in which the CDSC is waived. In addition to the waivers
described in the Prospectus, the CDSC on Class B Shares is waived on
redemptions from an account if the redemption results from the death of all
registered owners of the account (in the case of accounts established under the
Uniform Gift 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 Internal Revenue Code) of
all registered owners occurring after the purchase of the shares being
redeemed.
The following table sets forth the rates of the CDSC for Class B Shares of the
USA Fund and the Insured Fund:
USA FUND AND INSURED FUND
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF
YEAR AFTER DOLLAR AMOUNT
PURCHASE MADE SUBJECT TO CHARGE)
- ----------------- -------------------
<S> <C>
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
</TABLE>
During the seventh year after purchase, and thereafter, until converted
automatically into Class A Shares of the corresponding Series, Class B Shares of
the USA Fund and Insured Fund will still be subject to the annual 12b-1 Plan
expenses of up to 1% of the average daily net assets of the relevant Class B
Shares. At the end of approximately eight years after purchase, the investor's
Class B Shares of the USA Fund and the Insured Fund will be automatically
converted into Class A Shares of that Series. See Automatic Conversion of Class
B Shares under Buying Shares in the Classes' Prospectus. Such conversion will
constitute a tax-free exchange for federal income tax purposes. See Taxes in the
Prospectus for the Classes.
The following table sets forth the rates of the CDSC for the Class B Shares of
the USA Intermediate Fund:
USA INTERMEDIATE FUND
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
(AS A PERCENTAGE OF
YEAR AFTER DOLLAR AMOUNT
PURCHASE MADE SUBJECT TO CHARGE)
- ----------------- -------------------
<S> <C>
0-2 2%
3 1%
4 and thereafter None
</TABLE>
During the fourth year after purchase, and thereafter, until converted
automatically into Class A Shares of the USA Intermediate Fund, Class B Shares
of this Series will still be subject to annual 12b-1 Plan expenses of up to 1%
of the average daily net assets of those shares. At the end of approximately
five years after purchase, the investor's Class B Shares will be automatically
converted into Class A Shares of the USA Intermediate Fund. See Automatic
Conversion of Class B Shares under Buying Shares in the Prospectus for the USA
Intermediate Fund. Such conversion will constitute a tax-free exchange for
federal income tax purposes. See Taxes in the Prospectus for the USA
Intermediate Fund.
PLANS UNDER RULE 12B-1
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a separate
plan for each of the Class A Shares, the Class B Shares and the Class C Shares
of each Series (the "Plans"). Each Plan permits the Series to pay for certain
distribution, promotional and related expenses involved in the marketing of only
the Class to which the Plan applies.
The Plans permit the Series, pursuant to the Distribution Agreements, to pay
out of the assets of the respective 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 the 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 the Class B and Class C Shares are also used to
pay the
- 15
<PAGE> 17
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 16
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, the Series may make payments out of the assets of the respective
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 the Series under the Plans, and each
Series' Distribution Agreement, is on an annual basis, up to .30% of average
daily net assets of the Class A Shares of the USA Fund and Insured Fund for the
year, up to .30% (currently no more than .15%) of average daily net assets of
the Class A Shares of the USA Intermediate Fund, and up to 1% (.25% of which are
service fees to be paid by the Fund to the Distributor, dealers or 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.
The Fund's Board of Directors may reduce these amounts at any time. The
Distributor has agreed to waive these distribution fees to the extent such fee
for any day exceeds the net investment income realized by the Classes for such
day.
Effective June 1, 1992, the Board of Directors has determined that the annual
fee, payable on a monthly basis, under the separate Plans relating to the Class
A Shares of the USA Fund and the Insured Fund, will be equal to the sum of: (i)
the amount obtained by multiplying .30% by the average daily net assets
represented by the Class A Shares of the Series that were acquired by
shareholders on or after June 1, 1992; and (ii) the amount obtained by
multiplying .10% by the average daily net assets represented by the Class A
Shares of the Series that were acquired before June 1, 1992. While this is the
method for calculating the 12b-1 expenses to be paid by the Class A Shares of
the USA Fund and the Insured Fund, the fee is a Class A Shares' expense so that
all shareholders of the Class A Shares of each such Series regardless of when
they purchased their shares will bear 12b-1 expenses at the same rate. As Class
A Shares of such Series are sold on or after June 1, 1992, the initial rate of
at least .10% will increase over time. Thus, as the proportion of Class A Shares
purchased on or after June 1, 1992 to Class A Shares outstanding prior to June
1, 1992 increases, the expenses attributable to payments under the Plans will
also increase (but will not exceed .30% of average daily net assets). While this
describes the current formula for calculating the fees which will be payable
under the Plans with respect to the Class A Shares of the USA Fund and Insured
Fund, such Plans permit the Series to pay a full .30% on all assets at any time.
On September 17, 1992, the Board of Directors set the fee for the Class A
Shares of the USA Intermediate Fund at .15% of average daily net assets.
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 classes. Subject to seeking best price and
execution, the Fund may, from time to time, buy or sell portfolio securities
from or to firms which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from its own
resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreements, as amended, have been approved by
the Board of Directors of the Fund, including a majority of the directors who
are not "interested persons" (as defined in the 1940 Act) of the Fund and who
have no direct or indirect financial interest in the Plans, by vote cast in
person at a meeting duly called for the purpose of voting on the Plans and such
Agreements. Continuation of the Plans and the Distribution Agreements, as
amended, must be approved annually by the Board of Directors in the same manner
as specified above.
Each year, the directors must determine whether
continuation of the Plans is in the best interest of shareholders of,
respectively, Class A Shares, Class B Shares and Class C Shares and that there
is a reasonable likelihood of the Plan relating to a Class providing a benefit
to that Class. The Plans and the Distribution Agreements, as amended, may be
terminated with respect to a class at any time without penalty by a majority of
those directors who are not "interested persons" or by a majority vote of the
relevant Class' outstanding voting securities. Any amendment materially
increasing the percentage payable under the Plans must likewise be approved by a
majority vote of the relevant Class' outstanding voting securities, as well as
by a majority vote of those directors who are not "interested persons." With
respect to each Class A Share Plan, any material increase in the maximum
percentage payable thereunder must also be approved by a majority of the
outstanding voting securities of the respective Class B Shares. Also, any other
material amendment to the Plans must be approved by a majority vote of the
directors including a majority of the noninterested directors of the Fund having
no interest in the Plans. In addition, in order for the Plans to remain
effective, the selection and nomination of directors who are not "interested
persons" of the Fund must be effected by the directors who themselves are not
"interested persons" and who have no direct or indirect financial interest in
the Plans. Persons authorized to make payments under the Plans must provide
written reports at least quarterly to the Board of Directors for their review.
For the fiscal year ended August 31, 1995, payments from the Class A Shares of
the USA Fund, Insured Fund and the USA Intermediate Fund pursuant to their
respective Plans amounted to $1,344,379, $157,749 and $32,721, respectively.
Such amounts were used for the following purposes for the Tax-Free USA Fund A
Class: Advertising--$1,191; Annual and Semi-Annual Reports--$26,320; Broker
Trails--$1,099,853; Commissions to Wholesalers--$101,202; Promotional-Broker
Meetings--$36,664; Promotional-Other--$16,861; Prospectus Printing--$512;
Telephone Expenses--$8,772; Wholesaler Expenses--$53,004. Such amounts were used
for the
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 17
following purposes for the Tax-Free Insured Fund A Class: Annual and
Semi-Annual-Annual Reports--$6,652; Broker Trails--$127,029; Commissions to
Wholesalers--$7,983; Dealer Service Expenses--$2,545; Promotional-Broker
Meetings--$4,062; Promotional-Other--$5,105; Prospectus Printing--$512;
Telephone Expenses--$961; Wholesaler Expenses--$2,900. Such amounts were used
for the following purposes for the Tax-Free Fund USA Intermediate Fund A Class:
Annual and Semi-Annual-Annual Reports--$65; Broker Trails--$30,109; Commissions
to Wholesalers--$1,530; Promotional-Broker Meetings--$472; Promotional-
Other--$545.
For the fiscal year ended August 31, 1995, payments from the Class B Shares of
the USA Fund, Insured Fund and USA Intermediate Fund pursuant to their
respective Plans amounted to $99,501, $15,991 and $6,793, respectively. Such
amounts were used for the following purposes for the Tax-Free USA Fund B Class:
Broker Sales Charges--$34,132; Broker Trails--$24,752; Commissions to
Wholesalers--$4,423; Interest on Broker Sales Charges--$35,520;
Promotional-Broker Meetings--$536; Telephone Expenses--$103; Wholesaler Expenses
$35. Such amounts were used for the following purposes for the
Tax-Free Insured Fund B Class: Broker Sales Charges--$5,628; Broker
Trails--$3,768; Commissions to Wholesalers--$883; Interest on Broker Sales
Charges--$5,565; Promotional-Broker Meetings--$98; Telephone Expenses--$36;
Wholesaler Expenses--$13. Such amounts were used for the following purposes for
the Tax-Free Fund USA Intermediate Fund B Class: Broker Sales Charges--$3,360;
Broker Trails--$818; Commissions to Wholesalers--$729; Interest on Broker Sales
Charges--$1,394; Promotional- Broker Meetings--$39; Telephone Expenses--$29;
Wholesaler Expenses--$424.
The staff of the Securities and Exchange Commission ("SEC") has proposed
amendments to Rule 12b-1 and other related regulations that could impact Rule
12b-1 Distribution Plans. The Fund intends to amend the Plans, if necessary, to
comply with any new rules or regulations the SEC may adopt with respect to Rule
12b-1.
OTHER PAYMENTS TO DEALERS--CLASS A, CLASS B AND
CLASS C SHARES
From time to time, at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits as set
by the Distributor, may receive from the Distributor an additional payment of up
to .25% of the dollar amount of such sales. The Distributor may also provide
additional promotional incentives or payments to dealers that sell shares of the
Delaware Group of funds. In some instances, these incentives or payments may be
offered only to certain dealers who maintain, have sold or may sell certain
amounts of shares.
Payments to dealers made in connection with seminars, conferences or contests
relating to the promotion of fund shares may be in an amount up to 100% of the
expenses incurred or awards made. The Distributor may also pay a portion of the
expense of preapproved dealer advertisements promoting the sale of Delaware
Group fund shares.
SPECIAL PURCHASE FEATURES--CLASS A SHARES
BUYING AT NET ASSET VALUE
Class A Shares may be reinvested without a front-end sales charge under the
Dividend Reinvestment Plan and, under certain circumstances, the 12-Month
Reinvestment Privilege and the Exchange Privilege.
Current and former officers, directors and employees of the Fund, any other
fund in the Delaware Group, the Manager or any of the Manager's current
affiliates and those that may in the future be created, legal counsel to the
funds and registered representatives, and employees of broker/dealers who have
entered into Dealer's Agreements with the Distributor may purchase Class A
Shares and shares of any of the funds in the Delaware Group, including any fund
that may be created at net asset value. Spouses, parents, brothers, sisters and
children (regardless of age) of such persons at their direction, and any
employee benefit plan established by any of the foregoing funds, corporations,
counsel or broker/dealers may also purchase shares at net asset value. Purchases
of Class A Shares may also be made by clients of registered representatives of
an authorized investment dealer at net asset value within six months of a change
of the registered representative's employment, if the purchase is funded by
proceeds from an investment where a front-end sales charge has been assessed and
the redemption of the investment did not result in the imposition of a
contingent deferred sales charge or other redemption charges. Purchases of Class
A Shares also may 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 Class A Shares. Officers, directors and key
employees of institutional clients of the Manager or any of its affiliates may
purchase Class A Shares at net asset value. Moreover, purchases may be effected
at net asset value for the benefit of the clients of brokers, dealers and
registered investment advisers affiliated with a broker or dealer, if such
broker, dealer or investment adviser has entered into an agreement with the
Distributor providing specifically for the purchase of Class A Shares in
connection with special investment products, such as wrap accounts or similar
fee based programs. Such purchasers are required to sign a letter stating that
the purchase is for investment only and that the securities may not be resold
except to the issuer. Such purchasers may also be required to sign or deliver
such other documents as the Fund may reasonably require to establish eligibility
for purchase at net asset value. The Fund must be notified in advance that the
trade qualifies for purchase at net asset value.
LETTER OF INTENTION
The reduced front-end sales charges described above with respect to Class A
Shares are also applicable to the aggregate amount of purchases made by any such
purchaser previously enumerated 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 the Fund, 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
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 18
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 Series and of any class of any of the other mutual
funds in the Delaware Group (except shares of any Delaware Group fund which do
not carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge, CDSC
or Limited CDSC) previously purchased and still held as of the date of their
Letter of Intention toward the completion of such Letter. For purposes of
satisfying an investor's obligation under a Letter of Intention, Class B Shares
and Class C Shares of the Series and the corresponding classes of shares of
other Delaware Group funds which offer such shares may be aggregated with Class
A Shares of the Series and the corresponding class of shares of the other
Delaware Group funds.
COMBINED PURCHASES PRIVILEGE
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of the Class A Shares, Class B Shares and/or
Class C Shares of the Series, as well as any other class of any of the other
Delaware Group funds (except shares of any Delaware Group fund which do not
carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge, CDSC
or Limited CDSC).
The privilege also extends to all purchases made at one time by an individual;
or an individual, his or her spouse and their children under the age 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 Series, as well as
shares of any other class of any of the other Delaware Group funds which offer
such classes (except shares of any Delaware Group fund which do not carry a
front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). Using the Class A Shares of the USA Fund and the Insured Fund as an
example, if any such purchaser has previously purchased and still holds Class A
Shares of the USA Fund or the Insured Fund and/or shares of any other of the
classes described in the previous sentence with a value of $40,000 and
subsequently purchases $60,000 at offering price of additional shares of Class A
Shares of the USA Fund or the Insured Fund, the charge applicable to the $60,000
purchase would 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 who redeem such shares have one year from the date
of redemption to reinvest all or part of their redemption proceeds in Class A
Shares of a Series or in Class A Shares of any of the other funds in the
Delaware Group, subject to applicable eligibility and minimum purchase
requirements, in states where shares of such other funds may be sold, at net
asset value without the payment of a front-end sales charge. This privilege does
not extend to Class A Shares where the redemption of the shares triggered the
payment of a Limited CDSC. Persons investing redemption proceeds from direct
investments in mutual funds in the Delaware Group offered without a front-end
sales charge, will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any amount
necessary to purchase a full share). The reinvestment will be made at the net
asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account, will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is proposed 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 Limited
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 19
CDSC (see Contingent Deferred Sales Charge for Certain Purchases of Class A
Shares Made at Net Asset Value under Redemption and Exchange in the Series'
Prospectuses) in connection with the features described above.
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 Classes
in which an investor has an account (based on the net asset value of that Series
in effect on the reinvestment date) and will be credited to the shareholder's
account on that date. Confirmations of each dividend payment from net investment
income will be mailed to shareholders monthly. 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 respective Class. Such purchases, which must meet
the minimum subsequent purchase requirements set forth in the Prospectus and
this Part B, are made for Class A Shares at the public offering price, and for
Class B Shares and Class C 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
DELAWARE GROUP FUNDS
Subject to applicable eligibility and minimum initial purchase requirements,
and the limitations set forth below, holders of Class A, Class B and Class C
Shares may automatically reinvest dividends and/or distributions from the Series
in any of the other mutual funds in the Delaware Group, including the Series, in
states where their shares may be sold. Such investments will be made at net
asset value per share at the close of business on the reinvestment date without
any front-end sales charge or service fee. Nor will such investments be subject
to a CDSC or Limited CDSC. 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
proposed 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 Group may be invested in the Series at net asset
value, provided an account has been established. Dividends from Class A Shares
may not be directed to Class B Shares or Class C Shares of another fund in the
Delaware Group, including the Series. Dividends from Class B Shares may only be
directed to Class B Shares of another fund in the Delaware Group, including the
Series, that offers such class of shares. Dividends from Class C Shares may only
be directed to Class C Shares of another fund in the Delaware Group that offers
such class of shares. See Class B Funds and Class C Funds under Buying Shares in
the Classes' Prospectuses for the funds in the Delaware Group that are eligible
for investment by holders of Series shares.
INVESTING BY ELECTRONIC FUND TRANSFER
Direct Deposit Purchase Plan--Investors may arrange for the Series 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 Series account. This
type of investment will be handled in either of the two ways noted below. (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.
* * *
Investments under the Direct Deposit Purchase Plan and the Automatic Investing
Plan must be for $25 or more for Class A Shares and $100 or more for Class B and
Class C Shares. An investor wishing to take advantage of either service must
complete an authorization form. Either service can be discontinued by the
shareholder at any time without penalty by giving written notice.
Payments to a Series 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
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 20
reclamation, the Series 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 Series.
DIRECT DEPOSIT PURCHASES BY MAIL
Shareholders may authorize a third party, such as a bank or employer, to make
investments directly to their Series accounts. The Series 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 the Fund for proper
instructions.
DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering price next
calculated by each Series to be acquired after receipt of the order by the Fund
or its agent. Orders for purchases of Class B Shares and Class C Shares of each
Series are effected at the net asset value per share next calculated by the
Series to be acquired after receipt of the order by the Fund or its agent.
Selling dealers have the responsibility of transmitting orders promptly.
The offering price of 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 New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. When the
New York Stock Exchange is closed, the Fund 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 the Class A Shares, the offering price per share, is included in the
Series' financial statements which are incorporated by reference into this Part
B.
Each Series' net asset value per share is computed by adding the value of all
securities and other assets in the portfolio of that Series, deducting any
liabilities of the Series and dividing by the number of Series shares
outstanding. In determining a Series' total net assets, portfolio securities are
valued at fair value, using methods determined in good faith by the Board of
Directors. This method utilizes the services of an independent pricing
organization which employs a combination of methods including, among others, the
obtaining of market valuations from dealers who make markets and deal in such
securities, and by comparing valuations with those of other comparable
securities in a matrix of such securities. A pricing service's activities and
results are reviewed by the officers of the Fund. In addition, money market
instruments having a maturity of less than 60 days are valued at amortized cost.
Expenses and fees of each Series are accrued daily.
Each Class of a Series will bear, pro-rata, all of the common expenses of the
relevant Series. The net asset values of all outstanding shares of each Class of
each Series will be computed on a pro-rata basis for each outstanding share
based on the proportionate participation in such Series represented by the value
of shares of that Class. All income earned and expenses incurred by a Series
will be borne on a pro-rata basis by each outstanding share of a Class, based on
each Class' percentage in such Series represented by the value of shares of such
Classes, except that the Class A, Class B and Class C Shares alone will bear the
12b-1 Plan expenses payable under their respective Plans. Due to the specific
distribution expenses and other costs that would be allocable to each Class, the
dividends paid to each Class of a Series may vary. However, the net asset value
per share of each Class of a Series is expected to be equivalent.
REDEMPTION AND REPURCHASE
Any shareholder may require the Fund to redeem Series shares by sending a
WRITTEN REQUEST, signed by the record owner or owners exactly as the shares are
registered, to the Fund, 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. The Fund does not issue
certificates for Class A Shares unless a shareholder specifically requests them.
The Fund does not issue certificates for Class B Shares or Class C Shares. If
stock certificates have been issued for shares being redeemed, they must
accompany the written request. For redemptions of $50,000 or less paid to the
shareholder at the address of record, the Fund requires a request signed by all
owners of the shares or the investment dealer or record, but does not require
signature guarantees. When the redemption is for more than $50,000, or if
payment is made to someone else or to another address, signatures of all record
owners and a signature guarantee are required. Each signature guarantee must be
supplied by an eligible guarantor institution. The Fund reserves the right to
reject a signature guarantee supplied by an eligible institution based on its
creditworthiness. The Fund may request further documentation from corporations,
retirement plans, executors, administrators, trustees or guardians.
In addition to redemption of Series shares by the Fund, the Distributor,
acting as agent of the Fund, offers to repurchase Series 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 Fund or its agent less any applicable CDSC or Limited CDSC. This is computed
and effective at the time the offering price and net asset value are determined.
See Determining Offering Price and Net Asset
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<PAGE> 22
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 21
Value. The Fund and the Distributor end their business day 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 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 any applicable CDSC or Limited CDSC), if
the repurchase order was received by the broker/dealer from the shareholder
prior to the time the offering price and net asset value are determined on such
day. The selling dealer has the responsibility of transmitting orders to the
Distributor promptly. Such repurchase is then settled as an ordinary transaction
with the broker/dealer (who may make a charge to the shareholder for this
service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value may result
in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge for
Certain Purchases of Class A Shares Made at Net Asset Value under Redemption and
Exchange in the Series' Prospectuses relating to such shares. Class B Shares of
the USA Fund and Insured Fund 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 of the USA Intermediate Fund are
subject to a CDSC of 2% during the first two years of purchase and 1% during the
third year of purchase. Class C Shares of each Series are subject to a CDSC of
1% if shares are redeemed within twelve months following purchase. See
Contingent Deferred Sales Charge under Buying Shares in the Prospectus of the
relevant Series relating to such shares. Except for the applicable CDSC or
Limited CDSC and, with respect to the expedited payment by wire, for which there
is currently a $7.50 bank wiring cost, there is no fee charged for redemptions
or repurchases, but such fees could be charged at any time in the future.
Payment for shares redeemed will ordinarily be mailed the next business day,
but in no case later than seven days, after receipt of a redemption request in
good order.
If a shareholder who recently purchased shares by check seeks to redeem all or
a portion of those shares in a written request, the Fund will honor the
redemption request but will not mail the proceeds until it is reasonably
satisfied of the collection of the investment check. This potential delay can be
avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for insufficient funds or for any other reason, the
Fund will automatically redeem from the shareholder's account the Series shares
purchased by the check plus any dividends earned thereon. Shareholders may be
responsible for any losses to the Series 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 Series of securities owned by it is not reasonably practical, or
it is not reasonably practical for a Series fairly to value its assets, or in
the event that the Securities and Exchange Commission has provided for such
suspension for the protection of shareholders, a Series may postpone payment or
suspend the right of redemption or repurchase. In such case, a 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 in either 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 sales by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, the Fund has
elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which the
Fund is obligated to redeem Series shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Series during any 90-day period for
any one shareholder.
The value of the Series' investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Series may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
SMALL ACCOUNTS
Before the Fund involuntarily redeems shares from an account that, under the
circumstances listed in the relevant Prospectus, has remained below the minimum
amounts required by the Series' Prospectuses and sends the proceeds to the
shareholder, the shareholder will be notified in writing that the value of the
shares in the account is less than the minimum required and will be allowed 60
days from the date of notice to make an additional investment to meet the
required minimum. See The Conditions of Your Purchase under Buying Shares in the
Series' Prospectuses. Any redemption in an inactive account established with a
minimum investment may trigger mandatory redemption. No CDSC or Limited CDSC
will apply to the redemptions described in this paragraph.
* * *
The Fund has available certain redemption privileges, as described below. The
Fund reserves the right to suspend or terminate these expedited payment
procedures upon 60 days' written notice to shareholders.
EXPEDITED TELEPHONE REDEMPTIONS
Shareholders or their investment dealers of record wishing to redeem an amount
of Series shares of $50,000 or less for which certificates have not been issued
may call the Fund at 800-523-1918 (in Philadelphia, 215-988-1241) prior to the
time the offering price and net asset value are determined, as noted above, and
have the proceeds mailed to them at the record address. Checks payable to the
shareholder(s) of record will normally be mailed the next business day, but no
later than seven days, after the receipt
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 22
of the redemption request. This option is only available to individual, joint
and individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred to your
predesignated bank account by wire or by check by calling the Fund, as described
above. An authorization form must have been completed by the shareholder and
filed with the Fund before the request is received.
Payment will be made by wire or check to the bank account designated on the
authorization form as follows:
1. PAYMENT BY WIRE: Request that Federal Funds be wired to the bank account
designated on the authorization form. Redemption proceeds will normally be wired
on the next business day following receipt of the redemption request. There is a
$7.50 wiring fee (subject to change) charged by CoreStates Bank, N.A. which will
be deducted from the withdrawal proceeds each time the shareholder requests a
redemption. If the proceeds are wired to the shareholder's account at a bank
which is not a member of the Federal Reserve System, there could be a delay in
the crediting of the funds to the shareholder's bank account.
2. PAYMENT BY CHECK: Request a check be mailed to the bank account designated
on the authorization form. Redemption proceeds will normally be mailed the next
business day, but no later than seven days, after the date of the telephone
request. This procedure will take longer than the Payment by Wire option (1
above) because of the extra time necessary for the mailing and clearing of the
check after the bank receives it.
REDEMPTION REQUIREMENTS: In order to change the name of the bank and the
account number it will be necessary to send a written request to the Series and
a signature guarantee may be required. Each signature guarantee must be supplied
by an eligible guarantor institution. The Fund reserves the right to reject a
signature guarantee supplied by an eligible institution based on its
creditworthiness. To reduce the shareholder's risk of attempted fraudulent use
of the telephone redemption procedure, payment will be made only to the bank
account designated on the authorization form.
The Fund will not honor telephone redemptions for Series shares recently
purchased by check unless it is reasonably satisfied that the purchase check has
cleared.
If expedited payment under these procedures could adversely affect the Series,
the Fund may take up to seven days to pay the shareholder.
Neither the Fund nor the Transfer Agent is responsible for any shareholder
loss incurred in acting upon written or telephone instructions for redemption or
exchange of Series shares which are reasonably believed to be genuine. With
respect to such telephone transactions, the Fund will follow reasonable
procedures to confirm that instructions communicated by telephone are genuine
(including verification of a form of personal identification) as, if it does
not, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders are generally tape recorded. A written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders of Class A, Class B and Class C Shares who own or purchase $5,000
or more of shares at the offering price or net asset value, as applicable, for
which certificates have not been issued may establish a Systematic Withdrawal
Plan for monthly withdrawals of $25 or more, or quarterly withdrawals of $75 or
more, although the Fund does not recommend any specific amount of withdrawal.
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
Class A Shares of the paying Series at net asset value. This plan is not
recommended for all investors and should be started only after careful
consideration of its operation and effect upon the investor's savings and
investment program. To the extent that withdrawal payments from the plan exceed
any dividends and/or realized securities profits distributions paid on shares
held under the plan, the withdrawal payments will represent a return of capital
and the share balance may in time be depleted, particularly in a declining
market.
The sale of shares for withdrawal payments constitutes a taxable event and a
shareholder may incur a capital gain or loss for federal income tax purposes.
This gain or loss may be long-term or short-term depending on the holding period
for the specific shares liquidated.
Withdrawals under this plan by the shareholders of Class A Shares, or any
similar plan of any other investment company charging a front-end sales charge,
made concurrently with the purchase of Class A Shares or the shares of any other
investment company will ordinarily be disadvantageous to the shareholder because
of the payment of duplicative sales charges. Shareholders should not purchase
Class A Shares while participating in a Systematic Withdrawal Plan and a
periodic investment program in a fund managed by the Manager must be terminated
before a Systematic Withdrawal Plan can take effect, except if the shareholder
is a participant in one of our Retirement Plans or is investing in Delaware
Group funds which do not carry a sales charge. Also, redemptions of Class A
Shares pursuant to a Systematic Withdrawal Plan may be subject to a Limited CDSC
if the purchase was made at net asset value and a dealer's commission has been
paid on that purchase. Redemptions of Class B Shares or Class C Shares pursuant
to a Systematic Withdrawal Plan may be subject to a CDSC, unless the annual
amount selected to be withdrawn is less than 12% of the account balance on the
date that the Systematic Withdrawal Plan was established. See Waiver
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 23
of CDSC - Class B and Class C Shares and Waiver of Limited CDSC - Class A Shares
under Redemption and Exchange in the Prospectuses for the Classes.
An investor wishing to start a Systematic Withdrawal Plan must complete an
authorization form. If the recipient of Systematic Withdrawal Plan payments is
other than the registered shareholder, the shareholder's signature on this
authorization must be guaranteed. Each signature guarantee must be supplied by
an eligible guarantor institution. The 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.
WEALTH BUILDER OPTION
Shareholders of the Series may elect to invest in one or more of the other
mutual funds in the Delaware Group through our Wealth Builder Option. Under this
automatic exchange program, shareholders can authorize regular monthly
investments (minimum of $100 per fund) to be liquidated from their account and
invested automatically into other mutual funds in the Delaware Group, subject to
the conditions and limitations set forth in the Prospectuses relating to the
Classes. See Wealth Builder Option and Redemption and Exchange in the
Prospectuses relating to the Classes.
The investment will be made on the 20th day of each month (or, if the fund
selected is not open that day, the next business day) at the public offering
price or net asset value, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure profits
or protect against losses in a declining market. The price of the fund into
which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges.
Shareholders can also use the Wealth Builder Option to invest in a Series
through regular liquidations of shares in their accounts in other mutual funds
in the Delaware Group, subject to the conditions and limitations described in
the Prospectuses of the Classes. Shareholders can terminate their participation
at any time by written notice to the Fund.
DIVIDENDS AND REALIZED
DISTRIBUTIONS
The Fund declares a dividend to shareholders of each Series of that Series'
net investment income on a daily basis. Dividends are declared each day the Fund
is open and cash dividends are paid monthly on the first business day following
the end of each month. Payment by check of cash dividends will ordinarily be
mailed within three business days after the payable date. In determining daily
dividends, the amount of net investment income for each Series will be
determined at the time the offering price and net asset value are determined
(see Determining Offering Price and Net Asset Value) and shall include
investment income accrued by the respective Series, less the estimated expenses
of that Series incurred since the last determination of net asset value. Gross
investment income consists principally of interest accrued and, where
applicable, net pro-rata amortization of premiums and discounts since the last
determination. The dividend declared, as noted above, will be deducted
immediately before the net asset value calculation is made. Net investment
income earned on days when the Fund is not open will be declared as a dividend
on the next business day.
Purchases of Series shares by wire begin earning dividends when converted into
Federal Funds and available for investment, normally the next business day after
receipt. However, if the Fund is given prior notice of Federal Funds wire and an
acceptable written guarantee of timely receipt from an investor satisfying the
Fund's credit policies, the purchase will start earning dividends on the date
the wire is received. Investors desiring to guarantee wire payments must have an
acceptable financial condition and credit history in the sole discretion of the
Fund. The Fund 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 will share proportionately in the investment income and expenses of
its respective Series, except that Class A Shares, Class B Shares and Class C
Shares alone will incur distribution fees under their respective 12b-1 Plans.
Dividends are automatically reinvested in additional shares of the paying
Series at net asset value, unless an election to receive dividends in cash has
been made. 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
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 24
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 distributions from net realized securities profits will be made annually
during the quarter following the close of the fiscal year. Such distributions
will be reinvested in shares at the net asset value in effect on the first
business day after month end, unless the shareholder elects to receive them in
cash. The Fund will mail a quarterly statement showing a Class' dividends paid
and all the transactions made during the period.
During the fiscal year ended August 31, 1995, dividends totaling $0.746,
$0.639 and $0.550 per share of the Class A Shares of the USA Fund, Insured Fund
and USA Intermediate Fund, respectively, were paid from net investment income.
During the same period, dividends totaling $0.649, $0.550 and $0.460 per share
of the Class B Shares of the USA Fund, Insured Fund and USA Intermediate Fund,
respectively, were paid from net investment income.
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 Series may deduct from a shareholder's account the costs of
the Series' effort to locate a shareholder if a shareholder's mail is returned
by the Post Office or the Series 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.
The Fund anticipates that most of each Series' dividends paid to shareholders
will be exempt from federal income taxes. For the fiscal year ended August 31,
1995, the Fund's dividends were exempt from federal income tax. Information
concerning the tax status of dividends and distributions will be mailed to
shareholders annually.
TAXES
FEDERAL INCOME TAX ASPECTS
Each Series has qualified, and intends to continue to qualify, as a regulated
investment company as defined under Subchapter M of the Internal Revenue Code of
1986, as amended, so as not to be liable for federal income tax to the extent
its earnings are distributed. The term "regulated investment company" does not
imply the supervision of management or investment practices by any government
agency. Each Series of the Fund is treated as a single tax entity, and any
capital gains and losses for each Series are calculated separately. The Fund has
no fixed policy with regard to distributions of realized securities profits when
such realized securities profits may be offset by capital losses carried
forward. Currently, however, the Fund intends to offset realized securities
profits to the extent of capital losses carried forward, if any.
For the fiscal year ended August 31, 1995, the USA Intermediate Fund had a
capital loss of $623,654. At August 31, 1995, the USA Intermediate Fund had a
capital loss carryforward of $1,066,941 which expires as follows:
2002--$443,287 and 2003--$623,654.
Distributions by the Fund representing net interest received on municipal
bonds are considered tax-exempt income and are not includable by shareholders
in gross income for federal income tax purposes. Although exempt from regular
federal income tax, interest paid on certain types of municipal obligations is
deemed to be a preference item under federal tax law and is subject to the
federal alternative minimum tax. Distributions by the Fund representing net
interest income received by the Series from certain temporary investments (such
as certificates of deposit, commercial paper and obligations of the U.S.
Government, its agencies and instrumentalities), accretion of market discount
on tax-exempt bonds purchased by the Series after April 30, 1993 and net
short-term capital gains realized by the Series, if any, will be taxable to
shareholders as ordinary income and will not qualify for the deduction for
dividends received by corporations. Distributions from long-term capital gains
realized by the Series, if any, will be taxable to shareholders as long-term
capital gains regardless of the length of time an investor has held such
shares, and these gains are currently taxed at long-term capital gains 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. The
percentage of taxable income at the end of the year will not necessarily bear
relationship to the experience over a shorter period of time. Shareholders of
the Series may incur a tax liability for federal, state and local taxes upon
the sale or redemption of shares of the Series. The Fund has been advised by
counsel that if, under present tax laws, any amounts are paid to the Insured
Fund in lieu of interest on tax-exempt bonds pursuant to the various insurance
on the portfolio securities, they will be treated as tax-exempt income when
distributed to shareholders.
Section 265 of the Internal Revenue Code provides that interest paid on
indebtedness incurred or continued to purchase or carry obligations the interest
on which is tax-exempt, and certain expenses associated with tax-exempt income,
are not deductible. It is probable that interest on indebtedness incurred or
continued to purchase or carry shares of the Series is not deductible.
The Series may not be an appropriate investment for persons who are
"substantial users" of facilities financed by "industrial development bonds" or
for investors who are "related persons" thereof within the Internal Revenue
Code. Persons who are or may be considered "substantial users" should consult
their tax advisers in this matter before purchasing shares of the Series.
The Fund intends to use the "average annual" method of allocation in the event
a Series realizes any taxable interest income. Under this approach, the
percentage of interest income earned that is deemed to be taxable in any year
will be the same for each shareholder who held shares of the Series at any time
during the year.
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 25
Shareholders will be informed annually of the amount and nature of income and
capital gains. For fiscal year 1995, all of the Fund's dividends from net income
were exempt from federal income tax.
When the USA Intermediate Fund writes a call or put option, an amount equal to
the premium received by it is included in the Series' Statement of Assets and
Liabilities as an asset and as an equivalent liability. The amount of the
liability is subsequently "marked to market" to reflect the current market value
of the option written. If an option which the Series has written either expires
on its stipulated expiration date, or if the Series enters into a closing
purchase transaction, the Series realizes a gain (or loss if the cost of the
closing transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is extinguished. Any such gain or loss is a
short-term capital gain or loss for federal income tax purposes. If a call
option which the Series has written is exercised, the Series realizes a capital
gain or loss (long-term or short-term, depending on the holding period of the
underlying security) from the sale of the underlying security and the proceeds
from such sale are increased by the premium originally received. If a put option
which the Series has written is exercised, the amount of the premium originally
received will reduce the cost of the security which the Series purchases upon
exercise of the option.
The premium paid by the USA Intermediate Fund for the purchase of a put option
is recorded in the section of the Series' Statement of Assets and Liabilities as
an investment and subsequently adjusted daily to the current market value of the
option. For example, if the current market value of the option exceeds the
premium paid, the excess would be unrealized appreciation and, conversely, if
the premium exceeds the current market value, such excess would be unrealized
depreciation. If a put option which the Series has purchased expires on the
stipulated expiration date, the Series realizes a capital loss for federal
income tax purposes in the amount of the cost of the option. If the Series sells
the put option, it realizes a capital gain or loss, depending on whether the
proceeds from the sale are greater or less than the cost of the option. If the
Series exercises a put option, it realizes a capital gain or loss (long-term or
short-term, depending on the holding period of the underlying security) from the
sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. However, since the purchase of a put
option is treated as a short sale for federal income tax purposes, the holding
period of the underlying security will be affected by such a purchase.
The Internal Revenue Code includes special rules applicable to listed options
which the USA Intermediate Fund may write, purchase or sell. Such options are
classified as Section 1256 contracts under the Code. The character of gain or
loss under a Section 1256 contract is generally treated as 60% long-term gain or
loss and 40% short-term gain or loss. When held by the Series at the end of a
fiscal year, these options are required to be treated as sold at market value on
the last day of the fiscal year for federal income tax purposes ("marked to
market").
Over-the-counter options are not classified as Section 1256 contracts and are
not subject to the 60/40 gain or loss treatment or the "marked to market" rule.
Any gains or losses recognized by the USA Intermediate Fund from
over-the-counter option transactions generally constitute short-term capital
gains or losses.
The initial margin deposits made when entering into futures contracts are
recognized as assets due from the broker. During the period the futures contract
is open, changes in the value of the contract will be reflected at the end of
each day.
Futures contracts held by the USA Intermediate Fund at the end of each fiscal
year will be required to be "marked to market" for federal income tax purposes.
Any unrealized gain or loss on futures contracts will therefore be recognized
and deemed to consist of 60% long-term capital gain or loss and 40% short-term
capital gain or loss. Therefore adjustments are made to the tax basis in the
futures contract to reflect the gain or loss recognized at year end.
The Fund must meet several requirements to maintain its status as a regulated
investment company. Among these requirements are that at least 90% of its
investment company taxable income be derived from dividends, interest, payment
with respect to securities loans and gains from the sale or disposition of
securities; that at the close of each quarter of its taxable year at least 50%
of the value of its assets consist of cash and cash items, government
securities, securities of other regulated investment companies and, subject to
certain diversification requirements, other securities; and that less than 30%
of its gross income be derived from sales of securities held for less than three
months.
The Internal Revenue Service has ruled publicly that an Exchange-traded call
option is a security for purposes of the 50% of assets tests and that its issuer
is the issuer of the underlying security, not the writer of the option, for
purposes of the diversification requirements.
The requirement that not more than 30% of the Fund's gross income be derived
from gains from the sale or other disposition of securities held for less than
three months may restrict the USA Intermediate Fund in its ability to write
covered call options on securities which it has held less than three months, to
write options which expire in less than three months, to sell securities which
have been held less than three months, and to effect closing purchase
transactions with respect to options which have been written less than three
months prior to such transactions. Consequently, in order to avoid realizing a
gain within the three-month period, the USA Intermediate Fund may be required to
defer the closing out of a contract beyond the time when it might otherwise be
advantageous to do so. The Series may also be restricted in the sale of
purchased put options and the purchase of put options for the purpose of hedging
underlying securities because of the application of the short sale holding
period rules with respect to such underlying securities.
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 26
STATE AND LOCAL TAXES
The exemption of distributions for federal income tax purposes may not result
in similar exemptions under the laws of a particular state or local taxing
authority. It is recommended that shareholders consult their tax advisers in
this regard. The Fund will report annually for each Series the percentage of
interest income earned on municipal obligations on a state-by-state basis during
the preceding calendar year.
PENNSYLVANIA PERSONAL PROPERTY TAX
Shares of the Series will be exempt from Pennsylvania county personal property
tax.
INVESTMENT MANAGEMENT
AGREEMENT
The Manager, located at One Commerce Square, Philadelphia, PA 19103, furnishes
investment management services to each Series of the Fund, subject to the
supervision and direction of the Fund's Board of Directors.
The Manager and its predecessors have been managing the funds in the Delaware
Group since 1938. The aggregate assets of these funds on August 31, 1995 were
approximately $10,068,867,000. Investment advisory services are also provided to
institutional accounts with assets on August 31, 1995 of approximately
$17,506,688,000.
The Investment Management Agreements for the Series are dated April 3, 1995
and were approved by shareholders on March 29, 1995.
The Agreements have an initial term of two years and may be renewed each year
only so long as such renewal and continuance are specifically approved at least
annually by the Board of Directors or by vote of a majority of the outstanding
voting securities of the affected Series, and only if the terms and the renewal
thereof have been approved by vote of a majority of the directors of the Fund
who are not parties thereto or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval. Each
Agreement is terminable without penalty on 60 days' notice by the directors of
the Fund or by the Manager. An Agreement will terminate automatically in the
event of its assignment.
The annual compensation paid by each Series for investment management services
under its Investment Management Agreement is equal to: for the USA Fund, .60%
on the first $500 million of its average daily net assets, .575% on the next
$250 million and .55% on the average daily net assets in excess of $750
million; for the USA Intermediate Fund, .50% of its average daily net assets;
and for the Insured Fund, .60% of its average daily net assets, less a
proportionate share of all directors' fees paid to the unaffiliated directors
by each Series of the Fund.
On August 31, 1995, the total net assets of the Fund were $886,893,853, broken
down as follows: USA Fund-- $776,249,353; USA Intermediate Fund--$21,440,769;
Insured Fund--$89,203,731. The Manager makes and implements all investment
decisions on behalf of the Fund. The Manager pays the Fund's rent and the
salaries of all directors, officers and employees of the Fund who are affiliated
with both the Manager and the Fund. The Fund pays all of its other expenses. For
the fiscal years ended August 31, 1993, 1994 and 1995, investment management
fees paid by the USA Fund were $4,306,649, $4,448,874 and $4,388,886,
respectively. Investment management fees paid by the Insured Fund for the fiscal
years ended August 31, 1993, 1994 and 1995 amounted to $530,627, $558,029 and
$523,070, respectively. For the period January 7, 1993 (date of initial public
offering) to August 31, 1993, the investment management fee that would have been
payable by the USA Intermediate Fund amounted to $17,157 but no amount was paid
by this Series due to the waiver described below. For the fiscal years ended
August 31, 1994 and 1995, investment management fees that would have been
payable by the USA Intermediate Fund amounted to $110,990 and $104,724,
respectively, but no amount was paid by this Series for 1994 or for 1995 due to
the waiver.
Except for those expenses borne by the Manager under the Investment Management
Agreements and the Distributor under the Distribution Agreements, the Fund is
responsible for all of its own expenses. Among others, these include the
investment management fees; transfer and dividend disbursing agent fees and
costs; custodian expenses; federal and state securities registration fees; proxy
costs; and the costs of preparing prospectuses and reports sent to shareholders.
For the fiscal year ended August 31, 1995, the ratios of expenses to average
daily net assets of the Class A Shares of the USA Fund, Insured Fund and
USA Intermediate Fund were 0.92%, 0.98% and 0.25%, respectively. The ratios of
expenses to average daily net assets of the Class B Shares of the USA Fund,
Insured Fund and USA Intermediate Fund were 1.74%, 1.80% and 1.10%,
respectively. The ratios for each of the Classes reflect the impact of the
respective 12b-1 Plans. In addition, the ratios for the Class A Shares and the
Class B Shares of the USA Intermediate Fund reflect the waiver of fees described
below. The Fund anticipates that the ratio of expenses to average daily net
assets of Class C Shares will be identical to that of the respective Class B
Shares.
In connection with the USA Intermediate Fund, the Manager elected voluntarily
to waive that portion, if any, of the annual management fees payable by this
Series and to reimburse the Series to the extent necessary to ensure that the
Total Operating Expenses of the Class A Shares of this Series, including 12b-1
expenses, did not exceed .25% during the period from the commencement of the
public offering of the Series through June 30, 1993. This waiver was extended
through June 30, 1994, but modified effective May 2, 1994 through June 30, 1996
to provide that operating expenses of the Class A Shares would not exceed .10%,
excluding the 12b-1 expenses attributable to that Class. The Manager similarly,
elected to waive its fees to limit operating expenses of the Class B Shares to
.10%, excluding 12b-1 fees attributable to the Class B Shares for the period May
2, 1994 through June 30, 1996.
By California regulation, the Manager is required to waive certain fees and
reimburse the Fund for certain
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DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 27
expenses to the extent that the Fund's annual operating
expenses, exclusive of taxes, interest, brokerage commissions and extraordinary
expenses, exceed 2 1/2% of its first $30 million of average daily net assets, 2%
of the next $70 million of average daily assets and 1 1/2% of any additional
average daily net assets. Such undertaking is computed separately for each
Series. For the fiscal year ended August 31, 1995, no such reimbursement was
necessary or paid for any Series.
DISTRIBUTION AND SERVICE
The Distributor, Delaware Distributors, L.P. (which formerly conducted
business as Delaware Distributors, Inc.), located at 1818 Market Street,
Philadelphia, PA 19103, serves as the national distributor of Series shares
under separate Distribution Agreements dated April 3, 1995, as amended on
November 29, 1995. The Distributor is an affiliate of the Manager and bears all
of the costs of promotion and distribution, except for payments by a Series on
behalf of its respective Class A Shares, Class B Shares and Class C Shares under
the 12b-1 Plans. Prior to January 3, 1995, Delaware Distributors, Inc. ("DDI")
served as the national distributor of the Series' shares. On that date, Delaware
Distributors, L.P., a newly formed limited partnership, succeeded to the
business of DDI. All officers and employees of DDI became officers and employees
of Delaware Distributors, L.P. DDI is the corporate general partner of Delaware
Distributors, L.P. and both DDI and Delaware Distributors, L.P. are indirect,
wholly-owned subsidiaries of Delaware Management Holdings, Inc.
The Transfer Agent, Delaware Service Company, Inc., another affiliate of the
Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as the
Series' shareholder servicing, dividend disbursing and transfer agent pursuant
to a Shareholders Services Agreement dated June 29, 1988 for the USA Fund and
the Insured Fund and November 10, 1992 for the USA Intermediate Fund. The
Transfer Agent is also an indirect, wholly-owned subsidiary of Delaware
Management Holdings, Inc.
OFFICERS AND DIRECTORS
The business and affairs of the Fund are managed under the direction of its
Board of Directors.
Certain officers and directors of the Fund hold identical positions in each of
the other funds in the Delaware Group. On October 31, 1995, the Fund's officers
and directors owned approximately 2.56%, less than 1% and approximately 2.51% of
the outstanding shares of the Class A Shares of, respectively, the USA Fund,
Insured Fund and USA Intermediate Fund and less than 1% of the outstanding
shares of the Class B Shares of, respectively, the USA Fund, Insured Fund and
USA Intermediate Fund.
As of October 31, 1995, the Fund believes the following accounts held 5% or
more of the outstanding shares of the Tax-Free Insured Fund B Class: Merrill,
Lynch, Pierce, Fenner & Smith Inc., Mutual Fund Operations, Attention Book
Entry, 4800 Deer Lake Drive East, 3rd Fl., Jacksonville, FL 32246 held of record
for the benefit of others 32,205 shares (13.69%); Gerry M. Fleuriet SUCC TTEE,
Trust A/U/A DTD 3/16/77, Kenneth W. Mac Pherson and Hazel Mac Pherson Grantors,
621 E. Tyler, Harlingen, TX 78550 held 22,520 shares (9.57%); and Anthony F.
Czekanski, 300 Strawbridge Ave., Westmont, NJ 08108 held 12,485 shares (5.31%).
As of October 31, 1995, the Fund believes the following accounts held 5% or
more of the outstanding shares of the Tax-Free USA Intermediate Fund B Class:
Maimee G. Chapin and Merlaine G. Latham and Dolores Ann Lund & Norma J.
Alguard, 429 Lower 36th Avenue South, Jacksonville Beach, FL 32250 held 10,268
shares (10.67%); Bobbie Crump and Miriam Crump, Tenants In Common, 7460 Rienzi
Blvd., Baton Rouge, LA 70809 held 9,765 shares (10.15%); Charles D. La Motta,
286 Stonegate Drive, Devon, PA 19333 held 9,699 shares (10.08%); Smith Barney,
Inc., 00110803614, 388 Greenwich Street, New York, NY 10013 held 7,869 shares
(8.18%); Merrill Lynch, Pierce, Fenner & Smith Inc., Mutual Fund Operations,
Attention Book Entry, 4800 Deer Lake Drive East, 3rd Fl., Jacksonville, FL 32246
held of record for the benefit of others 7,613 shares (7.91%); Ann Shirilla, 626
Dumont, Campbell, OH 44405 held 6,020 shares (6.25%); Anna Swavely, Katherine M.
Tulley and Carol A. Masterson, 269 Madison Rd., Huntington Valley, PA 19006 held
5,747 shares (5.97%); and NFSC FEBO OBV-636037, Craig H. Rosen and Judith E.
Rosen, 42 Southwood Drive, Cherry Hill, NJ 08002 held 5,203 shares (5.40%).
DMH Corp., Delaware Management Company, Inc., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Management Trust Company, Delaware
International Holdings Ltd., Founders Holdings, Inc., Delaware International
Advisers Ltd. and Delaware Investment Counselors, Inc. are direct or indirect,
wholly-owned subsidiaries of Delaware Management Holdings, Inc. ("DMH"). On
April 3, 1995, a merger between DMH and a wholly-owned subsidiary of Lincoln
National Corporation ("Lincoln National") was completed. In connection with the
merger, new Investment Management Agreements between the Fund on behalf of each
Series and the Manager were executed following shareholder approval. DMH and the
Manager are now wholly-owned subsidiaries, and subject to the ultimate control,
of Lincoln National. Lincoln National, with headquarters in Fort Wayne, Indiana,
is a diversified organization with operations in many aspects of the financial
services industry, including insurance and investment management.
Directors and principal officers of the Fund are noted below along with their
ages and their business experience for the past five years. Unless otherwise
noted, the address of each officer and director is One Commerce Square,
Philadelphia, PA 19103.
- 27
<PAGE> 29
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 28
*WAYNE A. STORK (58)
Chairman, President, Chief Executive Officer, Director and/or Trustee of the
Fund, 15 other funds in the Delaware Group (which excludes Delaware Pooled
Trust, Inc.) and Delaware Management Holdings, Inc.
Chairman and Director of Delaware Investment Counselors, Inc. and Delaware
Pooled Trust, Inc.
Chairman, Chief Executive Officer, Chief Investment Officer and Director of
Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of DMH Corp., Delaware
International Advisers Ltd., Delaware International Holdings Ltd. and
Founders Holdings, Inc.
Director of Delaware Distributors, Inc. and Delaware Service Company, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware organization.
WINTHROP S. JESSUP (50)
Executive Vice President of the Fund, 15 other funds in the Delaware Group
(which excludes Delaware Pooled Trust, Inc.) and Delaware Management
Holdings, Inc.
President and Chief Executive Officer of Delaware Pooled Trust, Inc.
President and Director of Delaware Investment Counselors, Inc.
Executive Vice President and Director of DMH Corp., Delaware Management
Company, Inc., Delaware International Holdings Ltd. and Founders Holdings,
Inc.
Vice Chairman and Director of Delaware Distributors, Inc.
Vice Chairman of Delaware Distributors, L.P.
Director of Delaware Management Trust Company, Delaware Service Company, Inc.
and Delaware International Advisers Ltd.
During the past five years, Mr. Jessup has served in various executive
capacities at different times within the Delaware organization.
RICHARD G. UNRUH, JR. (56)
Executive Vice President of the Fund and each of the other 16 funds in the
Delaware Group.
Executive Vice President and Director of Delaware Management Company, Inc.
Senior Vice President of Delaware Management Holdings, Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware organization.
WALTER P. BABICH (68)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and from 1988
to 1991, he was a partner of I&L Investors.
ANTHONY D. KNERR (56)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Consultant, 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 (55)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer of the
Smithsonian Institution, Washington, DC, and from 1975 to 1994, she was
Adjunct Professor of Columbia Business School.
W. THACHER LONGSTRETH (75)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
1617 John F. Kennedy Boulevard, Philadelphia, PA 19103.
Vice Chairman, Packquisition Corp., a financial printing, commercial printing
and information processing firm.
Philadelphia City Councilman.
President, MLW, Associates.
Director, Tasty Baking Company.
Director, Healthcare Services Group.
CHARLES E. PECK (69)
Director and/or Trustee of the Fund and each of the other 16 funds in the
Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of The
Ryland Group, Inc., Columbia, MD.
- ------------------
*Director affiliated with the investment manager of the Fund and considered an
"interested person" as defined in the Investment Company Act of 1940.
- 28
<PAGE> 30
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 29
DAVID K. DOWNES (55)
Senior Vice President/Chief Administrative Officer/Chief Financial Officer of
the Fund, each of the other 16 funds in the Delaware Group and Delaware
Management Company, Inc.
Chairman and Director of Delaware Management Trust Company.
Senior Vice President/Chief Administrative Officer/Chief Financial
Officer/Treasurer of Delaware Management Holdings, Inc.
Senior Vice President/Chief Financial Officer/Treasurer and Director of DMH
Corp.
Senior Vice President/Chief Administrative Officer/Chief Financial Officer and
Director of Delaware Service Company, Inc.
Senior Vice President/Chief Administrative Officer of Delaware Distributors,
L.P.
Senior Vice President/Chief Administrative Officer and Director of Delaware
Distributors, Inc.
Chief Financial Officer and Director of Delaware International Holdings Ltd.
Senior Vice President/Chief Financial Officer/Treasurer of Delaware Investment
Counselors, Inc.
Senior Vice President and Director of Founders Holdings, Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief Administrative
Officer, Chief Financial Officer and Treasurer of Equitable Capital
Management Corporation, New York, from December 1985 through August 1992,
Executive Vice President from December 1985 through March 1992, and Vice
Chairman from March 1992 through August 1992.
GEORGE M. CHAMBERLAIN, JR. (48)
Senior Vice President and Secretary of the Fund, each of the other 16 funds in
the Delaware Group, Delaware Management Holdings, Inc., Delaware
Distributors, L.P. and Delaware Investment Counselors, Inc.
Executive Vice President, Secretary and Director of Delaware Management Trust
Company.
Senior Vice President, Secretary and Director of DMH Corp., Delaware
Management Company, Inc., Delaware Distributors, Inc. and Delaware Service
Company, Inc.
Corporate Vice President, Secretary and Director of Founders Holdings, Inc.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various capacities
at different times within the Delaware organization.
PATRICK P. COYNE (32)
Vice President/Senior Portfolio Manager of the Fund, of nine other funds in
the Delaware Group and Delaware Management Company, Inc.
From 1986 to 1990, Mr. Coyne was Vice President/ Municipal Trading with Kidder
Peabody & Co., Inc. Mr. Coyne joined the Delaware Group in 1990.
JOSEPH H. HASTINGS (45)
Vice President/Corporate Controller of the Fund, each of the other 16 funds in
the Delaware Group, Delaware Management Holdings, Inc., DMH Corp., Delaware
Management Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware Investment
Counselors, Inc. and Founders Holdings, Inc.
Executive Vice President/Treasurer/Chief Financial Officer of Delaware
Management Trust Company.
Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
Before joining the Delaware Group in 1992, Mr. Hastings was Chief Financial
Officer for Prudential Residential Services, L.P., New York, NY from 1989
to 1992. Prior to that, Mr. Hastings served as Controller and Treasurer for
Fine Homes International, L.P., Stamford, CT from 1987 to 1989.
MICHAEL P. BISHOF (33)
Vice President/Treasurer of the Fund, each of the other 16 funds in the
Delaware Group, Delaware Management Company, Inc., Delaware Distributors,
L.P., Delaware Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc. and Founders CBO Corporation.
Prior to joining the Delaware Group in 1995, Mr. Bishof was a vice president
for Bankers Trust, New York, NY from 1994 to 1995, a vice president for
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.
- 29
<PAGE> 31
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 30
The following is a compensation table listing for each director entitled to
receive compensation, the aggregate compensation received from the Fund and the
total compensation received from all Delaware Group funds for the fiscal year
ended August 31, 1995 and an estimate of annual benefits to be received upon
retirement under the Delaware Group Retirement Plan for Directors/Trustees as of
August 31, 1995.
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT ESTIMATED TOTAL
BENEFITS ANNUAL COMPENSATION
AGGREGATE ACCRUED BENEFITS FROM ALL 17
COMPENSATION AS PART OF UPON DELAWARE
NAME FROM FUND FUND EXPENSES RETIREMENT* GROUP FUNDS
- ---- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
W. Thacher Longstreth $ 3,098.19 None $18,100 $51,187.97
Ann R. Leven $ 3,600.63 None $18,100 $59,323.96
Walter P. Babich $ 3,667.23 None $18,100 $60,323.88
Anthony D. Knerr $ 2,533.11 None $18,100 $43,815.91
Charles E. Peck $ 2,927.19 None $18,100 $48,052.01
</TABLE>
*Under the terms of the Delaware Group Retirement Plan for Directors/Trustees,
each disinterested director who, at the time of his or her retirement from the
Board, has attained the age of 70 and served on the Board for at least five
continuous years, is entitled to receive payments from each fund in the
Delaware Group for a period equal to the lesser of the number of years that
such person served as a director or the remainder of such person's life. The
amount of such payments will be equal, on an annual basis, to the amount of the
annual retainer that is paid to directors of each fund at the time of such
person's retirement. If an eligible director retired as of August 31, 1995, he
or she would be entitled to annual payments totaling $18,100, in the aggregate,
from all of the funds in the Delaware Group, based on the number of funds in
the Delaware Group as of that date.
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of the Classes and for
shareholders of classes of other funds in the Delaware Group are set forth in
the relevant prospectuses for such classes. The following supplements that
information. The Fund may modify, terminate or suspend the exchange privilege
upon 60 days' notice to shareholders.
All exchanges involve a purchase of shares of the fund into which the exchange
is made. As with any purchase, an investor should obtain and carefully read that
fund's prospectus before buying shares in an exchange. The prospectus contains
more complete information about the fund, including charges and expenses. A
shareholder requesting such an exchange will be sent a current prospectus and an
authorization form for any of the other mutual funds in the Delaware Group.
Exchange instructions must be signed by the record owner(s) exactly as the
shares are registered.
An exchange constitutes, for tax purposes, the sale of one fund and the
purchase of another. The sale may involve either a capital gain or loss to the
shareholder for federal income tax purposes.
In addition, investment advisers and dealers may make exchanges between funds
in the Delaware Group on behalf of their clients by telephone or other expedited
means. This service may be discontinued or revised at any time by the Transfer
Agent. Such exchange requests may be rejected if it is determined that a
particular request or the total requests at any time could have an adverse
effect on any of the funds. Requests for expedited exchanges may be submitted
with a properly completed exchange authorization form, as described above.
TELEPHONE EXCHANGE PRIVILEGE
Shareholders owning shares for which certificates have not been issued or
their investment dealers of record may exchange shares by telephone for shares
in other mutual funds in the Delaware Group. This service is automatically
provided unless the Fund receives written notice from the shareholder to the
contrary.
Shareholders or their investment dealers of record may contact the Transfer
Agent at 800-523-1918 (in Philadelphia, 215-988-1241) to effect an exchange. The
shareholder's current Series account number must be identified, as well as the
registration of the account, the share or dollar amount to be exchanged and the
fund into which the exchange is to be made. Requests received on any day after
the time the offering price and net asset value are determined will be processed
the following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent.)
The telephone exchange privilege is intended as a convenience to shareholders
and is not intended to be a vehicle to speculate on short-term swings in the
securities market through frequent transactions in and out of the funds in the
Delaware Group. Telephone exchanges may be subject to limitations as to amounts
or frequency. The Transfer Agent and the Fund reserve the right to record
exchange instructions received by telephone, to reject any exchange request and
to modify, terminate or suspend the telephone exchange service at any time in
the future.
As described in the Series' Prospectuses, neither the Fund nor the Transfer
Agent is responsible for any shareholder loss incurred in acting upon written or
telephone instructions for redemption or exchange of Series shares which are
reasonably believed to be genuine.
RIGHT TO REFUSE TIMING ACCOUNTS
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), the Fund will refuse any new Timing
Arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
Group funds from Timing Firms. The 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
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<PAGE> 32
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 31
exchanges out of the Fund per calendar quarter, or (iii) exchanges shares equal
in value to at least $5 million, or more than 1/4 of 1% of the Fund's net
assets. Accounts under common ownership or control, including accounts
administered so as to redeem or purchase shares based upon certain predetermined
market indicators, will be aggregated for purposes of the exchange limits.
RESTRICTIONS ON TIMED EXCHANGES
Timing Accounts operating under existing Timing Agreements may only execute
exchanges between the following eight Delaware Group funds: (1) Decatur Income
Fund, (2) Decatur Total Return Fund, (3) Delaware Fund, (4) Limited-Term
Government Fund, (5) Tax-Free USA Fund, (6) Delaware Cash Reserve, (7)
Delchester Fund and (8) Tax-Free Pennsylvania Fund. No other Delaware Group
funds are available for Timed Exchanges. Assets redeemed or exchanged out of
Timing Accounts in Delaware Group funds not listed above may not be reinvested
back into that Timing Account. The Fund reserves the right to apply these same
restrictions to the account(s) of any person whose transactions seem to follow a
timing pattern (as described above).
The 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 the 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 the Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers of
record will be permitted to make exchanges or redemptions.
Following is a summary of the investment objectives of the other Delaware
Group funds:
DELAWARE FUND seeks long-term growth by a balance of capital appreciation,
income and preservation of capital. It uses a dividend-oriented valuation
strategy to select securities issued by established companies that are believed
to demonstrate potential for income and capital growth. DEVON FUND seeks current
income and capital appreciation by investing primarily in income-producing
common stocks, with a focus on common stocks the Manager believes have the
potential for above average dividend increases over time.
TREND FUND seeks long-term growth by investing in common stock issued by
emerging growth companies exhibiting strong capital appreciation potential.
VALUE FUND seeks capital appreciation by investing primarily in common stocks
whose market values appear low relative to their underlying value or future
potential.
DELCAP FUND seeks long-term capital growth by investing in common stocks and
securities convertible into common stocks of companies that have a demonstrated
history of growth and have the potential to support continued growth.
DECATUR INCOME FUND seeks the highest possible current income by investing
primarily in common stocks that provide the potential for income and capital
appreciation without undue risk to principal. DECATUR TOTAL RETURN FUND seeks
long-term growth by investing primarily in securities that provide the potential
for income and capital appreciation without undue risk to principal.
DELCHESTER FUND seeks as high a current income as possible by investing
principally in corporate bonds, and also in U.S. Government securities and
commercial paper.
U.S. GOVERNMENT FUND seeks high current income by investing primarily in
long-term debt obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
LIMITED-TERM GOVERNMENT FUND seeks high, stable income by investing primarily
in a portfolio of short- and intermediate-term securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and instruments
secured by such securities. U.S. GOVERNMENT MONEY FUND seeks maximum current
income with preservation of principal and maintenance of liquidity by investing
only in short-term securities issued or guaranteed as to principal and interest
by the U.S. Government, its agencies or instrumentalities, and repurchase
agreements collateralized by such securities, while maintaining a stable net
asset value.
DELAWARE CASH RESERVE seeks the highest level of income consistent with the
preservation of capital and liquidity through investments in short-term money
market instruments, while maintaining a stable net asset value.
TAX-FREE MONEY FUND seeks high current income, exempt from federal income tax,
by investing in short-term municipal obligations, while maintaining a stable net
asset value.
TAX-FREE PENNSYLVANIA FUND seeks a high level of current interest income
exempt from federal and, to the extent possible, certain Pennsylvania state and
local taxes, consistent with the preservation of capital.
INTERNATIONAL EQUITY FUND seeks to achieve long-term growth without undue risk
to principal by investing primarily in international securities that provide the
potential for capital appreciation and income. GLOBAL BOND FUND seeks to achieve
current income consistent with the preservation of principal by investing
primarily in global fixed income securities that may also provide the potential
for capital appreciation. GLOBAL ASSETS FUND seeks to achieve long-term total
return by investing in global securities which will provide higher current
income than a portfolio comprised exclusively of equity securities, along with
the potential for capital growth.
DELAWARE GROUP PREMIUM FUND offers nine series available exclusively as
funding vehicles for certain insurance company separate accounts. EQUITY/INCOME
SERIES seeks the highest possible total rate of return by selecting issues that
exhibit the potential for capital appreciation while providing higher than
average dividend income. HIGH YIELD SERIES seeks as high a current income as
possible by investing in rated and unrated corporate bonds, U.S. Government
securities and commercial paper. CAPITAL RESERVES SERIES seeks a high stable
level of current income while minimizing fluctuations in principal by investing
in a
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<PAGE> 33
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 32
diversified portfolio of short- and intermediate-term securities. MONEY MARKET
SERIES seeks the highest level of income consistent with preservation of capital
and liquidity through investments in short-term money market instruments. GROWTH
SERIES seeks long-term capital appreciation by investing its assets in a
diversified portfolio of securities exhibiting the potential for significant
growth. MULTIPLE STRATEGY SERIES seeks a balance of capital appreciation, income
and preservation of capital. It uses a dividend-oriented valuation strategy to
select securities issued by established companies that are believed to
demonstrate potential for income and capital growth. INTERNATIONAL EQUITY SERIES
seeks long-term growth without undue risk to principal by investing primarily in
equity securities of foreign issuers that provide the potential for capital
appreciation and income. VALUE SERIES seeks capital appreciation by investing in
small- to midcap common stocks whose market value appears low relative to their
underlying value or future earnings and growth potential. Emphasis will also be
placed on securities of companies that may be temporarily out of favor or whose
value is not yet recognized by the market. EMERGING GROWTH SERIES seeks
long-term capital appreciation by investing primarily in small-cap common stocks
and convertible securities of emerging and other growth-oriented companies.
These securities will have been judged to be responsive to changes in the market
place and to have fundamental characteristics to support growth. Income is not
an objective.
For more complete information about any of these funds, including charges and
expenses, you can obtain a prospectus from the Distributor. Read it carefully
before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the information
contained in each fund's prospectus(es).
GENERAL INFORMATION
The Manager is the investment manager of each Series of the Fund. The Manager
or its affiliate, Delaware International Advisers Ltd., also manages the other
funds in the Delaware Group. The Manager, through a separate division, also
manages private investment accounts. While investment decisions for the Series
are made independently from those of the other funds and accounts, they may
make investment decisions at the same time.
Access persons and advisory persons of the Delaware Group of funds, as those
terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide services to
the Manager, 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 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 Fund and for the other
mutual funds in the Delaware Group. As previously described, prior to January 3,
1995, DDI served as the national distributor for the Series. The Distributor
and, in its capacity as such, DDI received net commissions from the Series on
behalf of their respective Class A Shares, after reallowances to dealers, as
follows:
<TABLE>
<CAPTION>
USA FUND
CLASS A SHARES
TOTAL
AMOUNT NET
OF UNDER- AMOUNTS COMMISSION
FISCAL WRITING REALLOWED TO
YEAR ENDING COMMISSION TO DEALERS DISTRIBUTOR
- ----------- ---------- ---------- ----------
<S> <C> <C> <C>
8/31/95 $1,466,837 $1,217,558 $249,279
8/31/94 1,707,115 1,424,013 283,102
8/31/93 2,040,284 1,693,492 346,792
</TABLE>
<TABLE>
<CAPTION>
INSURED FUND
CLASS A SHARES
TOTAL
AMOUNT AMOUNTS NET
OF UNDER- REALLOWED COMMISSION
FISCAL WRITING TO TO
YEAR ENDING COMMISSION DEALERS DISTRIBUTOR
- ----------- ---------- --------- ----------
<S> <C> <C> <C>
8/31/95 $162,537 $134,900 $ 27,637
8/31/94 261,324 216,220 45,104
8/31/93 477,503 396,947 80,556
</TABLE>
<TABLE>
<CAPTION>
USA INTERMEDIATE FUND
CLASS A SHARES
TOTAL
AMOUNT AMOUNTS NET
OF UNDER- REALLOWED COMMISSION
FISCAL WRITING TO TO
YEAR ENDING COMMISSION DEALERS DISTRIBUTOR
- ----------- ---------- --------- ----------
<S> <C> <C> <C>
8/31/95 $ 48,037 $ 39,409 $ 8,628
8/31/94 172,869 141,372 31,497
8/31/93 213,327 174,151 39,176
</TABLE>
During the fiscal year ended 1993, there were no Limited CDSC payments made to
DDI with respect to the Class A Shares of the each Series. During the fiscal
year ended August 31, 1994, DDI received Limited CDSC payments in the amount of
$1,449 with respect to the Class A Shares of the USA Fund. No amounts were paid
for 1994 with respect to the Class A Shares of the Insured Fund and USA
Intermediate Fund. During the fiscal year ended August 31, 1995, the
Distributor, and in its capacity as such, DDI received Limited CDSC payments in
the amounts of $12,302, $74 and $6,145 with respect to the Class A Shares of the
USA Fund, Insured Fund and USA Intermediate Fund, respectively.
During the period from inception on May 2, 1994 through August 31, 1994, DDI
received CDSC payments in the amount of $400 with respect to the Class B Shares
of the Insured Fund. No amounts were paid for the fiscal year
- 32
<PAGE> 34
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 33
ended 1994 with respect to the Class B Shares of the USA Fund and USA
Intermediate Fund. During the fiscal year ended August 31, 1995, the Distributor
and, in its capacity as such, DDI received CDSC payments in the amounts of
$120,883, $228 and $756 with respect to the Class B shares of the USA Fund,
Insured Fund and USA Intermediate Fund, respectively.
Effective as of January 1, 1995, all such payments described above have been
paid to the Distributor.
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for the Fund and for the other
mutual funds in the Delaware Group. The Transfer Agent is paid a fee by each
Series 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
Directors, including a majority of the disinterested directors.
The Manager and its affiliates own the name "Delaware Group." Under certain
circumstances, including the termination of the Fund's advisory relationship
with the Manager or its distribution relationship with the Distributor, the
Manager and its affiliates could cause the Fund to delete the words "Delaware
Group" from the Fund's name.
Morgan Guaranty Trust Company of New York ("Morgan"), 60 Wall Street, New
York, NY 10260, is custodian of the Fund's securities and cash. As custodian for
the Fund, Morgan maintains a separate account or accounts for the Fund;
receives, holds and releases portfolio securities on account of the Fund; makes
receipts and disbursements of money on behalf of the Fund; and collects and
receives income and other payments and distributions on account of the Fund's
portfolio securities.
The legality of the issuance of the shares offered hereby registered, pursuant
to Rule 24f-2 under the Investment Company Act of 1940, has been passed upon for
the Fund by Stradley, Ronon, Stevens & Young, Philadelphia, Pennsylvania.
CAPITALIZATION
The Fund has present authorized capitalization of five hundred million shares
of capital stock with a $.01 par value per share. The Board of Directors has
allocated two hundred twenty-five million shares to the Tax-Free USA Fund with
one hundred seventy-five million shares allocated to Class A Shares, twenty-five
million shares to the Class B Shares and twenty-five million shares to the Class
C Shares; one hundred seventy-five million shares to the Tax-Free Insured Fund
with one hundred twenty-five million shares allocated to Class A Shares,
twenty-five million shares to the Class B Shares and twenty-five million shares
to the Class C Shares; and one hundred million shares to the Tax-Free USA
Intermediate Fund with fifty million shares allocated to Class A Shares,
twenty-five million shares to the Class B Shares and twenty-five million shares
to the Class C Shares.
While all shares have equal voting rights on matters affecting the entire
Fund, the Series would vote separately on any matter which affects only one
Series, such as any change in its own investment objective and policies or
action to dissolve the Series and as prescribed by the 1940 Act. Shares of a
Series have a priority in the assets of the Series, and in gains on and income
from the portfolio of the Series. Class A Shares, Class B Shares and Class C
Shares of each Series represent a proportionate interest in the assets of a
Series and have the same voting and other rights and preferences, except that,
as a general matter, Class A Shares, Class B Shares and Class C Shares may vote
only on matters affecting the 12b-1 Plan that relates to the class of shares
that they hold. However, Class B Shares may vote on any proposal to increase
materially the fees to be paid by a Series under the Plan relating to the
respective Class A Shares. The shares of each Class have no preemptive rights
are fully transferable and, when issued, are fully paid and nonassessable.
Prior to May 2, 1994, the Tax-Free USA Fund A Class was known as the Tax-Free
USA Fund, and prior to June 1, 1992, it was known as the USA Series. Prior to
May 2, 1994, the Tax-Free Insured Fund A Class was known as the Tax-Free Insured
Fund, and prior to June 1, 1992, it was known as the USA Insured Series. Prior
to May 2, 1994, the Tax-Free USA Intermediate Fund A Class was known as the
Tax-Free USA Intermediate Fund.
NONCUMULATIVE VOTING
THESE SHARES HAVE NONCUMULATIVE VOTING RIGHTS WHICH MEANS THAT THE HOLDERS OF
MORE THAN 50% OF THE SHARES OF THE FUND VOTING FOR THE ELECTION OF DIRECTORS CAN
ELECT ALL THE DIRECTORS IF THEY CHOOSE TO DO SO, AND, IN SUCH EVENT, THE HOLDERS
OF THE REMAINING SHARES WILL NOT BE ABLE TO ELECT ANY DIRECTORS.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the Securities and Exchange
Commission.
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<PAGE> 35
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 34
APPENDIX A--DESCRIPTION OF RATINGS
BONDS
Excerpts from Moody's description of its bond ratings: Aaa--judged to be the
best quality. They carry the smallest degree of investment risk; Aa--judged to
be of high quality by all standards; A--possess favorable attributes and are
considered "upper medium" grade obligations; Baa--considered as medium grade
obligations. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time; Ba--judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class; B--generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small; Caa--of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest;
Ca--represent obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings; C--the lowest rated
class of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Excerpts from S&P's description of its bond ratings: AAA--highest grade
obligations. They possess the ultimate degree of protection as to principal and
interest; AA--also qualify as high grade obligations, and in the majority of
instances differ from AAA issues only in a small degree; A--strong ability to
pay interest and repay principal although more susceptible to changes in
circumstances; BBB--regarded as having an adequate capacity to pay interest and
repay principal; BB, B, CCC, CC--regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and CC the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions; C--reserved
for income bonds on which no interest is being paid; D--in default, and payment
of interest and/or repayment of principal is in arrears.
COMMERCIAL PAPER
Excerpts from S&P's description of its two highest commercial paper ratings:
A-1--judged to be the highest investment grade category possessing the highest
relative strength; A-2--investment grade category possessing less relative
strength than the highest rating.
Excerpts from Moody's description of its two highest commercial paper ratings:
P-1--the highest grade possessing greatest relative strength; P-2--second
highest grade possessing less relative strength than the highest grade.
STATE AND MUNICIPAL NOTES
MIG-1--Notes bearing this description are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
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<PAGE> 36
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 35
APPENDIX B--EQUIVALENT YIELDS: TAX EXEMPT VERSUS TAXABLE SECURITIES
The table below shows the effect of the tax status of bonds on the effective
yield received by their holders under the federal income tax laws. It gives the
approximate yield a taxable security must earn at various income brackets to
produce after-tax yields equivalent to those of tax-exempt bonds yielding from
4% to 9%.
This table, which is based on incremental tax rates at the specified levels of
taxable income in effect on the date of this Part B, provides separate
computations for taxpayers who file joint or individual returns.
1995 RATES
<TABLE>
<CAPTION>
4.0%* 5.0%* 6.0%* 7.0%* 8.0%* 9.0%*
TAXABLE INCOME FEDERAL FEDERAL FEDERAL FEDERAL FEDERAL FEDERAL
- ------------------------------------- FEDERAL TAXABLE TAXABLE TAXABLE TAXABLE TAXABLE TAXABLE
JOINT RETURN SINGLE RETURN RATE RAX EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT
- ---------------- ---------------- -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$0-38,000 $0-22,750 15% 4.7% 5.9% 7.1% 8.2% 9.4% 10.6%
$38,001-91,850 $22,751-55,100 28% 5.6% 6.9% 8.3% 9.7% 11.1% 12.5%
$91,851-140,000 $55,101-115,000 31% 5.8% 7.2% 8.7% 10.1% 11.6% 13.0%
$140,001-250,000 $115,001-250,000 36%+ 6.3% 7.8% 9.4% 10.9% 12.5% 14.1%
Over $250,000 Over $250,000 39.6%+ 6.6% 8.3% 9.9% 11.6% 13.2% 14.9%
</TABLE>
The equivalent yields are calculated on 4, 5, 6, 7, 8 and 9 percent tax-free
yields. While it is expected that the Series will invest principally in
obligations generating interest exempt from federal income tax, other income
received by the Series may be taxable.
- ------------------
*This should not be considered representative of the Series' yield at any
specific time.
+For tax years beginning after 1992, a 36% tax rate applies to all taxable
income in excess of the maximum dollar amounts subject to the 31% tax rate. In
addition, a 10% surtax (not applicable to capital gains) applies to certain
high-income taxpayers. It is computed by applying a 39.6% rate to taxable
income in excess of $250,000. The above table does not reflect the personal
exemption phaseout nor the limitations of itemized deductions that may apply.
- 35
<PAGE> 37
DELAWARE GROUP TAX-FREE FUND, INC.-PART B--PAGE 36
FINANCIAL STATEMENTS
Ernst & Young LLP serves as the independent auditors for the Fund and, in its
capacity as such, audits the financial statements contained in the Fund's Annual
Reports. The USA Fund's, Insured Fund's and USA Intermediate Fund's Statements
of Net Assets, Statements of Operations, Statements of Changes in Net Assets and
Notes to Financial Statements, as well as the reports of Ernst & Young LLP,
independent auditors, for the fiscal year ended August 31, 1995, are included in
the Fund's Annual Reports to shareholders. The financial statements, 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.
- 36
