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PART B--STATEMENT OF ADDITIONAL INFORMATION
AUGUST 28, 1997
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Voyageur Tax Free Funds, Inc.
Voyageur Intermediate Tax-Free Funds, Inc.
Voyageur Insured Funds, Inc.
Voyageur Investment Trust
Voyageur Investment Trust II
Voyageur Mutual Funds, Inc.
Voyageur Mutual Funds II, Inc.
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1818 Market Street
Philadelphia, PA 19103
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For Prospectus and Performance of Class A Shares, Class B Shares and Class C
Shares: Nationwide 800-523-4640
Information on Existing Accounts of Class A Shares, Class B Shares and Class C
Shares: (SHAREHOLDERS ONLY) Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
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TABLE OF CONTENTS
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Cover Page
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Investment Policies and Restrictions
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Performance Information
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Trading Practices and Brokerage
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Purchasing Shares
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Investment Plans
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Determining Offering Price and Net Asset Value
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Redemption and Repurchase
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Distributions
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Taxes
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Investment Management Agreements
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Officers and Directors
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Exchange Privilege
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General Information
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Financial Statements
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Appendix A--Special Factors Affecting the Funds
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This Statement of Additional Information ("Part B") describes shares of
each fund listed below (individually, a "Fund" and collectively, the "Funds"),
which is a series of an open-end management investment company, commonly
referred to as a mutual fund.
Delaware-Voyageur Tax-Free Arizona Intermediate
Delaware-Voyageur Tax-Free Arizona Insured Fund
Delaware-Voyageur Tax-Free Arizona Fund
Delaware-Voyageur Tax-Free California Intermediate Fund
Delaware-Voyageur Tax-Free California Insured Fund
Delaware-Voyageur Tax-Free California Fund
Delaware-Voyageur Tax-Free Colorado Intermediate Fund
Delaware-Voyageur Tax-Free Colorado Insured Fund
Delaware-Voyageur Tax-Free Colorado Fund
Delaware-Voyageur Tax-Free Florida Intermediate Fund
Delaware-Voyageur Tax-Free Florida Insured Fund
Delaware-Voyageur Tax-Free Florida Fund
Delaware-Voyageur Tax-Free Iowa Fund
Delaware-Voyageur Tax-Free Idaho Fund
Delaware-Voyageur Tax-Free Kansas Fund
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund
Delaware-Voyageur Minnesota Insured Fund
Delaware-Voyageur Tax-Free Minnesota Fund
Delaware-Voyageur Tax-Free Missouri Insured Fund
Delaware-Voyageur Tax-Free New Mexico Fund
Delaware-Voyageur Tax-Free New York Fund
Delaware-Voyageur Tax-Free North Dakota Fund
Delaware-Voyageur Tax-Free Oregon Insured Fund
Delaware-Voyageur Tax-Free Utah Fund
Delaware-Voyageur Tax-Free Washington Insured Fund
Delaware-Voyageur Tax-Free Wisconsin Fund
Each Fund offers three retail classes of shares: "Class A Shares," "Class B
Shares" and "Class C Shares" (individually, a "Class" and collectively, the
"Classes"). This Part B describes each Fund 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 3.75% with respect to Tax-Free Funds and
Insured Funds and 2.75% with respect to Tax-Free Intermediate Funds. Class A
Shares are subject to annual 12b-1 Plan expenses which may not exceed 0.25%.
Class B Shares are subject to a contingent deferred sales charge ("CDSC") which
may be imposed on redemptions made within six years of purchase with respect to
Tax-Free Funds and Insured Funds and three years of purchase with respect to
Tax-Free Intermediate Funds. Class B Shares are subject to annual 12b-1 Plan
expenses of 1%, which are assessed for approximately eight years after purchase
against Class B Shares of Tax-Free Funds and Insured Funds and approximately
five years after purchase against Class B Shares of Tax-Free Intermediate Funds.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus. Class C Shares of each Fund are subject to a CDSC which may be
imposed on redemptions made within 12 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.
This Part B supplements the information contained in the current Prospectus
of the Funds dated August 28, 1997, as it may be amended from time to time. It
should be read in conjunction with the Funds' Prospectus. Part B is not itself a
prospectus but is, in its entirety, incorporated by reference into the
Prospectus. The Prospectus for the Funds may be obtained by writing or calling
your investment dealer or by contacting the Funds' national distributor,
Delaware Distributors, L.P. (the "Distributor"), 1818 Market Street,
Philadelphia, PA 19103.
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INVESTMENT POLICIES AND RESTRICTIONS
Investment Restrictions
The Funds have adopted certain investment restrictions set forth below
which, together with the investment objectives of each Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the Investment Company Act of 1940 (the
"1940 Act"), this means the lesser of the vote of (1) 67% of the shares of a
Fund at a meeting where more than 50% of the outstanding shares of a Fund are
present in person or by proxy or (2) more than 50% of the outstanding shares of
a Fund. The following investment restrictions apply to Tax-Free Arizona Insured
Fund, Tax-Free California Insured Fund, Tax-Free Colorado Fund, Tax-Free
Florida Insured Fund, Tax-Free Kansas Fund, Minnesota Insured Fund, Tax-Free
Minnesota Intermediate Fund, Tax-Free Minnesota Fund, Tax-Free Missouri Insured
Fund, Tax-Free New Mexico Fund, Tax-Free North Dakota Fund, Tax-Free Oregon
Insured Fund, Tax-Free Utah Fund, and Tax-Free Washington Insured Fund. No such
Fund will:
(1) Borrow money, except from banks for temporary or emergency purposes in
an amount not exceeding 20% (10% for Tax-Free Colorado Fund) of the value of
such Fund's total assets, including the amount borrowed. The Funds may not
borrow for leverage purposes, and securities will not be purchased while
borrowings are outstanding. Interest paid on any money borrowed will reduce such
Fund's net income.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 10% of its total assets (taken at the lower of cost or current value)
and then only to secure borrowings permitted by restriction (1) above.
(3) Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
(4) Make short sales of securities or maintain a short position for the
account of such Fund unless at all times when a short position is open it owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
(5) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(6) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate.
(7) Purchase or sell commodities or commodity contracts (including futures
contracts).
(8) Make loans, except by purchase of debt obligations in which such Fund
may invest consistent with its investment policies, and through repurchase
agreements.
(9) Invest in securities of any issuer if, to the knowledge of such Fund,
officers and directors (or trustees) of such Fund or officers and directors of
such Fund's investment adviser who beneficially own more than 1/2 of 1% of the
securities of that issuer together own more than 5% of such securities.
(10) Invest 25% or more of its assets in the securities of issuers in any
single industry, except that the Funds may invest without limitation, in
circumstances in which other appropriate available investments may be in limited
supply, in housing, health care and utility obligations; provided that there
shall be no limitation on the purchase of Tax Exempt Obligations and, for
defensive purposes, obligations
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issued or guaranteed by the U.S. government, its agencies or instrumentalities.
(Note: For purposes of this investment restriction, the Funds' investment
adviser (the "Manager") interprets "Tax Exempt Obligations" to exclude limited
obligation bonds payable only from revenues derived from facilities or projects
within a single industry.)
(11) Invest more than 15% of its net assets in illiquid investments.
The following fundamental investment restrictions apply to Tax-Free Iowa
Fund and Tax-Free Wisconsin Fund. These Funds will not:
(1) Borrow money, except from banks for temporary or emergency purposes in
an amount not exceeding 20% of the value of such Fund's total assets, including
the amount borrowed. The Funds may not borrow for leverage purposes, and
securities will not be purchased while borrowings are outstanding. Interest paid
on any money borrowed will reduce such Fund's net income.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may be
deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which such Fund
may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more of its assets in the securities of issuers in any
single industry, except that it may invest without limitation, in circumstances
in which other appropriate available investments may be in limited supply, in
housing, health care and/or utility obligations; provided that there shall be no
limitation on the purchase of Tax Exempt Obligations and, for defensive
purposes, obligations issued or guaranteed by U.S. government, its agencies or
instrumentalities. (Note: For purposes of this investment restriction, the
Manager interprets "Tax Exempt Obligations" to exclude limited obligations bonds
payable only from revenues derived from facilities or projects within a single
industry.)
(6) Issue any senior securities (as defined in the 1940 Act), except as set
forth in investment restriction number (1) above, and except to the extent that
purchasing or selling on a when-issued or forward commitment basis may be deemed
to constitute issuing a senior security.
(7) Purchase or sell commodities or commodity contracts (including futures
contracts).
(8) Make short sales of securities or maintain a short position for the
account of such Fund unless at all times when a short position is open it owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
The following restrictions apply to Tax-Free Arizona Intermediate Fund,
Tax-Free Arizona Fund, Tax-Free California Intermediate Fund, Tax-Free
California Fund, Tax-Free Colorado Intermediate Fund, Tax-Free Colorado Insured
Fund, Tax-Free Florida Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho
Fund and Tax-Free New York Fund. No such Fund will:
(1) Borrow money (provided that such Fund may enter into reverse repurchase
agreements), except from banks for temporary or emergency purposes in an amount
not exceeding 20% of the value of the Fund's total assets, including the amount
borrowed. The Funds may not borrow for leverage purposes, provided that such
Funds may enter into reverse repurchase agreements for such purposes, and
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securities will not be purchased while outstanding borrowings exceed 5% of the
value of such Fund's total assets.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of portfolio investments, such Fund may
be deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities which
are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which the Fund
may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more of its assets in the securities of issuers in any
single industry (except that it may invest without limitation, in circumstances
in which other appropriate available investments may be in limited supply, in
housing, health care, utility, transportation, education and/or industrial
obligations); provided that there shall be no limitation on the purchase of Tax
Exempt Obligations and, for defensive purposes, obligations issued or guaranteed
by the U. S. government, its agencies or instrumentalities. (Note: For purposes
of this investment restriction, the Manager interprets "Tax Exempt Obligations"
to exclude limited obligations bonds payable only from revenues derived from
facilities or projects within a single industry.)
(6) Issue any senior securities (as defined in the 1940 Act), except as set
forth in investment restriction number (1) above, and except to the extent that
using options, futures contracts and options on futures contracts, purchasing or
selling on a when-issued or forward commitment basis or using similar investment
strategies may be deemed to constitute issuing a senior security.
(7) Purchase or sell commodities or futures or options contracts with
respect to physical commodities. This restriction shall not restrict the Fund
from purchasing or selling, on a basis consistent with any restrictions
contained in its then-current Prospectus, any financial contracts or instruments
which may be deemed commodities (including, by way of example and not by way of
limitation, options, futures, and options on futures with respect, in each case,
to interest rates, currencies, stock indices, bond indices or interest rate
indices).
(8) With respect to Tax-Free Florida Intermediate Fund only, pledge,
hypothecate, mortgage or otherwise incumber its assets in excess of 10% of its
total assets (taken at the lower of cost or current value). For the purposes of
this restriction, collateral arrangements for margin deposits on futures
contracts with respect to the writing of options, with respect to reverse
repurchase agreements or with respect to similar investment techniques are not
deemed to be a pledge of assets.
The following non-fundamental investment restrictions may be changed by the
Board of each Fund at any time. None of the Funds will:
(1) Invest more than 5% of its total assets in securities of any single
investment company, nor more than 10% of its total assets in securities of two
or more investment companies, except as part of a merger, consolidation or
acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
(3) With respect to Tax-Free Arizona Intermediate Fund, Tax-Free Arizona
Fund, Tax-Free California Intermediate Fund, Tax-Free California Fund, Tax-Free
Colorado Intermediate Fund, Tax-Free Colorado Insured Fund, Tax-Free Florida
Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho Fund and Tax-Free New
York Fund, such Funds will not make short sales of securities or maintain a
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short position for the account of such Fund, unless at all times when a short
position is open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
Tax Exempt Obligations
The term "Tax Exempt Obligations" refers to debt obligations issued by or
on behalf of a state or territory or its agencies, instrumentalities,
municipalities and political subdivisions, the interest payable on which is, in
the opinion of bond counsel, excludable from gross income for purposes of
federal income taxation (except, in certain instances, the alternative minimum
tax, depending upon the shareholder's tax status) and with respect to the Funds
other than the three national funds, personal income tax of the state specified
in the Fund's name, if any. Tax-Exempt Obligations are generally issued to
obtain funds for various public purposes, including the construction or
improvement 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 Tax Exempt Obligations may be
issued include refunding outstanding obligations, obtaining funds for general
operating expenses and lending such funds to other public institutions and
facilities. In addition, Tax Exempt Obligations may be issued by or on behalf of
public bodies to obtain funds to provide for the construction, equipping, repair
or improvement of housing facilities, convention or trade show facilities,
airport, mass transit, industrial, port or parking facilities and certain local
facilities for water supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Funds may invest, including Tax Exempt Obligations,
are subject to the provisions of bankruptcy, insolvency, reorganization and
other laws affecting the rights and remedies of creditors, such as the federal
Bankruptcy Code, and laws, if any, which may be enacted by Congress or a State's
legislature extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations within
constitutional limitations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations for the payment of interest on and principal of their Tax Exempt
Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Tax Exempt Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Tax Exempt Obligations for investment by the
Funds and the value of each Fund's portfolio. In such event, management of the
Funds may discontinue the issuance of shares to new investors and may reevaluate
each Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Services ("S&P") for Tax Exempt
Obligations may change as a result of changes in such organizations or their
rating systems, the Funds will attempt to use comparable ratings as standards
for their investments in accordance with the investment policies contained in
the Funds' Prospectus and this Statement of Additional Information. The ratings
of Moody's and S&P represent their opinions as to the quality of the Tax Exempt
Obligations which they undertake to rate. It should be emphasized, however, that
ratings are relative and subjective and are not absolute standards of quality.
Although these ratings provide an initial criterion for selection of portfolio
investments, the Manager, will subject these securities to other evaluative
criteria prior to investing in such securities.
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Floating and Variable Rate Demand Notes. The Funds may purchase floating
and variable rate demand notes. Generally, such notes are secured by letters of
credit or other credit support arrangements provided by banks. Such notes
normally have a stated long-term maturity but permit the holder to tender the
note for purchase and payment of principal and accrued interest upon a specified
number of days' notice. The issuer of floating and variable rate demand notes
normally has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the note plus accrued interest
upon a specified number of days' notice to the noteholders. The interest rate on
a floating rate demand note is based on a specified interest index, such as a
bank's prime rate, and is adjusted automatically each time such index is
adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals, based upon current market conditions. The Manager monitors
the creditworthiness of issuers of floating and variable rate demand notes in
each Fund's portfolio.
Escrow Secured Bonds or Defeased Bonds. Escrow secured bonds or defeased
bonds are created when an issuer refunds in advance of maturity (or pre-refunds)
some of its outstanding bonds and it becomes necessary or desirable to set aside
funds for redemption or payment of the bonds at a future date or dates. In an
advance refunding, the issuer will use the proceeds of a new bond issue to
purchase high grade interest bearing debt securities which are then deposited in
an irrevocable escrow account held by an escrow agent to secure all future
payments of principal and interest of the advance refunded bond. Escrow secured
bonds will often receive a triple A rating from S&P and Moody's. The Tax-Free
Insured Funds will purchase escrow secured bonds without additional insurance
only where the escrow is invested in securities of the U.S. government or
agencies or instrumentalities of the U.S. government.
State or Municipal Lease Obligations. Municipal leases may take the form of
a lease with an option to purchase, an installment purchase contract, a
conditional sales contract or a participation certificate in any of the
foregoing. In determining leases in which the Funds will invest, the Manager
will evaluate the credit rating of the lessee and the terms of the lease.
Additionally, the Manager may require that certain municipal leases be secured
by a letter of credit or put arrangement with an independent financial
institution. State or municipal lease obligations frequently have the special
risks described below which are not associated with general obligation or
revenue bonds issued by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "nonappropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "nonappropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for nonappropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
Concentration Policy. As set forth in the Funds' Prospectus, although each
Fund may invest 25% or more of its total assets in limited obligation bonds, no
Fund will invest 25% or more of its total assets in limited obligation bonds
payable only from revenues derived from facilities or projects within a single
industry, except that the Funds may invest without limitation, in circumstances
in which other appropriate
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available investments may be in limited supply, in housing, health care and/or
utility obligations. Tax-Free Arizona Intermediate Fund, Tax-Free Arizona Fund,
Tax-Free California Intermediate Fund, Tax-Free California Fund, Tax-Free
Colorado Intermediate Fund, Tax-Free Colorado Insured Fund, Tax-Free Florida
Intermediate Fund, Tax-Free Florida Fund, Tax-Free Idaho Fund and Tax-Free New
York Fund also may, under such circumstances, invest without limit in
transportation, education and/or industrial obligations. Appropriate available
investments may be in limited supply, from time to time in the opinion of the
Manager, due to, among other things, each Fund's investment policy of investing
primarily in obligations of its state (and the state's municipalities, other
political subdivisions and public authorities) and of investing primarily in
investment grade (high grade, with respect to the Tax-Free Insured Funds)
securities. Additionally, the insurance policies of the Tax-Free Insured Funds
may affect the appropriate available investment supply from time to time in the
opinion of the Manager. Certain of the risks set forth below may be reduced or
eliminated to the extent a Fund invests in insured Tax Exempt Obligations.
Housing Obligations. Each Fund may invest, from time to time, 25% or more
of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
Health Care Obligations. Each Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
Utility Obligations. Each Fund may invest, from time to time, 25% or more
of its total assets in obligations issued by public bodies, including state and
municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
Transportation Obligations. Certain Funds may, from time to time, invest
25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance airports and highway,
bridge and toll road facilities. The major portion of an airport's gross
operating income is generally derived from fees received from signatory airlines
pursuant to use agreements which consist of annual payments for airport use,
occupancy of certain terminal space, service fees and leases. Airport operating
income may therefore be affected by the ability of the airlines to meet their
obligations under the use agreements. The air transport industry is experiencing
significant variations in earnings and traffic, due to increased competition,
excess capacity, increased costs, deregulation, traffic constraints and other
factors, and several airlines are experiencing severe financial difficulties.
The revenues of issuers which derive their payments from bridge, road or tunnel
toll revenues could be adversely affected by
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competition from toll-free vehicular bridges and roads and alternative modes of
transportation. Such revenues could also be adversely affected by a reduction in
the availability of fuel to motorists or significant increases in the costs
thereof.
Education Obligations. Certain Funds may, from time to time, invest 25% or
more of their total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
Industrial Revenue Obligations. Certain Funds may, from time to time,
invest 25% or more of their total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal income
taxes and the personal income taxes of certain states for certain housing,
health care, utility, transportation, education and industrial revenue bonds
depends on compliance with relevant provisions of the Code. The failure to
comply with these provisions could cause the interest on the bonds to become
includable in gross income, possibly retroactively to the date of issuance,
thereby reducing the value of the bonds, subjecting shareholders to
unanticipated tax liabilities and possibly requiring the Funds to sell the bonds
at the reduced value. Furthermore, such a failure to meet these ongoing
requirements may not enable the holder to accelerate payment of the bond or
require the issuer to redeem the bond.
Taxable Obligations
As set forth in the Funds' Prospectus, the Funds may invest to a limited
extent in obligations and instruments, the interest on which is includable in
gross income for purposes of federal and state income taxation.
Government Obligations. The Funds may invest in securities issued or
guaranteed by the U. S. Government or its agencies or instrumentalities. These
securities include a variety of Treasury securities, which differ in their
interest rates, maturities and times of issuance. Treasury Bills generally have
maturities of one year or less; Treasury Notes generally have maturities of one
to ten years; and Treasury Bonds generally have maturities of greater than ten
years. Some obligations issued or guaranteed by U.S. government agencies and
instrumentalities, such as Government National Mortgage Association pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury;
other obligations, such as those of the Federal Home Loan Banks, are secured by
the right of the issuer to borrow from the Treasury; other obligations, such as
those issued by the Federal National Mortgage Association, are
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supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and other obligations,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the instrumentality itself. Although the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law. The Funds will invest in such securities only when
the Manager is satisfied that the credit risk with respect to the issuer is
minimal.
Repurchase Agreements. The Funds may invest in repurchase agreements. The
Funds' custodian will hold the securities underlying any repurchase agreement or
such securities will be part of the Federal Reserve Book Entry System. The
market value of the collateral underlying the repurchase agreement will be
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the obligor under the agreement will promptly
furnish additional collateral to the Funds' custodian (so the total collateral
is an amount at least equal to the repurchase price plus accrued interest).
Other Taxable Investments. The Funds also may invest in certificates of
deposit, bankers' acceptances and other time deposits. Certificates of deposit
are certificates representing the obligation of a bank to repay the funds
deposited (plus interest thereon) at a time certain after the deposit. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. With respect to Colorado Fund, investments in time deposits
generally are limited to London branches of domestic banks that have total
assets in excess of one billion dollars.
Options and Futures Transactions
To the extent set forth in the Prospectus, each Fund may buy and sell put
and call options on the securities in which they may invest, and certain Funds
may enter into futures contracts and options on futures contracts with respect
to fixed-income securities or based on financial indices including any index of
securities in which the Fund may invest. Futures and options will be used to
facilitate allocation of a Fund's investments among asset classes, to generate
income or to hedge against changes in interest rates or declines in securities
prices or increases in prices of securities proposed to be purchased. Different
uses of futures and options have different risk and return characteristics.
Generally, selling futures contracts, purchasing put options and writing (i.e.
selling) call options are strategies designed to protect against falling
securities prices and can limit potential gains if prices rise. Purchasing
futures contracts, purchasing call options and writing put options are
strategies whose returns tend to rise and fall together with securities prices
and can causes losses if prices fall. If securities prices remain unchanged over
time option writing strategies tend to be profitable, while option buying
strategies tend to decline in value.
Writing Options. The Funds may write (i.e. sell) covered put and call
options with respect to the securities in which they may invest. By writing a
call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.
"Covered options" means that so long as a Fund is obligated as the writer
of a call option, it will own the underlying securities subject to the option
(or comparable securities satisfying the cover requirements of securities
exchanges). A Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains with its custodian cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option.
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Through the writing of call or put options, a Fund may obtain a greater
current return than would be realized on the underlying securities alone. A Fund
receives premiums from writing call or put options, which it retains whether or
not the options are exercised. By writing a call option, a Fund might lose the
potential for gain on the underlying security while the option is open, and by
writing a put option, a Fund might become obligated to purchase the underlying
security for more than its current market price upon exercise.
Purchasing Options. The Funds may purchase put options in order to protect
portfolio holdings in an underlying security against a decline in the market
value of such holdings. Such protection is provided during the life of the put
because a Fund may sell the underlying security at the put exercise price,
regardless of a decline in the underlying security's market price. Any loss to a
Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit a Fund realizes on the sale of the security
will be reduced by the premium paid for the put option less any amount for which
the put is sold.
A Fund may wish to protect certain portfolio securities against a decline
in market value at a time when no put options on those particular securities are
available for purchase. The Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio.
Each of the Funds may also purchase call options. During the life of the
call option, the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
Securities Index Option Trading. The Funds may purchase and write put and
call options on securities indexes. Options on securities indexes are similar to
options on securities except that, rather than the right to take or make
delivery of a security at a specified price, an option on an index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the index upon which the option is based is greater than,
in the case of a call, or less than, in the case of a put, the exercise price of
the option. The writer of the option is obligated to make delivery of this
amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in a Fund's portfolio
correlate with price movements of the index selected. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular security, whether a Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in the
level of prices in the relevant underlying securities markets generally or, in
the case of certain indexes, in an industry market segment, rather than
movements in the price of a particular security. Accordingly, successful use by
a Fund of options on security indexes will be subject to the Manager's ability
to predict correctly movements in the direction of the stock market or interest
rates market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual
securities. In the event the Manager is unsuccessful in predicting the movements
of an index, a Fund could be in a worse position than had no hedge been
attempted.
Because exercises of index options are settled in cash, a Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When a Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker
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as collateral for the option, cash, high-grade liquid debt securities or
"qualified securities" with a market value determined on a daily basis of not
less than 100% of the current market value of the option.
Options purchased and written by a Fund may be exchange traded or may be
options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by the Manager. OTC options are illiquid and it may not be possible for the Fund
to dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when the Manager believes it would be
advantageous to do so.
Futures Contracts and Options on Futures Contracts. Certain Funds may enter
into futures contracts and purchase and write options on these contracts,
including but not limited to interest rate and securities index contracts and
put and call options on these futures contracts. These contracts will be entered
into on domestic and foreign exchanges and boards of trade, subject to
applicable regulations of the Commodity Futures Trading Commission. These
transactions may be entered into for bona fide hedging and other permissible
risk management purposes.
In connection with transactions in futures contracts and writing related
options, each Fund will be required to deposit as "initial margin" a specified
amount of cash or short-term, U.S. government securities. The initial margin
required for a futures contract is set by the exchange on which the contract is
traded. It is expected that the initial margin would be approximately 1-1/2% to
5% of a contract's face value. Thereafter, subsequent payments (referred to as
"variation margin") are made to and from the broker to reflect changes in the
value of the futures contract. No Fund will purchase or sell futures contracts
or related options if, as a result, the sum of the initial margin deposit on
that Fund's existing futures and related options positions and premiums paid for
options or futures contracts entered into for other than bona fide hedging
purposes would exceed 5% of the Fund's assets.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded, a Fund will incur brokerage fees when it
purchases or sells futures contracts.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several risks in
using securities index or interest rate futures contracts as hedging devices.
One risk arises because the prices of futures contracts may not correlate
perfectly with movements in the underlying index or financial instrument due to
certain market distortions. First, all participants in the futures market are
subject to initial margin and variation margin requirements. Rather than making
additional variation margin payments, investors may close the contracts through
offsetting transactions which could distort the normal relationship between the
index or security and the futures market. Second, the margin requirements in the
futures market are lower than margin requirements in the securities market, and
as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures market
may also cause temporary price distortions. Because of possible price distortion
in the futures market and because of imperfect correlation between movements in
indexes of securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures
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<PAGE>
contracts, the risk of imperfect correlation increases as the composition of a
Fund's portfolio diverges from the financial instruments included in the
applicable index.
Successful use of futures contracts by a Fund is subject to the ability of
the Manager to predict correctly movements in the direction of interest rates or
the relevant underlying securities market. If a Fund has hedged against the
possibility of an increase in interest rates adversely affecting the value of
fixed-income securities held in its portfolio and interest rates decrease
instead, the Fund will lose part or all of the benefit of the increased value of
its security which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
Liquidity of Futures Contracts. A Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or board
of trade providing a secondary market for such futures contracts. Although the
Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risk of Options. The use of options on financial instruments and indexes
and on interest rate and index futures contracts also involves additional risk.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options involves less potential risk to a Fund because the maximum amount at
risk is the premium paid for the options (plus transactions costs). The writing
of a call option generates a premium, which may partially offset a decline in
the value of a Fund's portfolio assets. By writing a call option, the Fund
becomes obligated to sell an underlying instrument or a futures contract, which
may have a value higher than the exercise price. Conversely, the writing of a
put option generates a premium, but the Fund becomes obligated to purchase the
underlying instrument or futures contract, which may have a value lower than the
exercise price. Thus, the loss incurred by a Fund in writing options may exceed
the amount of the premium received.
The effective use of options strategies is dependent, among other things,
on a Fund's ability to terminate options positions at a time when the Manager
deems it desirable to do so. Although a Fund will
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enter into an option position only if the Manager believes that a liquid
secondary market exists for such option, there is no assurance that the Fund
will be able to effect closing transactions at any particular time or at an
acceptable price. The Funds' transactions involving options on futures contracts
will be conducted only on recognized exchanges.
A Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by the Manager,
which could prove to be inaccurate. Even if the expectations of the Manager are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of a purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; a Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a secondary
market for an option of the same series. If a secondary market does not exist,
it might not be possible to effect closing transactions in particular options
with the result that the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
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<PAGE>
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Certain Funds may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, such Funds will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
Certain Funds may purchase call options to hedge against an increase in
price of securities that the Funds anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC options").
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. OTC options are illiquid and it
may not be possible for the Funds to dispose of options they have purchased or
terminate their obligations under an option they have written at a time when the
Manager believes it would be advantageous to do so. Accordingly, OTC options are
subject to each Fund's limitation that a maximum of 15% of its net assets be
invested in illiquid securities. In the event of the bankruptcy of the writer of
an OTC option, a Fund could experience a loss of all or part of the value of the
option. The Manager anticipates that options on Tax Exempt Obligations will
consist primarily of OTC options.
Illiquid Investments
Each Fund is permitted to invest up to 15% of its net assets in illiquid
investments. For certain Funds, this policy is fundamental. See Investment
Restrictions above. An investment is generally deemed to be "illiquid" if it
cannot be disposed of within seven days in the ordinary course of business at
approximately the amount at which the investment company is valuing the
investment. "Restricted securities" are securities which were originally sold in
private placements and which have not been registered under the Securities Act
of 1933 (the "1933 Act"). Such securities generally have been considered
illiquid by the staff of the Securities and Exchange Commission (the "SEC"),
since such securities may be resold only subject to statutory restrictions and
delays or if registered under the 1933 Act. However, the Securities and Exchange
Commission has acknowledged that a market exists for certain restricted
securities (for example, securities qualifying for resale to certain "qualified
institutional buyers" pursuant to Rule 144A under the 1933 Act, certain forms of
interest-only and principal-only, mortgaged-backed U.S. government securities
and commercial paper issued pursuant to the private placement exemption of
Section 4(2) of the 1933 Act). As a fundamental policy, the Funds may invest
without limitation in these forms of restricted securities if such securities
are deemed by the Manager to be liquid in accordance with standards established
by the Funds' Board. Under these guidelines, the Manager must consider, among
other things, (a) the frequency of trades and quotes for the security, (b) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers, (c) dealer undertakings to make a market in the
security, and (d) the nature of the security and the nature of the marketplace
trades (for example, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer.)
At the present time, it is not possible to predict with accuracy how the
markets for certain restricted
15
<PAGE>
securities will develop. Investing in restricted securities could have the
effect of increasing the level of a Fund's illiquidity to the extent that
qualified purchasers of the securities become, for a time, uninterested in
purchasing these securities.
As more fully described in the Funds' Prospectus, the Funds are permitted
to invest in municipal leases. Traditionally, municipal leases have been viewed
by the Securities and Exchange Commission staff as illiquid investments.
However, subject to Board standards similar to the standards applicable to
restricted securities (as discussed above), the Manager may treat certain
municipal leases as liquid investments and not subject to the policy limiting
illiquid investments.
Diversification
Each Fund designated as such on the cover of the Prospectus operates as a
"diversified" management investment company, as defined in the Investment
Company Act of 1940 (the "1940 Act"), which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables),
Government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
such Fund and to not more than 10% of the outstanding voting securities of such
issuer. The other Funds are "non-diversified," as defined in the 1940 Act. See
the Prospectus regarding certain considerations relating to "non-diversified"
status.
For purposes of such diversification, the identification of the issuer of
Tax Exempt Obligations depends on the terms and conditions of the security. If a
State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond is
backed only by certain revenues to be received from the non-governmental user of
the project financed by the bond, then such non-governmental user is deemed to
be the sole issuer. If, however, in any of the above cases, a State, political
subdivision or some other entity guarantees a security and the value of all
securities issued or guaranteed by the guarantor and owned by one of the Funds
exceeds 10% of the value of such Fund's total assets, the guarantee is
considered a separate security and is treated as an issue of the guarantor.
Investments in municipal obligations refunded with escrowed U.S. government
securities will be treated as investments in U.S. government securities for
purposes of determining a Fund's compliance with the 1940 Act diversification
requirements.
In order to qualify as a regulated investment company, each Fund must
limit its investments so that, at the close of each quarter of the taxable year,
with respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Internal Revenue Code of 1986, as amended (the "Code") requires that not more
than 25% in value of each Fund's total assets may be invested in the securities
of a single issuer at the close of each quarter of the taxable year. Each Fund
intends to conduct its operations so that it will comply with diversification
requirements and qualify under the Code as a "regulated investment company."
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Insurance
The Manager anticipates that substantially all of the insured Tax-Exempt
Obligations in each Insured Fund's investment portfolio will be covered by
either Primary Insurance or Secondary Market Insurance. However, as a
non-fundamental policy, the Insured Funds must obtain Portfolio Insurance on all
Tax-Exempt Obligations requiring insurance that are not covered by either
Primary Insurance or Secondary Market Insurance. Both Primary Insurance and
Secondary Market Insurance are non-cancelable and continue in force so long as
the insured security is outstanding and the respective insurer remains in
business. Premiums for Portfolio Insurance, if any, would be paid from Fund
assets and would reduce the current yield on its investment portfolio by the
amount of such premiums.
Because Portfolio Insurance coverage terminates upon the sale of an insured
security from a Fund's portfolio, such insurance does not have an effect on the
resale value of the security. Therefore, unless a Fund elects to purchase
Secondary Market Insurance with respect to such securities or such securities
are already covered by Primary Insurance, it generally will retain any such
securities insured by Portfolio Insurance which are in default or in significant
risk of default, and will place a value on the insurance equal to the difference
between the market value of the defaulted security and the market value of
similar securities which are not in default.
The Insured Funds are authorized to obtain Portfolio Insurance from
insurers that have obtained a claims-paying ability rating of "AAA" from S&P or
"Aaa" (or a short-term rating of "MIG-1") from Moody's, including AMBAC
Indemnity Corporation ("AMBAC"), Municipal Bond Investors Assurance Corporation
("MBIA"), Financial Guaranty Insurance Company ("FGIC") and Financial Security
Assurance, Inc. ("FSA").
A Moody's insurance claims-paying ability rating is an opinion of the
ability of an insurance company to repay punctually senior policyholder
obligations and claims. An insurer with an insurance claims-paying ability
rating of Aaa is adjudged by Moody's to be of the best quality. In the opinion
of Moody's, the policy obligations of an insurance company with an insurance
claims-paying ability rating of Aaa carry the smallest degree of credit risk
and, while the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair the company's
fundamentally strong position. An S&P insurance claims-paying ability rating is
an assessment of an operating insurance company's financial capacity to meet
obligations under an insurance policy in accordance with its terms. An insurer
with an insurance claims-paying ability rating of AAA has the highest rating
assigned by S&P. The capacity of an insurer so rated to honor insurance
contracts is adjudged by S&P to be extremely strong and highly likely to remain
so over a long period of time.
An insurance claims-paying ability rating by Moody's or S&P does not
constitute an opinion on any specific insurance contract in that such an opinion
can only be rendered upon the review of the specific insurance contract.
Furthermore, an insurance claims-paying ability rating does not take into
account deductibles, surrender or cancellation penalties or the timeliness of
payment; nor does it address the ability of a company to meet non-policy
obligations (i.e., debt contracts).
The assignment of ratings by Moody's or S&P to debt issues that are fully
or partially supported by insurance policies, contracts or guarantees is a
separate process from the determination of insurance claims-paying ability
ratings. The likelihood of a timely flow of funds from the insurer to the
trustee for the bondholders is a likely element in the rating determination for
such debt issues.
Each of AMBAC, MBIA, FGIC, and FSA has a insurance claims-paying ability
rating of Aaa from Moody's and AAA from S&P.
AMBAC has received a letter ruling from the Internal Revenue Service which
holds in effect that insurance proceeds representing maturing interest on
defaulted municipal obligations paid by AMBAC to municipal bond funds
substantially similar to the Insured Tax-Free Funds, under policy provisions
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substantially identical to those contained in its municipal bond insurance
policy, will excludable from federal gross income under Section 103(a) of the
Internal Revenue Code.
As of December 31, 1996, the total admitted assets of AMBAC were
approximately $2.6 billion with statutory capital of approximately $1.5 billion.
Statutory capital consists of the AMBAC's statutory contingency reserve and
policyholders' surplus.
As of December 31, 1996, the total admitted assets (unaudited) of MBIA were
approximately $4.5 billion with statutory capital of approximately $1.5 billion.
As of December 31, 1996, the total admitted assets (unaudited) of FGIC were
approximately $2.4 billion total capital and surplus (unaudited) approximately
$1.6 billion.
As of December 31, 1996, admitted assets of FSA were approximately $1.1
billion with statutory capital of approximately $676 million.
None of AMBAC, MBIA, FGIC and FSA or any associate thereof, has any
material business relationship, direct or indirect, with the Funds.
AMBAC, MBIA, FGIC and FSA are subject to regulation by the department of
insurance in each state in which they are qualified to do business. Such
regulation however, is not a guarantee that any of AMBAC, MBIA, FGIC and FSA
will be able to perform on its contractual insurance in the event a claim should
be made thereunder at some time in the future.
The information relating to AMBAC, MBIA, FGIC and FSA set forth above,
including the financial information, has been furnished by such corporations or
has been obtained from publicly available sources. Financial information with
respect to AMBAC, MBIA, FGIC and FSA appears in reports filed by AMBAC, MBIA,
FGIC and FSA with insurance regulatory authorities and is subject to audit and
review by such authorities. No representation is made herein as to the accuracy
or adequacy of such information with respect to AMBAC, MBIA, FGIC and FSA or as
to the absence of material adverse changes in such information subsequent to the
date thereof.
18
<PAGE>
PERFORMANCE INFORMATION
From time to time, each Fund may state total return for its Classes in
advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life of fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information for its
Classes 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
Where P = a hypothetical initial purchase order of $1,000 from
which, in the case of only Class A Shares, the
maximum front-end sales charge is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical $1,000 purchase
at the end of the period after the deduction of the
applicable CDSC, if any, with respect to Class B
Shares and Class C Shares.
In presenting performance information for Class A Shares, the Limited CDSC
applicable to only certain redemptions of those shares will not be deducted from
any computation of total return. See the Prospectus for the Classes for a
description of the Limited CDSC and the limited instances in which it applies.
All references to a CDSC in this Performance Information section will apply to
Class B Shares or Class C Shares.
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, each Fund may present total return information that does
not reflect the deduction of the maximum front-end sales charge or any
applicable CDSC.
The performance, as shown below, is the average annual total return
quotations of each Class of each Fund through December 31, 1996, computed as
described above. The average annual total return for Class A Shares at offer
reflects the maximum front-end sales charge of 3.75% with respect to Tax-Free
Funds and Insured Funds and 2.75% with respect to Tax-Free Intermediate Funds
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 return for Class B Shares and Class C Shares
including deferred sales charge reflects the deduction of the applicable CDSC
that would be paid if the shares were redeemed at December 31, 1996. The average
annual total return for Class B Shares and Class C Shares excluding deferred
sales charge assumes the shares were not redeemed at December 31, 1996 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.
19
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Arizona Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 1.50% 5.47% 12/31/96 0.85% 4.83% 12/31/96 3.69% 4.68%
Period Period Period
3/2/95(1) 6/29/95(1) 5/13/95(1)
through through through
12/31/96 7.91% 10.18% 12/31/96 5.85% 8.41% 12/31/96 8.66% 8.66%
Tax-Free Arizona Insured Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 4.08%(3) 12/31/96 (0.66%)(3) 3.31%(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/10/95(1) 5/26/94(1)
ended through through
12/31/96 3.38%(3) 4.70%(3) 12/31/96 5.41%(3) 7.51%(3) 12/31/96 6.70%(3) 6.70%(3)
5 years
ended
12/31/96 6.46%(3) 7.27%(3)
Period
4/1/91(1)
through
12/31/96 7.34%(3) 8.05%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
20
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free California Fund(3)
Class B Class B
Class A Class A Shares Shares
Shares Shares (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year
ended ended
12/31/96 0.33% 4.19% 12/31/96 (0.16%) 3.76%
Period Period
3/3/95(1) 8/23/95(1)
through through
12/31/96 6.53% 8.77% 12/31/96 7.02% 9.88%
Tax-Free California Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.23%) 3.61% 12/31/96 (0.74%) 3.21% 12/31/96 1.47% 2.45%
Period Period
3 years 3/1/94(1) 4/12/95(1)
ended through through
12/31/96 2.85% 4.18% 12/31/96 3.44% 4.40% 12/31/96 5.93% 5.93%
Period
10/15/92(1)
through
12/31/96 5.94% 6.91%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
21
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Colorado Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 4.07%(3) 12/31/96 (0.72%)(3) 3.24%(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/22/95(1) 5/6/94(1)
ended through through
12/31/96 3.15%(3) 4.47%(3) 12/31/96 5.21%(3) 7.35%(3) 12/31/96 6.63%(3) 6.63%(3)
5 years
ended
12/31/96 6.62%(3) 7.43%(3)
Period
4/23/87(1)
through
12/31/96 7.74%(3) 8.17%(3)
Tax-Free Florida Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.18%) 3.73% 12/31/96 (0.43%) 3.50% 12/31/96 1.96% 2.94%
Period Period Period
3/2/95(1) 9/15/95(1) 4/22/95(1)
through through through
12/31/96 6.53% 8.78% 12/31/96 3.68% 6.72% 12/31/96 6.96% 6.96%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
22
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Insured Fund(3)
Class B Class B
Class A Class A Shares Shares
Shares Shares) (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year
ended ended
12/31/96 (1.00%) 2.89% 12/31/96 (1.53%) 2.39%
Period
3 years 3/11/94(1)
ended through
12/31/96 3.13% 4.45% 12/31/96 4.21% 5.20%
Period
1/1/92(1)
through
12/31/96 6.58% 7.40%
Tax-Free Florida Intermediate Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(4) CDSC) CDSC)(5) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 0.47% 3.33% 12/31/96 0.58% 2.56% 12/31/96 1.37% 2.36%
Period Period Period
5/1/94(1) 9/15/95(1) 3/23/95(1)
through through through
12/31/96 5.01% 6.10% 12/31/96 1.36% 2.87% 12/31/96 5.78% 5.78%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase;
and (ii) 1% if shares are redeemed during the third year following
purchase. The above figures have been calculated using this new
schedule.
(5) Beginning June 9, 1997, the CDSC applicable to Class C Shares will be
1.00% if shares are redeemed within 12 months of purchase. The above
figures have been calculated using this new schedule.
23
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Idaho Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.42% 4.34% 12/31/96 (0.23%) 3.73% 12/31/96 2.48% 3.47%
Period Period Period
1/4/95(1) 3/16/95(1) 1/11/95(1)
through through through
12/31/96 8.67% 10.77% 12/31/96 5.43% 7.55% 12/31/96 9.62% 9.62%
Tax-Free Iowa Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (1.27%) 2.55% 12/31/96 (2.17%) 1.74% 12/31/96 0.57% 1.54%
Period Period
3 years 3/24/95(1) 1/4/95(1)
ended through through
12/31/96 2.27% 3.58% 12/31/96 4.72% 6.88% 12/31/96 10.28% 10.28%
Period
9/1/93(1)
through
12/31/96 2.69% 3.87%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
24
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Kansas Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 3.41% 12/31/96 (1.26%) 2.67% 12/31/96 1.52% 2.51%
Period Period
3 years 4/8/95(1) 4/12/95(1)
ended through through
12/31/96 3.25% 4.57% 12/31/96 4.36% 6.58% 12/31/96 6.26% 6.26%
Period
11/30/92(1)
through
12/31/96 6.02% 7.02%
Tax-Free Minnesota Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.54%) 3.31% 12/31/96 (1.12%)(3) 2.82%(3) 12/31/96 1.65% 2.63%
Period Period
3 years 3/11/95(1) 5/4/94(1)
ended through through
12/31/96 2.91% 4.23% 12/31/96 4.90%(3) 7.01%(3) 12/31/96 6.04% 6.04%
5 years
ended
12/31/96 5.81% 6.62%
10 years
ended
12/31/96 6.72%(3) 7.13%(3)
Period
2/27/84(1)
through
12/31/96 8.70%(3) 9.03%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
25
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Minnesota Insured Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.17%) 3.74% 12/31/96 (0.94%)(3) 3.01%(3) 12/31/96 1.98% 2.96%
Period Period
3 years 3/7/95(1) 5/4/94(1)
ended through through
12/31/96 2.63%(3) 3.95%(3) 12/31/96 4.79%(3) 6.89%(3) 12/31/96 5.84%(3) 5.84%(3)
5 years
ended
12/31/96 5.96%(3) 6.77%(3)
Period
5/1/87(1)
through
12/31/96 7.13%(3) 7.55%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using
this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
26
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Minnesota Intermediate Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC)(3) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.64% 3.44% 12/31/96 0.74%(4) 2.72%(4) 12/31/96 1.69% 2.67%
Period Period
3 years 8/15/95(1) 5/4/94(1)
ended through through
12/31/96 3.07%(4) 4.05%(4) 12/31/96 4.08%(4) 4.36%(4) 12/31/96 4.73%(4) 4.73%(4)
5 years
ended
12/31/96 4.74%(4) 5.32%(4)
10 years
ended
12/31/96 5.43%(4) 5.72%(4)
Period
10/27/85(1)
through
12/31/96 5.93%(4) 6.19%(4)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase;
and (ii) 1% if shares are redeemed during the third year following
purchase. The above figures have been calculated using this new
schedule.
(3) Beginning June 9, 1997, the CDSC applicable to Class C Shares will be
1.00% if shares are redeemed within 12 months of purchase. The above
figures have been calculated using this new schedule.
(4) Reflects voluntary waivers in effect during the period(s).
27
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Missouri Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 3.39% 12/31/96 (1.02%) 2.92% 12/31/96 1.48% 2.46%
Period Period
3 years 3/12/94(1) 11/11/95(1)
ended through through
12/31/96 2.80% 4.12% 12/31/96 4.10% 5.09% 12/31/96 4.14% 4.14%
Period
11/2/92(1)
through
12/31/96 5.62% 6.59%
Tax-Free New Mexico Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
Period
1 year 1 year 5/7/96(1)
ended ended through
12/31/96 0.25% 4.12% 12/31/96 (0.59%) 3.37% 12/31/96 5.30% 6.30%
Period
3 years 3/3/94(1)
ended through
12/31/96 3.74% 5.06% 12/31/96 3.92% 4.90%
Period
10/5/92(1)
through
12/31/96 6.37% 7.33%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
28
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free New York Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (1.40%) 2.45% 12/31/96 (2.46%) 1.42% 12/31/96 0.46% 1.43%
Period Period
3 years 11/14/94(1) 4/26/95(1)
ended through through
12/31/96 2.11% 3.43% 12/31/96 4.99% 6.31% 12/31/96 3.98% 3.98%
5 years
ended
12/31/96 5.35% 6.15%
Period
11/6/87(1)
through
12/31/96 7.12% 7.57%
Tax-Free North Dakota Fund
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 3.87%(3) (0.04%)(3) 12/31/96 (0.58%)(3) 3.38%(3) 12/31/96 1.82% 2.80%
Period Period
3 years 5/10/94(1) 7/29/95(1)
ended through through
12/31/96 4.98%(3) 3.66%(3) 12/31/96 6.54%(3) 7.56%(3) 12/31/96 6.54%(3) 6.54%(3)
5 years
ended
12/31/96 7.13%(3) 6.32%(3)
Period
4/1/91(1)
through
12/31/96 7.80%(3) 7.09%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
29
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Oregon Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 (0.72%) 3.13% 12/31/96 (1.33%) 2.60% 12/31/96 1.38% 2.36%
Period Period
3 years 3/12/94(1) 7/5/95(1)
ended through through
12/31/96 2.86% 4.19% 12/31/96 3.77% 4.76% 12/31/96 5.88% 5.88%
Period
8/1/93(1)
through
12/31/96 3.70% 4.87%
Tax-Free Utah Fund(3)
Class B Class B
Class A Class A Shares Shares
Shares Shares (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC)
1 year 1 year
ended ended
12/31/96 (0.54%) 3.34% 12/31/96 ( .47%) 2.45%
Period
3 years 5/27/95(1)
ended through
12/31/96 3.50% 4.82% 12/31/96 3.24% 5.67%
Period
10/5/92(1)
through
12/31/96 6.83% 7.79%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
30
<PAGE>
Average Annual Total Return
<TABLE>
<CAPTION>
Tax-Free Washington Insured Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year 1 year 1 year
ended ended ended
12/31/96 0.03% 3.96% 12/31/96 (0.65%) 3.31% 12/31/96 2.11% 3.10%
Period Period
3 years 10/24/95(1) 4/21/95(1)
ended through through
12/31/96 3.53% 4.85% 12/31/96 2.29% 5.63% 12/31/96 6.62% 6.62%
Period
8/1/93(1)
through
12/31/96 5.47% 6.66%
Tax-Free Wisconsin Fund(3)
Class B Class B Class C Class C
Class A Class A Shares Shares Shares Shares
Shares Shares (including (excluding (including (excluding
(at offer) (at NAV) CDSC)(2) CDSC) CDSC) CDSC)
1 year 1 year 1 year
ended ended ended
12/31/96 (0.40%) 3.47% 12/31/96 (1.11%) 2.83% 12/31/96 1.74% 2.72%
Period Period
3 years 4/22/95(1) 3/28/95(1)
ended through through
12/31/96 2.44% 3.75% 12/31/96 3.56% 5.85% 12/31/96 6.10% 6.10%
Period
9/1/93(1)
through
12/31/96 2.82% 4.01%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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.
The above figures have been calculated using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
As stated in the Funds' Prospectus, each Fund may also quote its
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:
31
<PAGE>
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The above formula will be used in calculating quotations of yield for
each Class, based on specified 30-day periods identified in advertising by the
Fund. Using this formula, the yields for the Funds for the 30-day period ended
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
30-Day Yield
---------------------------------
Absent
Actual Voluntary Fee Waivers
------ ---------------------
<S> <C> <C>
Tax-Free Arizona Insured Fund - Class A 4.44% 4.34%
Tax-Free Arizona Insured Fund - Class B 3.86% 3.77%
Tax-Free Arizona Insured Fund - Class C 3.86% N/A
Tax-Free Arizona Fund - Class A 5.28% 4.68%
Tax-Free Arizona Fund - Class B 4.73% 4.03%
Tax-Free Arizona Fund - Class C 4.72% 4.10%
Tax-Free California Insured Fund - Class A 5.05% 4.91%
Tax-Free California Insured Fund - Class B 4.83% 4.41%
Tax-Free California Insured Fund - Class C 4.50% 4.34%
Tax-Free California Fund - Class A 6.47% 5.72%
Tax-Free California Fund - Class B 6.17% 4.94%
Tax-Free California Fund - Class C 5.97% 4.95%
Tax-Free Colorado Fund - Class A 5.16% 5.06%
Tax-Free Colorado Fund - Class B 4.48% 4.43%
Tax-Free Colorado Fund - Class C 4.48% N/A
Tax-Free Florida Insured Fund - Class A 4.56% 4.38%
Tax-Free Florida Insured Fund - Class B 4.10% 3.73%
Tax-Free Florida Intermediate Fund - Class A 6.05% 5.58%
Tax-Free Florida Intermediate Fund - Class B 5.37% 4.95%
Tax-Free Florida Intermediate Fund - Class C 5.27% 4.92%
Tax-Free Florida Fund - Class A 5.01% 4.32%
Tax-Free Florida Fund - Class B 4.80% 3.80%
Tax-Free Florida Fund - Class C 4.45% 3.77%
Tax-Free Idaho Fund - Class A 5.33% 4.96%
Tax-Free Idaho Fund - Class B 5.07% 4.49%
Tax-Free Idaho Fund - Class C 4.79% 4.41%
Tax-Free Iowa Fund - Class A 4.53% 4.42%
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
30-Day Yield
---------------------------------
Absent
Actual Voluntary Fee Waivers
------ ---------------------
<S> <C> <C>
Tax-Free Iowa Fund - Class B 3.93% 3.78%
Tax-Free Iowa Fund - Class C 4.22% 4.17%
Tax-Free Kansas Fund - Class A 4.47% 4.18%
Tax-Free Kansas Fund - Class B 3.81% 3.50%
Tax-Free Kansas Fund - Class C 3.76% 3.57%
Tax-Free Minnesota Insured Fund - Class A 4.47% N/A
Tax-Free Minnesota Insured Fund - Class B 3.90% 3.81%
Tax-Free Minnesota Insured Fund - Class C 3.89% N/A
Tax-Free Minnesota Intermediate Fund - Class A 4.01% N/A
Tax-Free Minnesota Intermediate Fund - Class B 3.38% 3.33%
Tax-Free Minnesota Intermediate Fund - Class C 3.38% N/A
Tax-Free Minnesota Fund - Class A 4.80% N/A
Tax-Free Minnesota Fund - Class B 4.38% 4.24%
Tax-Free Minnesota Fund - Class C 4.23% N/A
Tax-Free Missouri Insured Fund - Class A 4.95% 4.71%
Tax-Free Missouri Insured Fund - Class B 4.46% 4.09%
Tax-Free Missouri Insured Fund - Class C 4.22% 4.09%
Tax-Free New Mexico Fund - Class A 4.93% 4.79%
Tax-Free New Mexico Fund - Class B 4.31% 4.15%
Tax-Free New Mexico Fund - Class C 4.62% 4.55%
Tax-Free New York Fund - Class A 4.80% 4.68%
Tax-Free New York Fund - Class B 4.24% 4.13%
Tax-Free New York Fund - Class C 4.24% 4.10%
Tax-Free North Dakota Fund - Class A 4.79% 4.64%
Tax-Free North Dakota Fund - Class B 4.49% 4.12%
Tax-Free North Dakota Fund - Class C 4.53% N/A
Tax-Free Oregon Insured Fund - Class A 4.65% 4.37%
Tax-Free Oregon Insured Fund - Class B 4.17% 3.72%
Tax-Free Oregon Insured Fund - Class C 3.94% 3.73%
Tax-Free Utah Fund - Class A 4.88% 4.44%
Tax-Free Utah Fund - Class B 4.20% 3.78%
Tax-Free Washington Insured Fund - Class A 5.13% 4.52%
Tax-Free Washington Insured Fund - Class B 4.49% 3.84%
Tax-Free Washington Insured Fund - Class C 4.39% 3.90%
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
30-Day Yield
---------------------------------
Absent
Actual Voluntary Fee Waivers
------ ---------------------
<S> <C> <C>
Tax-Free Wisconsin Fund - Class A 4.71% 4.63%
Tax-Free Wisconsin Fund - Class B 4.17% 4.02%
Tax-Free Wisconsin Fund - Class C 4.29% 4.23%
</TABLE>
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.
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 December 31, 1996, the tax-equivalent yields
(assuming a federal income tax rate of 31%) of each Class of each Fund were as
follows:
<TABLE>
<CAPTION>
ACTUAL
------
ARIZONA(1)
----------
31.74% 34.59% 39.58% 42.98%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund - Class A 6.50% 6.79% 7.35% 7.79%
Tax-Free Arizona Insured Fund - Class B 5.66% 5.90% 6.39% 6.77%
Tax-Free Arizona Insured Fund - Class C 5.66% 5.90% 6.39% 6.77%
Tax-Free Arizona Fund - Class A 7.74% 8.07% 8.74% 9.26%
Tax-Free Arizona Fund - Class B 6.93% 7.23% 7.83% 8.30%
Tax-Free Arizona Fund - Class C 6.92% 7.22% 7.81% 8.28%
CALIFORNIA(2)
-------------
34.70% 37.42% 41.95% 45.22%
------ ------ ------ ------
Tax-Free California Insured Fund - Class A 7.73% 8.07% 8.70% 9.22%
Tax-Free California Insured Fund - Class B 7.40% 7.72% 8.32% 8.82%
Tax-Free California Insured Fund - Class C 6.89% 7.19% 7.75% 8.21%
Tax-Free California Fund - Class A 9.91% 10.34% 11.15% 11.81%
Tax-Free California Fund - Class B 9.45% 9.86% 10.63% 11.26%
Tax-Free California Fund - Class C 9.14% 9.54% 10.28% 10.90%
COLORADO (3)
------------
31.60% 34.45% 39.20% 42.62%
------ ------ ------ ------
Tax-Free Colorado Fund - Class A 7.54% 7.87% 8.49% 8.99%
Tax-Free Colorado Fund - Class B 6.55% 6.83% 7.37% 7.81%
Tax-Free Colorado Fund - Class C 6.55% 6.83% 7.37% 7.81%
FLORIDA
-------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Florida Insured Fund - Class A 6.33% 6.61% 7.13% 7.55%
Tax-Free Florida Insured Fund - Class B 5.69% 5.94% 6.41% 6.79%
Tax-Free Florida Intermediate Fund - Class A 8.40% 8.77% 9.45% 10.02%
Tax-Free Florida Intermediate Fund - Class B 7.46% 7.78% 8.39% 8.89%
Tax-Free Florida Intermediate Fund - Class C 7.32% 7.64% 8.23% 8.73%
Tax-Free Florida Fund - Class A 6.96% 7.26% 7.83% 8.29%
Tax-Free Florida Fund - Class B 6.67% 6.96% 7.50% 7.95%
Tax-Free Florida Fund - Class C 6.18% 6.45% 6.95% 7.37%
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ACTUAL
------
IDAHO(4)
--------
33.90% 36.66% 41.25% 44.55%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Idaho Fund - Class A 8.06% 8.41% 9.07% 9.61%
Tax-Free Idaho Fund - Class B 7.67% 8.00% 8.63% 9.14%
Tax-Free Idaho Fund - Class C 7.25% 7.56% 8.15% 8.64%
IOWA (5)
--------
33.32% 35.90% 40.24% 43.39%
------ ------ ------ ------
Tax-Free Iowa Fund - Class A 6.79% 7.07% 7.58% 8.00%
Tax-Free Iowa Fund - Class B 5.89% 6.13% 6.58% 6.94%
Tax-Free Iowa Fund - Class C 6.33% 6.58% 7.06% 7.45%
KANSAS (6)
----------
33.58% 36.35% 40.96% 44.28%
------ ------ ------ ------
Tax-Free Kansas Fund - Class A 6.73% 7.02% 7.57% 8.02%
Tax-Free Kansas Fund - Class B 5.74% 5.99% 6.45% 6.84%
Tax-Free Kansas Fund - Class C 5.66% 5.91% 6.37% 6.75%
MINNESOTA (7)
-------------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Minnesota Insured Fund - Class A 6.79% 7.08% 7.63% 8.09%
Minnesota Insured Fund - Class B 5.92% 6.18% 6.66% 7.06%
Minnesota Insured Fund - Class C 5.90% 6.16% 6.64% 7.04%
Tax-Free Minnesota Intermediate Fund - Class A 6.09% 6.35% 6.85% 7.26%
Tax-Free Minnesota Intermediate Fund - Class B 5.13% 5.35% 5.77% 6.12%
Tax-Free Minnesota Intermediate Fund - Class C 5.13% 5.35% 5.77% 6.12%
Tax-Free Minnesota Fund - Class A 7.29% 7.60% 8.20% 8.69%
Tax-Free Minnesota Fund - Class B 6.65% 6.94% 7.48% 7.93%
Tax-Free Minnesota Fund - Class C 6.42% 6.70% 7.22% 7.65%
MISSOURI(8)
-----------
31.16% 33.91% 38.51% 41.84%
------ ------ ------ ------
Tax-Free Missouri Insured Fund - Class A 7.19% 7.49% 8.05% 8.51%
Tax-Free Missouri Insured Fund - Class B 6.48% 6.75% 7.25% 7.67%
Tax-Free Missouri Insured Fund - Class C 6.13% 6.39% 6.86% 7.26%
NEW MEXICO(9)
-------------
33.69% 36.87% 41.44% 44.73%
------ ------ ------ ------
Tax-Free New Mexico Fund - Class A 7.48% 7.81% 8.42% 8.92%
Tax-Free New Mexico Fund - Class B 6.54% 6.83% 7.36% 7.80%
Tax-Free New Mexico Fund - Class C 7.01% 7.32% 7.89% 8.36%
NEW YORK(10)
------------
33.13% 35.92% 40.56% 43.90%
------ ------ ------ ------
Tax-Free New York Fund - Class A 7.18% 7.49% 8.08% 8.56%
Tax-Free New York Fund - Class B 6.34% 6.62% 7.13% 7.56%
Tax-Free New York Fund - Class C 6.34% 6.62% 7.13% 7.56%
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
ACTUAL
------
NORTH DAKOTA(11)
----------------
30.72% 33.87% 39.07% 42.77%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free North Dakota Fund - Class A 6.91% 7.24% 7.86% 8.37%
Tax-Free North Dakota Fund - Class B 6.48% 6.79% 7.37% 7.85%
Tax-Free North Dakota Fund - Class C 6.54% 6.85% 7.43% 7.92%
OREGON(12)
----------
34.48% 37.21% 41.76% 45.04%
------ ------ ------ ------
Tax-Free Oregon Insured Fund - Class A 7.10% 7.41% 7.98% 8.46%
Tax-Free Oregon Insured Fund - Class B 6.36% 6.64% 7.16% 7.59%
Tax-Free Oregon Insured Fund - Class C 6.01% 6.27% 6.77% 7.17%
UTAH(13)
--------
32.38% 35.13% 39.72% 43.04%
------ ------ ------ ------
Tax-Free Utah Fund - Class A 7.22% 7.52% 8.10% 8.57%
Tax-Free Utah Fund - Class B 6.21% 6.47% 6.97% 7.37%
WASHINGTON
----------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Washington Insured Fund - Class A 7.13% 7.43% 8.02% 8.49%
Tax-Free Washington Insured Fund - Class B 6.24% 6.51% 7.02% 7.43%
Tax-Free Washington Insured Fund - Class C 6.10% 6.36% 6.86% 7.27%
WISCONSIN(14)
-------------
32.99% 35.78% 40.44% 43.79%
------ ------ ------ ------
Tax-Free Wisconsin Fund - Class A 7.03% 7.33% 7.91% 8.38%
Tax-Free Wisconsin Fund - Class B 6.22% 6.49% 7.00% 7.42%
Tax-Free Wisconsin Fund - Class C 6.40% 6.68% 7.20% 7.63%
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
ARIZONA(1)
----------
31.74% 34.59% 39.58% 42.98%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund - Class A 6.36% 6.63% 7.18% 7.61%
Tax-Free Arizona Insured Fund - Class B 5.52% 5.76% 6.24% 6.61%
Tax-Free Arizona Insured Fund - Class C 5.66% 5.90% 6.39% 6.77%
Tax-Free Arizona Fund - Class A 6.86% 7.15% 7.75% 8.21%
Tax-Free Arizona Fund - Class B 5.90% 6.16% 6.67% 7.07%
Tax-Free Arizona Fund - Class C 6.01% 6.27% 6.79% 7.19%
CALIFORNIA(2)
-------------
34.70% 37.42% 41.95% 45.22%
------ ------ ------ ------
Tax-Free California Insured Fund - Class A 7.52% 7.85% 8.46% 8.96%
Tax-Free California Insured Fund - Class B 6.75% 7.05% 7.60% 8.05%
Tax-Free California Insured Fund - Class C 6.65% 6.93% 7.48% 7.92%
Tax-Free California Fund - Class A 8.76% 9.14% 9.85% 10.44%
Tax-Free California Fund - Class B 7.56% 7.89% 8.51% 9.02%
Tax-Free California Fund - Class C 7.58% 7.91% 8.53% 9.04%
COLORADO (3)
------------
31.60% 34.45% 39.20% 42.62%
------ ------ ------ ------
Tax-Free Colorado Fund - Class A 7.40% 7.72% 8.32% 8.82%
Tax-Free Colorado Fund - Class B 6.48% 6.76% 7.29% 7.72%
Tax-Free Colorado Fund - Class C 6.55% 6.83% 7.37% 7.81%
FLORIDA
-------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Florida Insured Fund - Class A 6.08% 6.35% 6.84% 7.25%
Tax-Free Florida Insured Fund - Class B 5.18% 5.41% 5.83% 6.18%
Tax-Free Florida Intermediate Fund - Class A 7.75% 8.09% 8.72% 9.24%
Tax-Free Florida Intermediate Fund - Class B 6.88% 7.17% 7.73% 8.20%
Tax-Free Florida Intermediate Fund - Class C 6.83% 7.13% 7.69% 8.15%
Tax-Free Florida Fund - Class A 6.00% 6.26% 6.75% 7.15%
Tax-Free Florida Fund - Class B 5.28% 5.51% 5.94% 6.29%
Tax-Free Florida Fund - Class C 5.24% 5.46% 5.89% 6.24%
IDAHO (4 )
----------
33.90% 36.66% 41.25% 44.55%
------ ------ ------ ------
Tax-Free Idaho Fund - Class A 7.50% 7.83% 8.44% 8.95%
Tax-Free Idaho Fund - Class B 6.79% 7.09% 7.64% 8.10%
Tax-Free Idaho Fund - Class C 6.67% 6.96% 7.51% 7.95%
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
IOWA(5)
-------
33.32% 35.90% 40.24% 43.39%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free Iowa Fund - Class A 6.63% 6.90% 7.40% 7.81%
Tax-Free Iowa Fund - Class B 5.67% 5.90% 6.33% 6.68%
Tax-Free Iowa Fund - Class C 6.25% 6.51% 6.98% 7.37%
KANSAS (6)
----------
33.58% 36.35% 40.96% 44.28%
------ ------ ------ ------
Tax-Free Kansas Fund - Class A 6.29% 6.57% 7.08% 7.50%
Tax-Free Kansas Fund - Class B 5.27% 5.50% 5.93% 6.28%
Tax-Free Kansas Fund - Class C 5.37% 5.61% 6.05% 6.41%
MINNESOTA (7)
-------------
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Minnesota Insured Fund - Class A 6.79% 7.08% 7.63% 8.09%
Minnesota Insured Fund - Class B 5.78% 6.03% 6.51% 6.89%
Minnesota Insured Fund - Class C 5.90% 6.16% 6.64% 7.04%
Tax-Free Minnesota Intermediate Fund - Class A 6.09% 6.35% 6.85% 7.26%
Tax-Free Minnesota Intermediate Fund - Class B 5.05% 5.27% 5.69% 6.03%
Tax-Free Minnesota Intermediate Fund - Class C 5.13% 5.35% 5.77% 6.12%
Tax-Free Minnesota Fund - Class A 7.29% 7.60% 8.20% 8.69%
Tax-Free Minnesota Fund - Class B 6.44% 6.72% 7.24% 7.67%
Tax-Free Minnesota Fund - Class C 6.42% 6.70% 7.22% 7.65%
MISSOURI(8)
-----------
31.16% 33.91 38.51% 41.84%
------ ----- ------ ------
Tax-Free Missouri Insured Fund - Class A 6.84% 7.13% 7.66% 8.10%
Tax-Free Missouri Insured Fund - Class B 5.94% 6.19% 6.65% 7.03%
Tax-Free Missouri Insured Fund - Class C 5.94% 6.19% 6.65% 7.03%
NEW MEXICO(9)
-------------
33.69% 36.87% 41.44% 44.73%
------ ------ ------ ------
Tax-Free New Mexico Fund - Class A 7.27% 7.59% 8.18% 8.67%
Tax-Free New Mexico Fund - Class B 6.30% 6.57% 7.09% 7.51%
Tax-Free New Mexico Fund - Class C 6.91% 7.21% 7.77% 8.23%
NEW YORK(10)
------------
33.13% 35.92% 40.56% 43.90%
------ ------ ------ ------
Tax-Free New York Fund - Class A 7.00% 7.30% 7.87% 8.34%
Tax-Free New York Fund - Class B 6.18% 6.44% 6.95% 7.36%
Tax-Free New York Fund - Class C 6.13% 6.40% 6.90% 7.31%
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
ABSENT VOLUNTARY FEE WAIVERS
----------------------------
NORTH DAKOTA(11)
----------------
30.72% 33.87% 39.07% 42.77%
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax-Free North Dakota Fund - Class A 6.70% 7.02% 7.62% 8.11%
Tax-Free North Dakota Fund - Class B 5.95% 6.23% 6.76% 7.20%
Tax-Free North Dakota Fund - Class C 6.54% 6.85% 7.43% 7.92%
OREGON(12)
----------
34.48% 37.21% 41.76% 45.04%
------ ------ ------ ------
Tax-Free Oregon Insured Fund - Class A 6.67% 6.96% 7.50% 7.95%
Tax-Free Oregon Insured Fund - Class B 5.68% 5.92% 6.39% 6.77%
Tax-Free Oregon Insured Fund - Class C 5.69% 5.94% 6.40% 6.79%
UTAH(13)
--------
32.38% 35.13% 39.72% 43.04%
------ ------ ------ ------
Tax-Free Utah Fund - Class A 6.57% 6.84% 7.37% 7.79%
Tax-Free Utah Fund - Class B 5.59% 5.83% 6.27% 6.64%
WASHINGTON
----------
28% 31% 36% 39.6%
--- --- --- -----
Tax-Free Washington Insured Fund - Class A 6.28% 6.55% 7.06% 7.48%
Tax-Free Washington Insured Fund - Class B 5.33% 5.57% 6.00% 6.36%
Tax-Free Washington Insured Fund - Class C 5.42% 5.65% 6.09% 6.46%
WISCONSIN(14)
-------------
32.99% 35.78% 40.44% 43.79%
------ ------ ------ ------
Tax-Free Wisconsin Fund - Class A 6.91% 7.21% 7.77% 8.54%
Tax-Free Wisconsin Fund - Class B 6.00% 6.26% 6.75% 7.15%
Tax-Free Wisconsin Fund - Class C 6.31% 6.59% 7.10% 7.52%
</TABLE>
39
<PAGE>
(1) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 5.2% Arizona marginal rate and a 26.54%
federal marginal rate, (b) a 5.2% Arizona marginal rate and a 29.39%
federal marginal rate, (c) a 5.6% Arizona marginal rate and a 33.98%
federal marginal rate, and (d) a 5.6%Arizona marginal rate and a 37.38%
federal marginal rate.
(2) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9.3% California marginal rate and (a) a 25.4%
federal marginal rate, (b) a 28.12% federal marginal rate, (c) a 32.65%
federal marginal rate, and (d) a 35.92% federal marginal rate.
(3) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 5% Colorado rate and (a) a 26.6% federal
marginal rate, (b) a 29.45% federal marginal rate, (c) a 34.20% federal
marginal rate, and (d) 37.62% federal marginal rate.
(4) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.20% Idaho tax rate and (a) a 25.70% federal
marginal rate, (b) a 28.46% federal marginal rate, (c) a 33.05% federal
marginal rate, and (d) a 36.35% federal marginal rate.
(5) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.39% Iowa marginal rate and a 25.93%
federal marginal rate, (b) a 7.11% Iowa marginal rate and a 28.8%
federal marginal rate, (c) a 6.63% Iowa marginal rate and a 33.61%
federal marginal rate, and (d) a 6.28% Iowa marginal rate and a 37.11%
federal marginal rate.
(6) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 7.75 Kansas marginal rate and (a) a 25.83%
federal marginal rate, (b)a 28.60% federal marginal rate, (c) a 33.21%
federal marginal rate, and (d) a 36.53% federal marginal rate.
(7) The four combined rates listed above assume, respectively, that the
taxpayer is subject to an 8.5% Minnesota marginal rate and (a) a 25.62%
federal marginal rate, (b) a 28.37% federal marginal rate, (c) a 32.94%
federal marginal rate, and (d) a 36.23% federal marginal rate.
(8) The four combined rates listed above assume that the taxpayer is
subject to (a) a 4.39% Missouri marginal rate and a 26.77% federal
marginal rate, (b) a 4.22% Missouri marginal rate and a 29.69% federal
marginal rate, (c) a 3.92% Missouri marginal rate and a 34.59% federal
marginal rate, and (d) a 3.71% Missouri marginal rate and a 38.13%
federal marginal rate.
(9) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 7.9% New Mexico marginal rate and a 25.79%
federal marginal rate, (b) a 8.5% New Mexico marginal rate and a 28.37%
federal marginal rate, (c) a 8.5% New Mexico marginal rate and a 32.94%
federal marginal rate, and (d) a 8.5% New Mexico marginal rate and a
36.23% federal marginal rate.
(10) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 7.125% New York marginal rate and (a) a 26.00%
federal marginal rate, (b) a 28.79% federal marginal rate, (c) a 33.43%
federal marginal rate and (d) a 36.77% federal marginal rate.
(11) The four combined rates listed above assume that the taxpayer is
subject to (a) 26.94%, (b) 29.71%, (c) 34.27%% and (d) 37.52% federal
marginal rates and elects to determine his or her North Dakota income
tax liability as an amount equal to 14% of his or her adjusted federal
income tax liability.
(12) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 9% Oregon tax rate and (a) a 25.48% federal
marginal rate, (b) a 28.21% federal marginal rate, (c) a 32.76% federal
marginal rate, and (d) a 36.04% federal marginal rate.
(13) The four combined rates listed above assume, respectively, that the
taxpayer is subject to (a) a 6.08% Utah marginal rate and a 26.30%
federal marginal rate, (b) a 5.98% Utah marginal rate and a 29.15%
federal marginal rate, (c) a 5.81% Utah marginal rate and a 33.91%
federal marginal rate, and (d) a 5.69% Utah marginal rate and a 37.35%
federal marginal rate.
(14) The four combined rates listed above assume, respectively, that the
taxpayer is subject to a 6.93% Wisconsin marginal rate and (a) a 26.06%
federal marginal rate, (b) a 28.85% federal marginal rate, (c) a 33.51%
federal marginal rate, and (d) a 36.86% federal marginal rate.
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 Fund may advertise a
tax-equivalent yield assuming other income tax rates, when applicable.
40
<PAGE>
Investors should note that the income earned and dividends paid by a
Fund will vary with the fluctuation of interest rates and performance of the
portfolio. The net asset value of a Fund may change. Unlike money market funds,
each Fund invests in longer-term securities that fluctuate in value and do so in
a manner inversely correlated with changing interest rates. Each Fund's net
asset value will tend to rise when interest rates fall. Conversely, each Fund's
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 a Fund will vary from day
to day and investors should consider the volatility of a Fund's net asset values
as well as the yield before making a decision to invest.
From time to time, a Fund may also quote for its Classes 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 Fund may also promote its Classes' total return and/or yield
performance and use comparative performance information computed by and
available from certain industry and 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 activities and performances of the Funds and in
illustrating general financial planning principles. From time to time, certain
mutual fund performance ranking information, calculated and provided by these
organizations, may also be used in the promotion of sales of the Funds. Any
indices used are not managed for any investment goal.
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. In
addition, the performance of multiple indices compiled and maintained
by these firms may be combined to create a blended performance
41
<PAGE>
result for comparative purposes. Generally, the indices selected will
be representative of the types of securities in which the Funds may
invest and the assumptions that were used in calculating the blended
performance will be described.
Current interest rate and yield information on government debt
obligations of various durations, as reported weekly by the Federal Reserve
(Bulletin H.15), may also be used. 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, in the case
of Class A Shares, the impact of the maximum front-end sales charge, if any,
paid on the illustrated investment amount, annualized. Performance of Class A
Shares may also be shown without reflecting the impact of any front-end sales
charge. Performance of Class B Shares and Class C Shares will be calculated with
both the applicable CDSC included and excluded. The results will not reflect any
income taxes, if applicable, payable by shareholders on the reinvested
distributions included in the calculations. The net asset values of the Funds
fluctuate so shares, when redeemed, may be worth more or less than the original
investment, and past performance should not be considered a guarantee of future
results.
The following tables, for purposes of illustration only, reflect the
cumulative total return performance for each Class of each Fund through December
31, 1996.
42
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Arizona Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.21%) 12/31/96 (1.65%) 2.35% 12/31/96 1.44% 2.44%
6 months 6 months 6 months
ended ended ended
12/31/96 1.56%(4) 12/31/96 1.20% 5.20% 12/31/96 4.27% 5.27%
9 months 9 months 9 months
ended ended ended
12/31/96 3.24% 12/31/96 2.80% 6.80% 12/31/96 5.72% 6.72%
1 year 1 year 1 year
ended ended ended
12/31/96 1.50% 12/31/96 0.85% 4.83% 12/31/96 3.69% 4.68%
Period Period Period
3/2/95(1) 6/29/95(1) 5/13/95(1)
through through through
12/31/96 14.99% 12/31/96 8.96% 12.96% 12/31/96 14.56% 14.56%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.55%.
43
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Arizona Insured Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.41%)(3) 12/31/96 (1.70%)(3) 2.30%(3) 12/31/96 1.30% 2.30%
6 months 6 months 6 months
ended ended ended
12/31/96 1.05%(3)(4) 12/31/96 0.61%(3) 4.61%(3) 12/31/96 3.58% 4.58%
9 months 9 months 9 months
ended ended ended
12/31/96 1.63%(3) 12/31/96 0.89%(3) 4.89%(3) 12/31/96 3.92% 4.92%
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 12/31/96 (0.66%)(3) (3.31%)(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/10/95(1) 5/26/94(1)
ended through through
12/31/961 0.48%(3) 12/31/96 10.03%(3) 14.03%(3) 12/31/96 18.39%(3) 18.39%(3)
5 years
ended
12/31/96 36.76%(3)
Period
4/1/91(1)
through
12/31/96 50.27%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 4.99%.
44
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free California Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (0.92%) 12/31/96 (1.30%) 2.70% 12/31/96 1.66% 2.66%
6 months 6 months 6 months
ended ended ended
12/31/96 1.89%(4) 12/31/96 1.64% 5.64% 12/31/96 4.42% 5.42%
Period
9 months 9 months 4/9/96(3)
ended ended through
12/31/96 2.49% 12/31/96 2.13% 6.13% 12/31/96 6.58% 7.58%
1 year 1 year
ended ended
12/31/96 0.33% 12/31/96 (0.16%) 3.76%
Period Period
3/3/95(1) 8/23/95(1)
through through
12/31/96 12.30% 12/31/96 9.65% 13.65%
Tax-Free California Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
3 months 3 months 3 months
ended ended ended
12/31/96 (1.16%) 12/31/96 (1.44%) 2.56% 12/31/96 1.01% 2.01%
6 months 6 months 6 months
ended ended ended
12/31/96 1.42%(4) 12/31/96 1.18% 5.18% 12/31/96 3.62% 4.62%
9 months 9 months 9 months
ended ended ended
12/31/96 1.82% 12/31/96 1.47% 5.47% 12/31/96 3.81% 4.81%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.23%) 12/31/96 (0.74%) 3.21% 12/31/96 1.47% 2.45%
Period Period
3 years 3/1/94(1) 4/12/95(1)
ended through through
12/31/96 8.80% 12/31/96 10.05% 13.00% 12/31/96 10.43% 10.43%
Period
10/15/92(1)
through
12/31/96 27.52%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.90% for Tax-Free California Fund and 5.39% for Tax-Free
California Insured Fund.
45
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Colorado Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.57%)(3) 12/31/96 (1.89%)(3) 2.11%(3) 12/31/96 1.11% 2.11%
6 months 6 months 6 months
ended ended ended
12/31/96 1.18%(3)(4) 12/31/96 0.70%(3) 4.70%(3) 12/31/96 3.59% 4.59%
9 months 9 months 9 months
ended ended ended
12/31/96 2.00%(3) 12/31/96 1.33%(3) 5.33%(3) 12/31/96 4.29% 5.29%
1 year 1 year 1 year
ended ended ended
12/31/96 0.21%(3) 12/31/96 (0.72%)(3) 3.24%(3) 12/31/96 2.17% 3.16%
Period Period
3 years 3/22/95(1) 5/6/94(1)
ended through through
12/31/96 9.77%(3) 12/31/96 9.46%(3) 13.46%(3) 12/31/96 18.61%(3) 18.61%(3)
5 years
ended
12/31/96 37.75%(3)
Period
4/23/87(1)
through
12/31/96 106.06%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.12%.
46
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.27%) 12/31/96 (1.57%) 2.43% 12/31/96 1.35% 2.35%
6 months 6 months 6 months
ended ended ended
12/31/96 1.56%(4) 12/31/96 1.44% 5.44% 12/31/96 4.16% 5.16%
9 months 9 months 9 months
ended ended ended
12/31/96 2.24% 12/31/96 2.04% 6.04% 12/31/96 4.77% 5.77%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.18%) 12/31/96 (0.43%) 3.50% 12/31/96 1.98% 2.96%
Period Period Period
3/2/95(1) 9/15/95(1) 4/22/95(1)
through through through
12/31/96 12.32% 12/31/96 4.79% 8.79% 12/31/96 12.12% 12.12%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.53%.
47
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Insured Fund(3)
Class B Class B
Class A Shares Shares
Shares (including (excluding
(at offer) CDSC)(2) CDSC)
<S> <C> <C> <C> <C>
3 months 3 months
ended ended
12/31/96 (1.46%) 12/31/96 (1.78%) 2.22%
6 months 6 months
ended ended
12/31/96 1.27%(4) 12/31/96 1.07% 5.07%
9 months 9 months
ended ended
12/31/96 1.59% 12/31/96 1.25% 5.25%
1 year 1 year
ended ended
12/31/96 (1.00%) 12/31/96 (1.53%) 2.39%
Period
3 years 3/11/94(1)
ended through
12/31/96 9.67% 12/31/96 12.30% 15.30%
Period
1/1/92(1)
through
12/31/96 37.55%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated
using this new schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.26%.
48
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Florida Intermediate Fund(2)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(3) CDSC) CDSC)(4) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (0.97%) 12/31/96 (0.49%) 1.51% 12/31/96 0.49% 1.49%
6 months 6 months 6 months
ended ended ended
12/31/96 0.55%(5) 12/31/96 0.88% 2.88% 12/31/96 1.81% 2.81%
9 months 9 months 9 months
ended ended ended
12/31/96 1.10% 12/31/96 1.25% 3.25% 12/31/96 2.12% 3.12%
1 year 1 year 1 year
ended ended ended
12/31/96 0.47% 12/31/96 0.58% 2.56% 12/31/96 1.37% 2.36%
Period Period Period
5/1/94(1) 9/15/95(1) 3/23/95(1)
through through through
12/31/96 13.95% 12/31/96 1.76% 3.73% 12/31/96 10.50% 10.50%
</TABLE>
(1) Date of initial public offering.
(2) Reflects voluntary waivers in effect during the period(s).
(3) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase;
and (ii) 1% if shares are redeemed during the third year following
purchase. The above figures have been calculated using this new
schedule.
(4) Beginning June 9, 1997, the CDSC applicable to Class C Shares will
be 1.00% if shares are redeemed within 12 months of purchase.
The above figures have been calculated using this new schedule.
(5) Cumulative total return at nav for Class A Shares at December 31, 1996
was 3.38%.
49
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Idaho Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.20%) 12/31/96 (1.55%) 2.45% 12/31/96 1.39% 2.39%
6 months 6 months 6 months
ended ended ended
12/31/96 1.30%(4) 12/31/96 0.86% 4.86% 12/31/96 3.73% 4.73%
9 months 9 months 9 months
ended ended ended
12/31/96 2.17% 12/31/96 1.72% 5.72% 12/31/96 4.53% 5.53%
1 year 1 year 1 year
ended ended ended
12/31/96 0.42% 12/31/96 (0.23%) 3.73% 12/31/96 2.48% 3.47%
Period Period Period
1/4/95(1) 3/16/95(1) 1/11/95(1)
through through through
12/31/96 18.00% 12/31/96 9.97% 13.97% 12/31/96 19.85% 19.85%
</TABLE>
50
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Iowa Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.31%) 12/31/96 (1.75%) 2.25% 12/31/96 1.23% 2.23%
6 months 6 months 6 months
ended ended ended
12/31/96 2.04%(4) 12/31/96 1.52% 5.52% 12/31/96 4.45% 5.45%
9 months 9 months 9 months
ended ended ended
12/31/96 2.59% 12/31/96 1.90% 5.90% 12/31/96 4.77% 5.77%
1 year 1 year 1 year
ended ended ended
12/31/96 (1.27%) 12/31/96 (2.17%) 1.74% 12/31/96 0.57% 1.54%
Period Period
3 years 3/24/95(1) 1/4/95(1)
ended through through
12/31/96 6.97% 12/31/96 8.53% 12.53% 12/31/96 21.52% 21.52%
Period
9/1/93(1)
through
12/31/96 9.25%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.20% for Tax-Free Idaho Fund and 6.00% for Tax-Free Iowa Fund.
51
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Kansas Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.68%) 12/31/96 (2.01%) 1.99% 12/31/96 0.98% 1.98%
6 months 6 months 6 months
ended ended ended
12/31/96 0.96%(4) 12/31/96 0.48% 4.48% 12/31/96 3.34% 4.34%
9 months 9 months 9 months
ended ended ended
12/31/96 1.83% 12/31/96 1.30% 5.30% 12/31/96 4.10% 5.10%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 12/31/96 (1.26%) 2.67% 12/31/96 1.52% 2.51%
Period Period
3 years 4/8/95(1) 4/12/95(1)
ended through through
12/31/96 10.08% 12/31/96 7.69% 11.69% 12/31/96 11.02% 11.02%
Period
11/30/92(1)
through
12/31/96 26.99%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 4.88%.
52
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Minnesota Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.54%) 12/31/96 (1.82%)(3) 2.18%(3) 12/31/96 1.15% 2.15%
6 months 6 months 6 months
ended ended ended
12/31/96 1.03%(4) 12/31/96 0.66%(3) 4.66%(3) 12/31/96 3.67% 4.67%
9 months 9 months 9 months
ended ended ended
12/31/96 1.51% 12/31/96 1.06%(3) 5.06%(3) 12/31/96 3.94% 4.94%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.54%) 12/31/96 (1.12%)(3) 2.82%(3) 12/31/96 1.65% 2.63%
Period Period
3 years 3/11/95(1) 5/4/94(1)
ended through through
12/31/96 8.98% 12/31/96 9.06%(3) 13.06%(3) 12/31/96 16.91% 16.91%
5 years
ended
12/31/96 32.60%
10 years
ended
12/31/96 91.65%(3)
Period
2/27/84(1)
through
12/31/96 192.11%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 4.95%.
53
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Minnesota Insured Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.40%) 12/31/96 (1.79%)(3) 2.21%(3) 12/31/96 1.30% 2.30%
6 months 6 months 6 months
ended ended ended
12/31/96 0.88%(4) 12/31/96 0.33%(3) 4.33%(3) 12/31/96 1.30% 2.30%
9 months 9 months 9 months
ended ended ended
12/31/96 1.35% 12/31/96 0.64%(3) 4.64%(3) 12/31/96 3.67% 4.67%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.17%) 12/31/96 (0.94%)(3) 3.01%(3) 12/31/96 1.98% 2.96%
Period Period
3 years 3/7/95(1) 5/4/94(1)
ended through through
12/31/96 8.11%(3) 2/31/96 8.90%(3) 12.90%(3) 12/31/96 16.33%(3) 16.33%(3)
5 years
ended
12/31/96 33.60%(3)
Period
5/1/87(1)
through
12/31/96 94.61%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 4.77%.
54
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Minnesota Intermediate Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(3) CDSC) CDSC)(4) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.00%) 12/31/96 (0.36%)(2) 1.64%(2) 12/31/96 0.64% 1.64%
6 months 6 months 6 months
ended ended ended
12/31/96 0.47%(5) 12/31/96 0.89%(2) 2.89%(2) 12/31/96 1.97% 2.97%
9 months 9 months 9 months
ended ended ended
12/31/96 0.73% 12/31/96 0.99%(2) 2.99%(2) 12/31/96 1.92% 2.92%
1 year 1 year 1 year
ended ended ended
12/31/96 0.64% 12/31/96 0.74%(2) 2.72%(2) 12/31/96 1.69% 2.67%
Period Period
3 years 8/15/95(1) 5/4/94(1)
ended through through
12/31/96 9.51%(2) 12/31/96 4.08%(2) 6.08%(2) 12/31/96 13.11%(2) 13.11%(2)
5 years
ended
12/31/96 26.03%(2)
10 years
ended
12/31/96 69.87%(2)
Period
10/27/85(1)
through
12/31/96 90.37%(2)
</TABLE>
(1) Date of initial public offering.
(2) Reflects voluntary waivers in effect during the period(s).
(3) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (i) 2% if shares are redeemed within two years of purchase; and
(ii) 1% if shares are redeemed during the third year following purchase.
The above figures have been calculated using this new schedule.
(4) Beginning June 9, 1997, the CDSC applicable to Class C Shares will be
1.00% if shares are redeemed within 12 months of purchase.
The above figures have been calculated using this new schedule.
(5) Cumulative total return at nav for Class A Shares at December 31, 1996
was 3.33%.
55
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Missouri Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.37%) 12/31/96 (1.67%) 2.33% 12/31/96 1.28% 2.28%
6 months 6 months 6 months
ended ended ended
12/31/96 1.41%(4) 12/31/96 1.01% 5.01% 12/31/96 3.78% 4.78%
9 months 9 months 9 months
ended ended ended
12/31/96 1.80% 12/31/96 1.46% 5.46% 12/31/96 4.13% 5.13%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.48%) 12/31/96 (1.02%) 2.92% 12/31/96 1.48% 2.46%
Period Period
3 years 3/12/94(1) 11/11/95(1)
ended through through
12/31/96 8.64% 12/31/96 11.96% 14.96% 12/31/96 4.73% 4.73%
Period
11/2/92(1)
through
12/31/96 25.55%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.33%.
56
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free New Mexico Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.62%) 12/31/96 (1.94%) 2.06% 12/31/96 1.04% 2.04%
6 months 6 months 6 months
ended ended ended
12/31/96 1.17%(4) 12/31/96 0.63% 4.63% 12/31/96 3.65% 4.65%
Period
9 months 9 months 5/7/96(1)
ended ended through
12/31/96 2.14% 12/31/96 1.56% 5.56% 12/31/96 5.30% 6.30%
1 year 1 year
ended ended
12/31/96 0.25% 12/31/96 (0.59%) 3.37%
Period
3 years 3/3/94(1)
ended through
12/31/96 11.65% 12/31/96 11.51% 14.51%
Period
10/5/92(1)
through
12/31/96 29.92%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.12%.
57
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free New York Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (2.61%) 12/31/96 (3.04%) 0.94% 12/31/96 (0.05%) 0.95%
6 months 6 months 6 months
ended ended ended
12/31/96 (0.97%)(4) 12/31/96 (1.59%) 2.41% 12/31/96 1.42% 2.42%
9 months 9 months 9 months
ended ended ended
12/31/96 (0.37%) 12/31/96 (1.23%) 2.74% 12/31/96 1.75% 2.75%
1 year 1 year 1 year
ended ended ended
12/31/96 (1.40%) 12/31/96 (2.46%) 1.42% 12/31/96 0.46% 1.43%
Period Period
3 years 11/14/94(1) 4/26/95(1)
ended through through
12/31/96 6.45% 12/31/96 10.93% 13.93% 12/31/96 6.79% 6.79%
5 years
ended
12/31/96 29.75%
Period
11/6/87(1)
through
12/31/96 87.64%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 2.93%.
58
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free North Dakota Fund
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.61%)(3) 12/31/96 (1.88%)(3) 2.12%(3) 12/31/96 1.01% 2.01%
6 months 6 months 6 months
ended ended ended
12/31/96 0.79%(3)(4) 12/31/96 0.43%(3) 4.43%(3) 12/31/96 3.10% 4.10%
9 months 9 months 9 months
ended ended ended
12/31/96 1.46%(3) 12/31/96 1.08%(3) 5.08%(3) 12/31/96 3.74% 4.74%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.04%)(3) 12/31/96 (0.58%)(3) 3.38%(3) 12/31/96 1.82% 2.80%
Period Period
3 years 5/10/94(1) 7/29/95(1)
ended through through
12/31/96 11.37%(3) 12/31/961 8.27%(3) 21.27%(3) 12/31/96 9.46%(3) 9.46%(3)
5 years
ended
12/31/96 35.86%(3)
Period
4/1/91(1)
through
12/31/96 48.30%(3)
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 4.67%.
59
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Oregon Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.59%) 12/31/96 (1.90%) 2.10% 12/31/96 1.15% 2.15%
6 months 6 months 6 months
ended ended ended
12/31/96 1.45%(4) 12/31/96 1.06% 5.06% 12/31/96 3.94% 4.94%
9 months 9 months 9 months
ended ended ended
12/31/96 1.67% 12/31/96 1.24% 5.24% 12/31/96 4.12% 5.12%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.72%) 12/31/96 (1.33%) 2.60% 12/31/96 1.38% 2.36%
Period Period
3 years 3/12/94(1) 7/7/95(1)
ended through through
12/31/96 8.83% 12/31/96 10.94% 13.94% 12/31/96 8.87% 8.87%
Period
8/1/93(1)
through
12/31/96 13.23%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.36%.
60
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Utah Fund(3)
Class B Class B
Class A Shares Shares
Shares (including (excluding
(at offer) CDSC)(2) CDSC)
<S> <C> <C> <C> <C>
3 months 3 months
ended ended
12/31/96 (1.57%) 12/31/96 (2.01%) 1.99%
6 months 6 months
ended ended
12/31/96 0.71%(4) 12/31/96 0.09% 4.09%
9 months 9 months
ended ended
12/31/96 1.25% 12/31/96 0.54% 4.54%
1 year 1 year
ended ended
12/31/96 (0.54%) 12/31/96 (1.47%) 2.45%
Period
3 years 5/27/95(1)
ended through
12/31/96 10.88% 12/31/96 5.23% 9.23%
Period
10/5/92(1)
through
12/31/96 32.39%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 4.59%.
61
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Washington Insured Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.50%) 12/31/96 (1.83%) 2.18% 12/31/96 1.25% 2.25%
6 months 6 months 6 months
ended ended ended
12/31/96 1.34%(4) 12/31/96 0.99% 4.99% 12/31/96 3.92% 4.92%
9 months 9 months 9 months
ended ended ended
12/31/96 2.18% 12/31/96 1.55% 5.55% 12/31/96 4.42% 5.42%
1 year 1 year 1 year
ended ended ended
12/31/96 0.03% 12/31/96 (0.65%) 3.31% 12/31/96 2.11% 3.10%
Period Period
3 years 10/24/95(1) 4/21/95(1)
ended through through
12/31/96 10.97% 12/31/96 2.73% 6.73% 12/31/96 11.51% 11.51%
Period
8/1/93(1)
through
12/31/96 19.99%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 5.28%.
62
<PAGE>
Cumulative Total Return
<TABLE>
<CAPTION>
Tax-Free Wisconsin Fund(3)
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.26%) 12/31/96 (1.69%) 2.31% 12/31/96 1.28% 2.28%
6 months 6 months 6 months
ended ended ended
12/31/96 0.88%(4) 12/31/96 0.41% 4.41% 12/31/96 3.43% 4.43%
9 months 9 months 9 months
ended ended ended
12/31/96 1.37% 12/31/96 0.74% 4.74% 12/31/96 3.70% 4.70%
1 year 1 year 1 year
ended ended ended
12/31/96 (0.40%) 12/31/96 (1.11%) 2.83% 12/31/96 1.74% 2.72%
Period Period
3 years 4/22/95(1) 3/28/95(1)
ended through through
12/31/96 7.50% 12/31/96 6.12% 10.12% 12/31/96 11.02% 11.02%
Period
9/1/93(1)
through
12/31/96 9.72%
</TABLE>
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) Cumulative total return at nav for Class A Shares at December 31, 1996
was 4.85%.
Because every investor's goals and risk threshold are different, the
Distributor, as distributor for the Funds 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 Funds', and other Delaware Group funds',
investment disciplines employed in seeking their objectives. The Distributor may
also from time to time cite general or specific information about the
institutional clients of the Manager, including the number of such clients
serviced by the Manager.
Dollar-Cost Averaging
For many people, deciding when to invest can be a difficult decision.
Security prices tend to move up and down over various market cycles and logic
says to invest when prices are low. However, even experts can't always pick the
highs and the lows. By using a strategy known as dollar-cost averaging, you
schedule your investments ahead of time. If you invest a set amount on a regular
basis, that money will always buy more shares when the price is low and fewer
when the price is high. You can choose to invest at any regular interval--for
example, monthly or quarterly--as long as you stick to your regular schedule.
Dollar-cost averaging looks simple and it is,
63
<PAGE>
but there are important things to remember.
Dollar-cost averaging works best over longer time periods, and it doesn't
guarantee a profit or protect against losses in declining markets. If you need
to sell your investment when prices are low, you may not realize a profit no
matter what investment strategy you utilize. That's why dollar-cost averaging
can make sense for long-term goals. Since the potential success of a dollar-cost
averaging program depends on continuous investing, even through periods of
fluctuating prices, you should consider your dollar-cost averaging program a
long-term commitment and invest an amount you can afford and probably won't need
to withdraw. You also should consider your financial ability to continue to
purchase shares during periods of high fund share prices. Delaware Group offers
three services -- Automatic Investing Plan, Direct Deposit Purchase Plan and the
Wealth Builder Option -- that can help to keep your regular investment program
on track. See Investing by Electronic Fund Transfer Direct Deposit Purchase Plan
and Automatic Investing Plan under Investment Plans and Wealth Builder Option
under Investment Plans for a complete description of these services, including
restrictions or limitations.
The example below illustrates how dollar-cost averaging can work. In a
fluctuating market, the average cost per share over a period of time will be
lower than the average price per share for the same time period.
Number
Investment Price Per of Shares
Amount Share Purchased
Month 1 $100 $10.00 10
Month 2 $100 $12.50 8
Month 3 $100 $ 5.00 20
Month 4 $100 $10.00 10
--------------------------------------------------------------
$400 $37.50 48
Total Amount Invested: $400
Total Number of Shares Purchased: 48
Average Price Per Share: $9.38 ($37.50/4)
Average Cost Per Share: $8.33 ($400/48 shares)
This example is for illustration purposes only. It is not intended to
represent the actual performance of the Funds.
64
<PAGE>
The Power of Compounding
When you opt to reinvest your current income for additional Fund
shares, your investment is given yet another opportunity to grow. It's called
the Power of Compounding 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>
1 Year $10,407 $10,617 $10,830
2 Years $10,831 $11,272 $11,729
3 Years $11,273 $11,967 $12,702
4 Years $11,732 $12,705 $13,757
5 Years $12,210 $13,488 $14,898
6 Years $12,707 $14,320 $16,135
7 Years $13,225 $15,203 $17,474
8 Years $13,764 $16,141 $18,924
9 Years $14,325 $17,137 $20,495
10 Years $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.
65
<PAGE>
TRADING PRACTICES AND BROKERAGE
Banks, brokers or dealers are selected to execute transactions on
behalf of a Fund 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 Fund 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 Fund pays a minimal share transaction
cost when the transaction presents no difficulty.
During the fiscal years ended December 31, 1994, 1995 and 1996, no
brokerage commissions were paid by the Funds.
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 December 31, 1996, there were no portfolio
transactions of any 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 Fund, higher commissions are permitted to be paid
to broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, the Funds believe that the
commissions paid to such broker/dealers are not, in general, higher than
commissions that would be paid to broker/dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In some instances, services may be provided to
the Manager 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 Funds and to other funds in the Delaware
Group. Subject to best price and execution, commissions allocated to brokers
providing such pricing services may or may not be generated by the funds
receiving the pricing service.
The Manager 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
66
<PAGE>
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 Funds may place orders with broker/dealers that have agreed to
defray certain expenses of the funds in the Delaware Group of funds such as
custodian fees, and may, at the request of the Distributor, give consideration
to sales of such funds' shares as a factor in the selection of brokers and
dealers to execute Fund portfolio transactions.
Portfolio Turnover
Each Fund anticipates that its portfolio turnover rate will generally
be less than 100%. However, a Fund will not attempt to achieve or be limited to
a predetermined rate of portfolio turnover for a Fund, such a turnover always
being incidental to transactions undertaken with a view to achieving each Fund's
investment objective in relation to anticipated movements in the general level
of interest rates. In investing for liberal current income, a Fund 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 Fund shares.
The portfolio turnover rate of each Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by the monthly average of the value of the portfolio securities owned by
the Fund during the particular fiscal year, exclusive of securities whose
maturities at the time of acquisition are one year or less.
The portfolio turnover rates for each Fund for the past two fiscal
years were as follows:
Fund 1995 1996
Tax-Free Arizona Insured Fund 42.96% 42.76%
Tax-Free Arizona Fund 38.05(1) 70.14
Tax-Free California Insured Fund 107.45 54.52
Tax-Free California Fund 39.51(1) 7.87
Tax-Free Colorado Fund 82.83 40.35
Tax-Free Florida Intermediate Fund 27.76 63.06
Tax-Free Florida Insured Fund 101.48 57.18
Tax-Free Florida Fund 63.52(1) 70.17
Tax-Free Idaho Fund 41.97(1) 34.68
Tax-Free Iowa Fund 21.67 14.56
Tax-Free Kansas Fund 19.71 56.77
Tax-Free Minnesota Intermediate Fund 40.28 28.18
Minnesota Insured Fund 53.72 14.04
Tax-Free Minnesota Fund 50.84 27.67
Tax-Free Missouri Insured Fund 31.69 28.26
Tax-Free New Mexico Fund 55.72 42.12
Tax-Free New York Fund 10.00(2) 5.00(3)
Tax-Free North Dakota Fund 45.34 57.50
Tax-Free Oregon Insured Fund 41.08 39.54
Tax-Free Utah Fund 35.28 39.58
Tax-Free Washington Insured Fund 50.54 33.30
Tax-Free Wisconsin Fund 38.54 12.10
- -----
(1) Annualized.
(2) For the year October 1, 1994 through September 30, 1995.
(3) For the period October 1, 1996 through December 31, 1996. For the period
October 1, 1995 through September 30, 1996, the portfolio turnover rate was
12.00%.
67
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for each Fund's
shares and has agreed to use its best efforts to sell shares of each Fund. See
the Prospectus for additional information on how to invest. Shares of each Fund
are offered on a continuous basis and may be purchased through authorized
investment dealers or directly by contacting a Fund or the Distributor.
The minimum initial investment generally is $1,000 for each Class of
each Fund. Subsequent purchases generally must be at least $100. The initial and
subsequent minimum investments for Class A Shares will be waived for purchases
by officers, directors and employees of any Delaware Group fund, the Manager or
any of the Manager's affiliates if the purchases are made pursuant to a payroll
deduction program. Shares purchased pursuant to the Uniform Gifts to Minors Act
or Uniform Transfers to Minors Act and shares purchased in connection with an
Automatic Investing Plan are subject to a minimum initial purchase of $250 and a
minimum subsequent purchase of $25. Accounts opened under the Delaware Group
Asset Planner service are subject to a minimum initial investment of $2,000 per
Asset Planner Strategy selected.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. A Fund will reject any purchase order 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. 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, and
that Class A Shares are subject to lower annual 12b-1 Plan expenses than Class B
Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers have the responsibility of transmitting orders
promptly. The Fund reserves the right to reject any order for the purchase of
its shares if in the opinion of management such rejection is in such Fund's 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 Tax-Free Funds and Insured Funds are purchased at the
offering price which reflects a maximum front-end sales charge of 3.75%. Class A
Shares of Tax-Free Intermediate Funds are also purchased at the offering price
which reflects a maximum front-end sales charge of 2.75%. Lower sales charges
apply for larger purchases. See the tables 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 Tax-Free Funds and Insured Funds 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. Shares of such Funds 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 Tax-Free Intermediate Funds 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. Shares of such Funds 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.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus.
Class C Shares of each Fund are purchased at net asset value and are
subject to a CDSC of 1% if shares are redeemed within 12 months following
purchase. Class C Shares are also subject to annual 12b-1 Plan expenses for the
life of the investment which are equal to those to which Class B Shares are
subject.
See Determining Offering Price and Net Asset Value and Plans Under Rule
12b-1 in this Part B.
68
<PAGE>
Certificates representing shares purchased are not ordinarily issued
unless, in the case of Class A Shares or Institutional Class shares, a
shareholder submits a specific request. Certificates are not issued in the case
of Class B Shares or Class C Shares. However, purchases not involving the
issuance of certificates are confirmed to the investor and credited to the
shareholder's account on the books maintained by Delaware Service Company, Inc.
(the "Transfer Agent"). The investor will have the same rights of ownership with
respect to such shares as if certificates had been issued. An investor that is
permitted to obtain a certificate may receive a certificate representing full
share denominations purchased by sending a letter signed by each owner of the
account to the Transfer Agent requesting the certificate. No charge is assessed
by the Funds for any certificate issued. A shareholder may be subject to fees
for replacement of a lost or stolen certificate under certain conditions,
including the cost of obtaining a bond covering the lost or stolen certificate.
Please contact the Funds for further information. Investors who hold
certificates representing any of their shares may only redeem those shares by
written request. The investor's certificate(s) must accompany such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class C
Shares permit investors to choose the method of purchasing shares that is most
suitable for their needs given the amount of their purchase, the length of time
they expect to hold their shares and other relevant circumstances. Investors
should determine whether, given their particular circumstances, it is more
advantageous to purchase Class A Shares and incur a front-end sales charge and
annual 12b-1 Plan expenses of up to a maximum of 0.25% 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 a Fund with the
investment thereafter subject to a CDSC and annual 12b-1 expenses. Class B
Shares of Tax-Free Funds and Insured Funds are subject to a CDSC if the shares
are redeemed within six years of purchase. Class B Shares of Tax-Free
Intermediate Funds are subject to a CDSC if the shares are redeemed within three
years of purchase. Class C Shares of each Fund are subject to a CDSC if the
shares are redeemed within 12 months of purchase. Class B and Class C Shares are
each subject to annual 12b-1 Plan expenses of 1% (0.25% of which are service
fees to be paid to the Distributor, dealers and others, for providing personal
service and/or maintaining shareholder accounts) of average daily net assets of
the respective Class. Shares of USA B Class and Insured B Class will
automatically convert to Class A Shares of the respective Fund at the end of
approximately eight years after purchase and shares of Intermediate B Class will
automatically convert to the Class A Shares of this Fund 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 0.25% 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.
69
<PAGE>
<TABLE>
<CAPTION>
Tax-Free Funds and Insured Funds+
- -------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as % of as % of
Amount of Purchase Offering Offering
Price Amount Invested Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.75% 0.00%** 3.25%
$100,000 but less than $250,000 3.00 0.00** 2.50
$250,000 but less than $500,000 2.50 0.00** 2.00
$500,000 but less than $1,000,000* 2.00 0.00** 1.75
- -------------------------------------------------------------------------------------------------------------------
Intermediate Funds++
- -------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as % of as % of
Amount of Purchase Offering Offering
Price Amount Invested Price
- -------------------------------------------------------------------------------------------------------------------
Less than $100,000 2.75% 0.00%** 2.35%
$100,000 but less than $250,000 2.00 0.00** 1.75
$250,000 but less than $500,000 1.00 0.00** 0.75
$500,000 but less than $1,000,000* 1.00 0.00** 0.75
- -------------------------------------------------------------------------------------------------------------------
</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% limited
contingent deferred sales charge may apply upon redemption of such
shares.
** The front-end sales charge as a percentage of the amount invested is
based on the net asset value per share of the respective Class A shares
as of the end of the most recent fiscal year. Those amounts are as
follows:
<TABLE>
<CAPTION>
Offering Price Offering Price
3.75% 3.00% 2.50% 2.00% 2.75% 2.00% 1.00%
--------------------------------- ---------------------
Amount Invested Amount Invested
--------------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona 3.93% 3.08% 2.52% 2.06% Tax-Free Arizona Intermediate 2.80% 2.00% 1.00%
Tax-Free Arizona Insured 3.89 3.07 2.53 2.08 Tax-Free California Intermediate 2.80 2.00 1.00
Tax-Free California 3.93 3.07 2.59 2.01 Tax-Free Colorado Intermediate 2.80 2.00 1.00
Tax-Free California Insured 3.90 3.05 2.57 2.00 Tax-Free Florida Intermediate 2.78 2.01 1.05
Tax-Free Colorado 3.90 3.06 2.60 2.04 Tax-Free Minnesota Intermediate 2.82 2.00 1.00
Tax-Free Colorado Insured 3.90 3.10 2.60 2.00
Tax-Free Florida 3.90 3.14 2.57 2.00
Tax-Free Florida Insured 3.92 3.08 2.52 2.05
Tax-Free Idaho 3.94 3.12 2.57 2.02
Tax-Free Iowa 3.85 3.12 2.60 2.08
Tax-Free Kansas 3.88 3.13 2.56 2.08
Tax-Free Minnesota 3.87 3.06 2.58 2.02
Minnesota Insured 3.87 3.02 2.55 2.08
Tax-Free Missouri Insured 3.86 3.09 2.60 2.03
Tax-Free New Mexico 3.89 3.06 2.59 2.04
Tax-Free New York Fund 3.93 3.09 2.53 2.06
Tax-Free North Dakota 3.86 3.13 2.57 2.02
Tax-Free Oregon Insured 3.85 3.14 2.53 2.03
Tax-Free Washington Insured 3.88 3.11 2.52 2.04
Tax-Free Wisconsin 3.94 3.11 2.59 2.07
Tax-Free Utah 3.87 3.14 2.58 2.03
</TABLE>
- --------------------------------------------------------------------------------
*** Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
+ Tax-Free Funds and Insured Funds: Tax-Free Arizona, Tax-Free Arizona
Insured, Tax-Free California, Tax-Free California Insured, Tax-Free
Colorado, Colorado Insured Tax-Free Florida, Tax-Free Florida
70
<PAGE>
Insured, Free, Tax-Free Idaho, Tax-Free Iowa, Tax-Free Kansas, Tax-Free
Minnesota, Minnesota Insured, Tax-Free Missouri Insured, Tax-Free New
Mexico, Tax-Free New York Fund, Tax-Free North Dakota, Tax-Free Oregon
Insured, Tax-Free Washington Insured, Tax-Free Wisconsin and Tax-Free Utah.
++ Tax-Free Intermediate Funds: Tax-Free Arizona Intermediate, Tax-Free
California Intermediate, Tax-Free Colorado Intermediate, Tax-Free Florida
Intermediate and Tax-Free Minnesota Intermediate.
- --------------------------------------------------------------------------------
A Fund must be notified when a sale takes place which would qualify for the
reduced front-end sales charge on the basis of previous or current
purchases. The reduced front-end sales charge will be granted upon
confirmation of the shareholder's holdings by such Fund. Such reduced
front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during which
the Distributor may reallow to dealers up to the full amount of the
front-end sales charge shown above. In addition, certain dealers who enter
into an agreement to provide extra training and information on Delaware
Group products and services and who increase sales of Delaware Group funds
may receive an additional commission of up to 0.15% of the offering price.
Dealers who receive 90% or more of the sales charge may be deemed to be
underwriters under the 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 commission of up to 0.15% 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 commission will be paid. Participating
dealers may be deemed to have additional responsibilities under the securities
laws.
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are effected in accordance with the following schedules:
Tax-Free Funds and Insured Funds
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
Tax-Free Intermediate Funds
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 0.50%
Next $1 million up to $3 million 0.50
Next $2 million up to $5 million 0.40
Amount over $5 million 0.20
71
<PAGE>
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 Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Prospectus) applies may be aggregated with those of Class A
Shares of a Fund. Financial advisers also may be eligible for a dealer's
commission in connection with certain purchases made under a Letter of Intention
or pursuant to an investor's Right of Accumulation. Financial advisers should
contact the Distributor concerning the applicability and calculation of the
dealer's commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B and Class C Shares are purchased without 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 12 months of purchase may be subject
to a CDSC of 1%. CDSCs are charged as a percentage of the dollar amount subject
to the CDSC. The charge will be assessed on an amount equal to the lesser of the
net asset value at the time of purchase of shares being redeemed or the net
asset value of those shares at the time of redemption. No CDSC will be imposed
on increases in net asset value above the initial purchase price, nor will a
CDSC be assessed on redemption of shares acquired through the reinvestment of
dividends or capital gains distributions. See Waiver of Contingent Deferred
Sales Charge - Class B and Class C Shares under Redemption and Exchange in the
Prospectus for a list of the instances in which the CDSC is waived.
The following table sets forth the rates of the CDSC for the Class B
Shares of Tax-Free Funds and Insured Funds:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
- ------------------------ ------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Funds and Insured
Funds will still be subject to the annual 12b-1 Plan expenses of up to 1% of
average daily net assets of those shares. See Automatic Conversion of Class B
Shares, above. Investors are reminded that the Class A Shares into which the
Class B Shares will convert are subject to ongoing annual 12b-1 Plan expenses
of up to a maximum of 0.25% of average daily net assets of such shares.
The following table sets forth the rates of the CDSC for the Class B
Shares of Tax-Free Intermediate Funds:
72
<PAGE>
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
- ------------------------ ------------------
0-2 2%
3 1%
4 and thereafter None
During the fourth year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares of Tax-Free Intermediate Funds
will still be subject to the annual 12b-1 Plan expenses of up to 1% of average
daily net assets of those shares. See Automatic Conversion of Class B Shares
above. Investors are reminded that the Class A Shares into which the Class B
Shares will convert are subject to ongoing annual 12b-1 Plan expenses of up to a
maximum of 0.25% of average daily net assets representing such shares.
Plans Under Rule 12b-1
Pursuant to Rule 12b-1 under the 1940 Act, each of the Class A Shares,
Class B Shares and Class C Shares of the Funds have a separate distribution plan
under Rule 12b-1 (the "Plans"). Each Plan permits the relevant Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the Class to which the Plan applies.
The Plans permit a Fund, pursuant to its Distribution Agreement, 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 Distributor for advancing the commission costs to dealers with respect
to the initial sale of such shares.
In addition, each Fund may make payments out of the assets of 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 a Fund under its Plans, and each
Fund's Distribution Agreement, is on an annual basis, up to 0.25% of average
daily net assets of the Class A Shares, and up to 1% (0.25% of which are service
fees to be paid to the Distributor, dealers or others for providing personal
service and/or maintaining shareholder accounts) of each of the Class B Shares'
and Class C Shares' average daily net assets for the year. Each Fund's Board of
Directors or Trustees 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.
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, a
Fund may, from time to time, buy or sell portfolio securities from or to firms
which receive payments under the Plans.
From time to time, the Distributor may pay additional amounts from its
own resources to dealers for aid in distribution or for aid in providing
administrative services to shareholders.
The Plans and the Distribution Agreements, as amended, have been
approved by the Board of Directors or Trustees of the Funds, including a
majority of the directors who are not "interested persons" (as defined in the
1940 Act) and who have no direct or indirect financial interest in the Plans, by
vote cast in person at a meeting duly
73
<PAGE>
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 or Trustees in the same manner as specified
above.
Each year, the directors or trustees must determine whether
continuation of the Plans is in the best interest of shareholders of,
respectively, Class A Shares, Class B Shares and Class C Shares of each Fund and
that there is a reasonable likelihood of the Plan relating to a 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 or trustees 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 or trustees
who are not "interested persons." With respect to each Class A Shares' Plan, any
material increase in the maximum percentage payable thereunder must also be
approved by a majority of the outstanding voting securities of 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 Funds 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 Funds 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 years (or portions thereof, as indicated) ended December
31, 1996, 1995, and 1994, Rule 12b-1 fees and the amount waived, if any, for
each Fund are set forth below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund
Class A $551,781 $290,833 $608,790 $582,768 $648,615 $493,491
Class B 25,838 $2,956 7,062 1,807 N/A N/A
Class C 5,529 0 4,263 561 1,609 333
Tax-Free Arizona Fund
Class A 21,058 0 6,184 0 N/A N/A
Class B 26,502 2,854 3,765 975 N/A N/A
Class C 240 0 121 0 N/A N/A
Tax-Free California Insured Fund
12/31/95 - Class A 79,903 0 80,709 23,803 11,176 8,495
12/31/95 - Class B 63,807 22,641 44,275 17,904 2,774 1,260
12/31/95 - Class C 799 0 1,792 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 54,720 44,074
10/31/94 - Class B N/A N/A N/A N/A 4,534 1,869
10/31/94 - Class C N/A N/A N/A N/A N/A N/A
Tax-Free California Fund
Class A 2,820 0 2,145 0 N/A N/A
Class B 3,054 811 390 177 N/A N/A
Class C 418 0 N/A N/A N/A N/A
Tax-Free Colorado Fund
Class A 922,540 499,145 969,424 642,447 265,096 265,096
Class B 26,004 1,726 5,460 1,113 N/A N/A
Class C 14,080 0 7.874 0 2,161 14
Tax-Free Florida Intermediate Fund
Class A 5,390 4,315 1,536 1,389 602 602
Class B 6,567 1,102 120 30 N/A N/A
Class C 539 0 402 0 N/A N/A
Tax-Free Florida Insured Fund
12/31/95 - Class A 529,135 469,011 611,873 595,950 101,760 101,760
12/31/95 - Class B 30,245 14,311 22,840 13,701 2,101 1,265
10/31/94 - Class A N/A N/A N/A N/A 739,775 739,775
10/31/94 - Class B N/A N/A N/A N/A 4,452 1,761
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Florida Fund
Class A 12,611 0 5,427 0 N/A N/A
Class B 9,331 3,755 195 99 N/A N/A
Class C 98 0 48 0 N/A N/A
Tax-Free Idaho Fund
Class A 54,123 0 16,620 3,224 N/A N/A
Class B 37,996 9,559 6,034 1,549 N/A N/A
Class C 8,416 0 4,499 93 N/A N/A
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Iowa Fund
12/31/95 - Class A 103,980 55,582 95,497 86,503 28,296 28,296
12/31/95 - Class B 12,291 2,296 2,753 704 N/A N/A
12/31/95 - Class C 6,075 301 2,373 0 N/A N/A
8/31/94 - Class A N/A N/A N/A N/A 63,681 63,681
Tax-Free Kansas Fund
12/31/95 - Class A 25,773 13,777 23,138 19,960 2,775 2,775
12/31/95 - Class B 16,667 2,342 2,445 601 N/A N/A
12/31/95 - Class C 580 0 136 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 11,078 11,078
Tax-Free Minnesota Intermediate Fund
12/31/95 - Class A 172,919 0 185,286 0 171,101 0
12/31/95 - Class B 2,048 124 83 21 N/A N/A
12/31/95 - Class C 8,875 0 5,099 0 1,385 0
2/28/94 - Class A N/A N/A N/A N/A 31,163 0
2/28/94 - Class C N/A N/A N/A N/A N/A N/A
Minnesota Insured Fund
Class A 736,300 0 759,866 126,114 778,913 119,759
Class B 58,570 6,996 19,425 5,515 N/A N/A
Class C 32,890 0 25,345 453 6,399 0
Tax-Free Minnesota Fund
Class A 1,093,043 0 1,108,235 0 1,118,958 0
Class B 45,609 8,024 8,871 2,274 N/A N/A
Class C 27,693 0 17,906 0 4,020 0
Tax-Free Missouri Insured Fund
12/31/95 - Class A 123,099 75,641 113,879 103,135 15,539 15,539
12/31/95 - Class B 86,717 28,315 44,885 22,490 3,190 1,609
12/31/95 - Class C 1,388 0 28 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 85,866 85,866
10/31/94 - Class B N/A N/A N/A N/A 4,486 2,119
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ----------------- ----------------
12b-1 Amount 12b-1 Amount 12b-1 Amount
Fee Waived Fee Waived Fee Waived
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free New Mexico Fund
12/31/95 - Class A 51,934 39,932 52,868 48,466 8,619 8,619
12/31/95 - Class B 6,452 1,358 5,003 1,508 446 134
12/31/95 - Class C 1,358 118 N/A N/A N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 54,411 54,411
10/31/94 - Class B N/A N/A N/A N/A 1,441 310
Tax-Free New York Fund
Class A 3,240 0 176 0 90 0
Class B 861 0 3,057 0 1,544 0
Class C 133 0 518 0 260 0
Tax-Free North Dakota Fund
Class A 86,154 69,695 88,956 85,447 90,095 90,095
Class B 5,623 2,656 2,317 1,161 622 310
Class C 167 0 168 0 N/A N/A
Tax-Free Oregon Insured Fund
12/31/95 - Class A 52,403 21,733 46,075 39,592 5,914 5,914
12/31/95 - Class B 37,462 11,847 21,913 9,883 2,045 923
12/31/95 - Class C 2,501 0 708 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 23,890 23,890
10/31/94 - Class B N/A N/A N/A N/A 3,762 1,507
Tax-Free Utah Fund
12/31/95 - Class A 10,009 8,808 10,086 9,556 1,590 1,590
12/31/95 - Class B 3,821 749 1,209 305 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 10,190 10,190
Tax-Free Washington Insured Fund
12/31/95 - Class A 5,596 4,029 5,154 4,717 710 710
12/31/95 - Class B 2,775 472 29 8 N/A N/A
12/31/95 - Class C 188 0 123 0 N/A N/A
10/31/94 - Class A N/A N/A N/A N/A 3,782 3,782
Tax-Free Wisconsin Fund
12/31/95 - Class A 67,339 20,178 60,960 50,749 15,845 14,603
12/31/95 - Class B 9,369 1,519 3,151 803 N/A N/A
12/31/95 - Class C 3,603 153 308 0 N/A N/A
8/31/94 - Class A N/A N/A N/A N/A 23,230 23,230
</TABLE>
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 Funds intend to amend the Plans, if
necessary, to comply with any new rules or regulations the SEC may adopt with
respect to Rule 12b-1.
77
<PAGE>
Other Payments to Dealers - Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all registered
broker/dealers whose aggregate sales of the Classes exceed certain limits as set
by the Distributor, may receive from the Distributor an additional payment of up
to 0.25% of the dollar amount of such sales. The Distributor may also provide
additional promotional incentives or payments to dealers that sell shares of the
Delaware Group of funds. In some instances, these incentives or payments may be
offered only to certain dealers who maintain, have sold or may sell certain
amounts of shares. The Distributor may also pay a portion of the expense of
preapproved dealer advertisements promoting the sale of Delaware Group fund
shares.
Special Purchase Features - Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be reinvested without a front-end sales charge under
the Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege.
Current and former officers, directors or trustees and employees of
each 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. Family members
(regardless of age) of such persons at their direction, and any employee benefit
plan established by any of the foregoing funds, corporations, counsel or
broker/dealers may also purchase shares at net asset value. Class A Shares may
also be purchased at net asset value by current and former officers, directors
and employees (and members of their families) of the Dougherty Financial Group
LLC.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value 12 months
of a change of the registered representative's employment, if the purchase is
funded by proceeds from an investment where a front-end sales charge, contingent
deferred sales charge or other sales charge has been assessed. Purchases of
Class A Shares may also be made at net asset value by bank employees who provide
services in connection with agreements between the bank and unaffiliated brokers
or dealers concerning sales of shares of the Delaware Group funds. Officers,
directors and key employees of institutional clients of the Manager or any of
its affiliates may purchase Class A Shares at net asset value. Moreover,
purchases may be effected at net asset value for the benefit of the clients of
brokers, dealers and registered investment advisers affiliated with a broker or
dealer, if such broker, dealer or investment adviser has entered into an
agreement with the Distributor providing specifically for the purchase of Class
A Shares in connection with special investment products, such as wrap accounts
or similar fee based programs. 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 Funds may reasonably require to establish
eligibility for purchase at net asset value.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group at net asset value.
Each 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 Funds, which provides
for the holding in escrow by the Transfer Agent, of 5% of the total amount of
Class A Shares intended to be purchased until such purchase is completed within
the 13-month period. A Letter of Intention may be dated to include shares
purchased up to 90 days prior to the date the Letter is signed. The 13-month
period begins on the date of the earliest purchase. If the intended investment
is not completed, except as noted below, the purchaser will be asked to pay an
amount equal to the difference between the front-end sales charge on Class A
Shares purchased at the reduced rate and the front-end sales charge otherwise
78
<PAGE>
applicable to the total shares purchased. If such payment is not made within 20
days following the expiration of the 13-month period, the Transfer Agent will
surrender an appropriate number of the escrowed shares for redemption in order
to realize the difference. Such purchasers may include the value (at offering
price at the level designated in their Letter of Intention) of all their shares
of the Funds and of any class of any of the other mutual funds in the Delaware
Group (except shares of any Delaware Group fund which do not carry a front-end
sales charge, CDSC or Limited CDSC, other than shares of Delaware Group Premium
Fund, Inc. beneficially owned in connection with the ownership of variable
insurance products, unless they were acquired through an exchange from a
Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC) previously purchased and still held as of the date of their Letter of
Intention toward the completion of such Letter.
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 Funds, 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 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). Using the Tax-Free Funds as an example, if any such purchaser has
previously purchased and still holds shares of Class A Shares of those Funds
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 a Tax-Free Fund, the charge applicable to the $60,000
purchase would be 3.00%. For the purpose of this calculation, the shares
presently held shall be valued at the public offering price that would have been
in effect were the shares purchased simultaneously with the current purchase.
Investors should refer to the table of sales charges for Class A Shares to
determine the applicability of the Right of Accumulation to their particular
circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of a Fund who redeem such shares have one
year from the date of redemption to reinvest all or part of their redemption
proceeds in Class A Shares of that Fund or in Class A Shares of any of the other
funds in the Delaware Group, subject to applicable eligibility and minimum
purchase requirements, in states where shares of such other funds may be sold,
at net asset value without the payment of a front-end sales charge. This
privilege does not extend to Class A Shares where the redemption of the shares
triggered the payment of a Limited CDSC. Persons investing redemption proceeds
from direct investments in mutual funds in the Delaware Group offered without a
front-end sales charge, will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account, will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor
79
<PAGE>
should obtain and read carefully the prospectus for the fund in which the
investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
Investors should consult their financial advisers or the Transfer
Agent, which also serves as the Funds' shareholder servicing agent, about the
applicability of the Limited CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus) in connection with the features
described above.
80
<PAGE>
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 Fund 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 quarterly. A confirmation
of each distribution from realized securities profits, if any, will be mailed to
shareholders in the first quarter of the fiscal year.
Under the Reinvestment Plan/Open Account, shareholders may purchase and
add full and fractional shares to their plan accounts at any time either through
their investment dealers or by sending a check or money order to the specific
Fund and Class in which shares are being purchased. Such purchases, which must
meet the minimum subsequent purchase requirements set forth in the 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 a Fund in any of the other mutual funds in the Delaware Group, including
the Funds, 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 intended to be made before investing or
sending money. The prospectus contains more complete information about the fund,
including charges and expenses. See also Additional Methods of Adding to Your
Investment - Dividend Reinvestment Plan under How to Buy Shares in the
Prospectus.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the Funds 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. Dividends from
Class B Shares may only be directed to other Class B Shares, and dividends from
Class C Shares may only be directed to other Class C Shares. See Appendix C -
Classes Offered in the Prospectus for the funds in the Delaware Group that are
eligible for investment by holders of Fund shares.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan--Investors may arrange for the Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan--Shareholders of Class A, Class B and Class C
Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date, although no check is required to initiate the transaction. (2)
If the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
81
<PAGE>
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
of either service must complete an authorization form. Either service can be
discontinued by the shareholder at any time without penalty by giving written
notice.
Payments to a Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
a Fund may liquidate sufficient shares from a shareholder's account to reimburse
the government or the private source. In the event there are insufficient shares
in the shareholder's account, the shareholder is expected to reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. A Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll allotments, by
mail directly from the third party. Investors should contact their employers or
financial institutions who in turn should contact the Funds for proper
instructions.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in a Class
through regular liquidations of shares in their accounts in other mutual funds
in the Delaware Group. Shareholders of each Class may also elect to invest in
one or more of the other mutual funds in the Delaware Group through our Wealth
Builder Option. See Wealth Builder Option and Redemption and Exchange in the
Prospectus.
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 Prospectus.
The investment will be made on the 20th day of each month (or, if the fund
selected is not open that day, the next business day) at the public offering
price or net asset value, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges. Shareholders can terminate their participation at any time by written
notice to their Fund.
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<PAGE>
DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund or its agent. Orders for purchases of Class B
Shares and Class C Shares of each Fund are effected at the net asset value per
share next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund 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.
The portfolio securities in which each Fund invests fluctuate
in value, and therefore, the net asset value per share of each Fund also
fluctuates. As of December 31, 1996, the net asset value per share of each Fund
which had commenced investment operations was calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Tax-Free Arizona Insured Fund
Class A Net Assets ($209,258,103) = Net Asset Value Per Share ($11.06)
------------------------------------ Shares Outstanding (18,923,862)
Class B Net Assets ($3,110,071) = Net Asset Value Per Share ($11.05)
------------------------------------ Shares Outstanding (281,457)
Class C Net Assets ($554,189) = Net Asset Value Per Share ($11.06)
------------------------------------ Shares Outstanding (50,124)
Tax-Free Arizona Fund
Class A Net Assets ($9,755,083) = Net Asset Value Per Share ($10.70)
------------------------------------ Shares Outstanding (911,692)
Class B Net Assets ($3,490,651) = Net Asset Value Per Share ($10.69)
------------------------------------ Shares Outstanding (326,539)
Class C Net Assets ($22,697) = Net Asset Value Per Share ($10.71)
------------------------------------ Shares Outstanding (2,120)
Tax-Free California Insured Fund
Class A Net Assets ($30,551,302) = Net Asset Value Per Share ($10.50)
------------------------------------ Shares Outstanding (2,909,650)
Class B Net Assets ($6,717,106) = Net Asset Value Per Share ($10.50)
------------------------------------ Shares Outstanding (639,694)
Class C Net Assets ($54,786) = Net Asset Value Per Share ($10.46)
-------------------------------------- Shares Outstanding (5,239)
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Tax-Free California Fund
Class A Net Assets ($1,218,159) = Net Asset Value Per Share ($10.43)
------------------------------------ Shares Outstanding (116,808)
Class B Net Assets ($660,468) = Net Asset Value Per Share ($10.44)
------------------------------------ Shares Outstanding (63,260)
Class C Net Assets ($93,850) = Net Asset Value Per Share ($10.42)
------------------------------------ Shares Outstanding (9,003)
Tax-Free Colorado Fund
Class A Net Assets ($358,328,150) = Net Asset Value Per Share ($10.78)
------------------------------------ Shares Outstanding (33,238,520)
Class B Net Assets ($4,172,133) = Net Asset Value Per Share ($10.78)
------------------------------------ Shares Outstanding (387,138)
Class C Net Assets ($1,522,353) = Net Asset Value Per Share ($10.78)
------------------------------------ Shares Outstanding (141,218)
Tax-Free Florida Insured Fund
Class A Net Assets ($192,170,842) = Net Asset Value Per Share ($10.71)
------------------------------------ Shares Outstanding (17,937,779)
Class B Net Assets ($3,222,081) = Net Asset Value Per Share ($10.71)
------------------------------------ Shares Outstanding (300,908)
Tax-Free Florida Intermediate Fund
Class A Net Assets ($3,158,899) = Net Asset Value Per Share ($10.43)
------------------------------------ Shares Outstanding (302,985)
Class B Net Assets ($1,042,061) = Net Asset Value Per Share ($10.42)
------------------------------------ Shares Outstanding (99,966)
Class C Net Assets ($54,283) = Net Asset Value Per Share ($10.42)
------------------------------------ Shares Outstanding (5,209)
Tax-Free Florida Fund
Class A Net Assets ($5,761,111) = Net Asset Value Per Share ($10.52)
------------------------------------ Shares Outstanding (547,447)
Class B Net Assets ($1,634,750) = Net Asset Value Per Share ($10.53)
------------------------------------ Shares Outstanding (155,265)
Class C Net Assets ($15,563) = Net Asset Value Per Share ($10.52)
------------------------------------ Shares Outstanding (1,479)
Tax-Free Idaho Fund
Class A Net Assets ($27,683,985) = Net Asset Value Per Share ($10.91)
------------------------------------ Shares Outstanding (2,538,218)
Class B Net Assets ($4,945,246) = Net Asset Value Per Share ($10.89)
------------------------------------ Shares Outstanding (453,932)
Class C Net Assets ($821,981) = Net Asset Value Per Share ($10.90)
------------------------------------ Shares Outstanding (75,392)
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Tax-Free Iowa Fund
Class A Net Assets ($40,037,169) = Net Asset Value Per Share ($9.62)
------------------------------------ Shares Outstanding (4,163,834)
Class B Net Assets ($1,645,131) = Net Asset Value Per Share ($9.61)
----------------------------------- Shares Outstanding (171,173)
Class C Net Assets ($670,289) = Net Asset Value Per Share ($9.61)
------------------------------------ Shares Outstanding (69,744)
Tax-Free Kansas Fund
Class A Net Assets ($10,176,166) = Net Asset Value Per Share ($10.56)
------------------------------------ Shares Outstanding (964,027)
Class B Net Assets ($2,401,734 ) = Net Asset Value Per Share ($10.57)
------------------------------------ Shares Outstanding (227,305)
Class C Net Assets ($90,350) = Net Asset Value Per Share ($10.55)
------------------------------------ Shares Outstanding (8,565)
Minnesota Insured Fund
Class A Net Assets ($304,876,891) = Net Asset Value Per Share ($10.60)
------------------------------------ Shares Outstanding (28,772,685)
Class B Net Assets ($6,817,309) = Net Asset Value Per Share ($10.58)
------------------------------------ Shares Outstanding (644,114)
Class C Net Assets ($3,126,091) = Net Asset Value Per Share ($10.60)
------------------------------------ Shares Outstanding (295,018)
Tax-Free Minnesota Intermediate Fund
Class A Net Assets ($66,024,295) = Net Asset Value Per Share ($10.99)
------------------------------------ Shares Outstanding (6,010,087)
Class B Net Assets ($408,320) = Net Asset Value Per Share ($10.99)
------------------------------------ Shares Outstanding (37,154)
Class C Net Assets ($1,137,276) = Net Asset Value Per Share ($10.99)
------------------------------------ Shares Outstanding (103,528)
Tax-Free Minnesota Fund
Class A Net Assets ($428,379,970) = Net Asset Value Per Share ($12.40)
------------------------------------ Shares Outstanding (34,538,091)
Class B Net Assets ($6,233,411) = Net Asset Value Per Share ($12.40)
------------------------------------ Shares Outstanding (502,673)
Class C Net Assets ($3,082,795) = Net Asset Value Per Share ($12.41)
------------------------------------ Shares Outstanding (248,473)
Tax-Free Missouri Insured Fund
Class A Net Assets ($49,301,215) = Net Asset Value Per Share ($10.37)
------------------------------------ Shares Outstanding (4,754,081)
Class B Net Assets ($10,432,486) = Net Asset Value Per Share ($10.37)
------------------------------------ Shares Outstanding (1,006,301)
Class C Net Assets ($151,771) = Net Asset Value Per Share ($10.37)
------------------------------------ Shares Outstanding (14,630)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Tax-Free New Mexico Fund
Class A Net Assets ($20,133,196) = Net Asset Value Per Share ($10.79)
------------------------------------ Shares Outstanding (1,865,440)
Class B Net Assets ($794,330) = Net Asset Value Per Share ($10.79)
------------------------------------ Shares Outstanding (73,584)
Class C Net Assets ($341,228) = Net Asset Value Per Share ($10.79)
------------------------------------ Shares Outstanding (31,619)
Tax-Free New York Fund
Class A Net Assets ($10,044,178) = Net Asset Value Per Share ($10.69)
------------------------------------ Shares Outstanding (940,019)
Class B Net Assets ($254,408) = Net Asset Value Per Share ($10.65)
------------------------------------ Shares Outstanding (23,887)
Class C Net Assets ($52,815) = Net Asset Value Per Share ($10.66)
------------------------------------ Shares Outstanding (4,955)
Tax-Free North Dakota Fund
Class A Net Assets ($33,713,299) = Net Asset Value Per Share ($10.88)
------------------------------------ Shares Outstanding (3,099,514)
Class B Net Assets ($700,333) = Net Asset Value Per Share ($10.88)
------------------------------------ Shares Outstanding (64,382)
Class C Net Assets ($40,492) = Net Asset Value Per Share ($10.87)
------------------------------------ Shares Outstanding (3,726)
Tax-Free Oregon Insured Fund
Class A Net Assets ($20,912,822) = Net Asset Value Per Share ($9.87)
------------------------------------ Shares Outstanding (2,118,095)
Class B Net Assets ($4,758,497) = Net Asset Value Per Share ($9.87)
------------------------------------ Shares Outstanding (481,913)
Class C Net Assets ($359,820) = Net Asset Value Per Share ($9.88)
------------------------------------ Shares Outstanding (36,429)
Tax-Free Utah Fund
Class A Net Assets ($3,860,621) = Net Asset Value Per Share ($10.84)
------------------------------------ Shares Outstanding (356,303)
Class B Net Assets ($397,386) = Net Asset Value Per Share ($10.83)
------------------------------------ Shares Outstanding (36,679)
Tax-Free Washington Insured Fund
Class A Net Assets ($2,382,304) = Net Asset Value Per Share ($10.30)
------------------------------------ Shares Outstanding (231,187)
Class B Net Assets ($515,653) = Net Asset Value Per Share ($10.31)
------------------------------------ Shares Outstanding (50,013)
Class C Net Assets ($19,459) = Net Asset Value Per Share ($10.30)
------------------------------------ Shares Outstanding (1,890)
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Tax-Free Wisconsin Fund
Class A Net Assets ($28,292,440) = Net Asset Value Per Share ($9.64)
------------------------------------ Shares Outstanding (2,936,014)
Class B Net Assets ($1,339,330) = Net Asset Value Per Share ($9.63)
------------------------------------ Shares Outstanding (139,085)
Class C Net Assets ($554,860) = Net Asset Value Per Share ($9.66)
------------------------------------ Shares Outstanding (57,445)
</TABLE>
Each Fund's net asset value per share is computed by adding the value
of all securities and other assets in the portfolio of that Fund, deducting any
liabilities of the Fund and dividing by the number of Fund shares outstanding.
In determining a Fund's 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 Fund
are accrued daily.
Each Class of a Fund will bear, pro-rata, all of the common expenses of
the relevant Fund. The net asset values of all outstanding shares of each Class
of each Fund will be computed on a pro-rata basis for each outstanding share
based on the proportionate participation in such Fund represented by the value
of shares of that Class. All income earned and expenses incurred by a Fund will
be borne on a pro-rata basis by each outstanding share of a Class, based on each
Class' percentage in such Fund 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 Fund may vary. However, the net asset value
per share of each Class of a Fund is expected to be equivalent.
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REDEMPTION AND REPURCHASE
Any shareholder may require his or her Fund to redeem shares by sending
a written request, signed by the record owner or owners exactly as the shares
are registered, to the Fund at 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. Certificates are issued for Class
A Shares only if a shareholder specifically requests them. Certificates are not
issued for Class B Shares or Class C Shares. If stock certificates have been
issued for shares being redeemed, they must accompany the written request. For
redemptions of $50,000 or less paid to the shareholder at the address of record,
the request must be signed by all owners of the shares or the investment dealer
or record, but a signature guarantee is not required. When the redemption is for
more than $50,000, or if payment is made to someone else or to another address,
signatures of all record owners and a signature guarantee are required. Each
signature guarantee must be supplied by an eligible guarantor institution. Each
Fund reserves the right to reject a signature guarantee supplied by an eligible
institution based on its creditworthiness. The Funds may request further
documentation from corporations, retirement plans, executors, administrators,
trustees or guardians.
In addition to redemption of Fund shares, the Distributor, acting as
agent of the Funds, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the respective Fund or
its agent 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 Value. The Fund and the Distributor end
their business days at 5 p.m., Eastern time. This offer is discretionary and may
be completely withdrawn without further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to 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 Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus. Class B Shares of Tax-Free Funds and
Insured Funds are subject to a contingent deferred sales charge ("CDSC") of: (i)
4% if shares are redeemed within two years of purchase; (ii) 3% if shares are
redeemed during the third or fourth year following purchase; (iii) 2% if shares
are redeemed during the fifth year following purchase; and (iv) 1% if shares are
redeemed during the sixth year following purchase. Class B Shares of Tax-Free
Intermediate Funds 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. See Automatic Conversion of Class B Shares under
Classes of 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; provided, however, that each commitment to mail or wire
redemption proceeds by a certain time, as described below, is modified by the
qualifications described in the next paragraph.
Each Fund will process written or telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. A Fund will honor redemption requests as to shares for which a check
was tendered as payment, but a Fund will not mail or wire the proceeds until it
is reasonably satisfied that the check has cleared. This potential delay can be
avoided by making investments by wiring Federal Funds.
If a shareholder has been credited with a purchase by a check which is
subsequently returned unpaid for
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<PAGE>
insufficient funds or for any other reason, the Fund involved will automatically
redeem from the shareholder's account the Fund shares purchased by the check
plus any dividends earned thereon. Shareholders may be responsible for any
losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by a Fund of securities owned by it is not reasonably practical,
or it is not reasonably practical for a Fund fairly to value its assets, or in
the event that the Securities and Exchange Commission has provided for such
suspension for the protection of shareholders, a Fund may postpone payment or
suspend the right of redemption or repurchase. In such case, 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, Tax-Free
Fund, Inc. has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Fund is obligated to redeem Fund shares solely in cash up to the
lesser of $250,000 or 1% of the net asset value of such Fund during any 90-day
period for any one shareholder.
The value of a Fund's investments is subject to changing market prices.
Thus, a shareholder reselling shares to a Fund may sustain either a gain or
loss, depending upon the price paid and the price received for such shares.
Small Accounts
Before a Fund involuntarily redeems shares from an account that, under
the circumstances listed in the relevant Prospectus, has remained below the
minimum amounts required by the Funds' Prospectus 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 How to Buy Shares in
the Funds' Prospectus. 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.
* * *
Each Fund has made available certain redemption privileges, as
described below. The Funds reserve the right to suspend or terminate these
expedited payment procedures upon 60 days' written notice to shareholders.
Expedited Telephone Redemptions
Shareholders or their investment dealers of record wishing to redeem an
amount of Fund shares of $50,000 or less for which certificates have not been
issued may call the Shareholders Service Center at 800-523-1918 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 of the redemption request. This option
is only available to individual, joint and individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the 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
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<PAGE>
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
relevant Fund and a signature guarantee may be required. Each signature
guarantee must be supplied by an eligible guarantor institution. The Funds
reserve the right to reject a signature guarantee supplied by an eligible
institution based on its creditworthiness.
To reduce the shareholder's risk of attempted fraudulent use of the
telephone redemption procedure, payment will be made only to the bank account
designated on the authorization form.
If expedited payment under these procedures could adversely affect a
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Funds nor the Funds' Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, 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, such 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 Funds do 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 Fund 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 made concurrently with the purchase of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is a participant in one of our
retirement plans or is investing in Delaware Group funds which do not carry a
sales charge. Redemptions of Class A Shares pursuant to a Systematic
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<PAGE>
Withdrawal Plan may be subject to a Limited CDSC if the purchase was made at net
asset value and a dealer's commission has been paid on that purchase.
Redemptions of Class B Shares or Class C Shares pursuant to a Systematic
Withdrawal Plan may be subject to a CDSC, unless the annual amount selected to
be withdrawn is less than 12% of the account balance on the date that the
Systematic Withdrawal Plan was established. See Waiver of Contingent Deferred
Sales Charge - Class B and Class C Shares and Waiver of Limited Contingent
Deferred Sales Charge - Class A Shares under Redemption and Exchange in the
Prospectus. Shareholders should consult their financial advisers to determine
whether a Systematic Withdrawal Plan would be suitable for them.
An investor wishing to start a Systematic Withdrawal Plan must complete
an authorization form. If the recipient of Systematic Withdrawal Plan payments
is other than the registered shareholder, the shareholder's signature on this
authorization must be guaranteed. Each signature guarantee must be supplied by
an eligible guarantor institution. The 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.
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DISTRIBUTIONS
Each declares a dividend to shareholders of that Fund's net investment
income on a daily basis. Dividends are declared each day the Funds are open and
cash dividends are paid monthly. 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 Fund
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 Fund, less the estimated
expenses of that Fund 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 Fund shares by wire begin earning dividends when converted
into Federal Funds and available for investment, normally the next business day
after receipt. However, if a Fund is given prior notice of Federal Funds wire
and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Investors desiring to guarantee wire payments
must have an acceptable financial condition and credit history in the sole
discretion of the Fund. The Funds reserve 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 Fund, except that Class A Shares, Class B Shares and
Class C Shares alone will incur distribution fees under their respective 12b-1
Plans.
Dividends are automatically reinvested in additional shares of the
paying Fund 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 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, unless the shareholder elects to
receive them in cash. Shareholders will receive a quarterly statement showing a
Class' dividends paid and all the transactions made during the period.
Any check in payment of dividends or other distributions which cannot
be delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. A Fund may deduct from a shareholder's account the costs of
the Fund's effort to locate a shareholder if a shareholder's mail is returned by
the United States Post Office or the Fund is otherwise unable to locate the
shareholder or verify the shareholder's mailing address. These costs may include
a percentage of the account when a search company charges a percentage fee in
exchange for their location services.
Each Fund anticipates that most of its dividends paid to shareholders
will be exempt from federal income taxes.
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TAXES
Under the Internal Revenue Code of 1986, as amended (the "Code"), all
or a portion of the interest on indebtedness incurred or continued to purchase
or carry shares of an investment company paying exempt-interest dividends, such
as each of the Funds, will not be deductible by a shareholder. Indebtedness may
be allocated to shares of a Fund even though not directly traceable to the
purchase of such shares.
Each Fund's present policy is to designate exempt-interest dividends at
each daily distribution of net interest income. Shareholders are required for
information purposes to report exempt-interest dividends and other tax-exempt
interest on their tax returns.
Each Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, each Fund must declare dividends by the end of the calendar year
representing 98% of such Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long- and short-term capital gain) for the
12-month period ending on October 31 of such year. For purposes of the excise
tax, any income on which a Fund has paid corporate-level tax is considered to
have been distributed. Each Fund intends to make sufficient distributions each
year to avoid the payment of the excise tax.
Under a special provision of the Revenue Reconciliation Act of 1993,
all or a portion of the gain that a Fund realizes on the sale of a Tax Exempt
Obligation that it purchased at a market discount may have to be treated as
ordinary income rather than capital gain.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Exempt-interest
dividends attributable to interest income on certain tax-exempt obligations
issued after August 7, 1986 to finance private activities are treated as an item
of tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers and the federal
environmental tax on corporations. In addition, all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings for purposes of determining the federal corporate
AMT and the environmental tax imposed on corporations by Section 59A of the
Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Funds. The Funds will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in any Fund's portfolio lost its exempt status,
such Fund would make every effort to dispose of such investment on terms that
are not detrimental to the Fund.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which any Fund
may purchase options. To the extent a Fund engages in short-term trading and
enters into options transactions, the likelihood of violating this 30%
requirement is increased.
Gain or loss on options is taken into account when realized by entering
into a closing transaction or by exercise. In addition, with respect to many
types of options held at the end of a Fund's taxable year, unrealized gain or
loss on such contracts is taken into account at the then current fair market
value thereof under a special "marked-to-market, 60/40 system," and such gain or
loss is recognized for tax purposes. The gain or loss from
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such options (including premiums on certain options that expire unexercised) is
treated as 60% long-term and 40% short-term capital gain or loss, regardless of
their holding period. The amount of any capital gain or loss actually realized
by a Fund in a subsequent sale or other disposition of such options will be
adjusted to reflect any capital gain or loss taken into account by the Fund in a
prior year as a result of the constructive sale under the "marked-to-market,
60/40 system."
Certain information about state taxation is contained in the
Prospectus. Additional information about California, Iowa and Wisconsin follows:
California State Taxation. Present California law taxes both long-term
and short-term capital gains at the rates applicable to ordinary income.
Interest on indebtedness incurred or continued by a shareholder in connection
with the purchase of shares of California Fund will not be deductible for
California personal income tax purposes. California has an alternative minimum
tax similar to the federal alternative minimum tax described above. However, the
California alternative minimum tax does not include interest from private
activity bonds as an item of tax preference. Generally, corporate shareholders
of a California Fund subject to the California franchise tax will be required to
include any gain on an exchange or redemption of shares and all distributions of
exempt interest, capital gains and other taxable income, if any, as income
subject to such tax. The California Funds will not be subject to California
franchise or corporate income tax on interest income or net capital gain
distributed to the shareholders. Shares of the California Funds will be exempt
from local property taxes in California.
Iowa State Taxation. Iowa taxes long-term capital gains at the same
rates as ordinary income, while imposing limitations on the deductibility of
capital losses similar to those under federal law.
Iowa imposes an alternative minimum tax on individuals and corporations
to the extent that such tax exceeds the taxpayer's regular tax liability. Iowa
AMT is based on federal alternative minimum taxable income, with certain
adjustments. The Fund has received a ruling to the effect that dividends paid by
the Iowa Fund that are attributable to interest paid on obligations issued by
the State of Iowa, its political subdivisions, agencies and instrumentalities,
the interest on which is exempt under Iowa statute, and on obligations of U. S.
territories and possessions will not be subject to the AMT that Iowa imposes on
individuals and corporations.
Wisconsin State Taxation. Wisconsin taxes long-term capital gains at
the same rates as ordinary income, while imposing limitations on the
deductibility of capital losses similar to those under federal law.
Wisconsin imposes an alternative minimum tax on individuals, trusts and
estates to the extent that such tax exceeds a taxpayer's regular tax liability.
Wisconsin's AMT is based on federal alternative minimum taxable income, with
certain adjustments. The Fund has received a ruling to the effect that dividends
paid by the Wisconsin Fund that are attributable to interest paid on obligations
issued by the State of Wisconsin or its agencies, the interest on which is
exempt from Wisconsin personal income tax under Wisconsin statute, and on
obligations of U. S. territories and possessions will not be subject to the
Wisconsin AMT when received by shareholders subject to the Wisconsin personal
income tax.
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<PAGE>
INVESTMENT MANAGEMENT AGREEMENTS
Delaware Management Company, Inc.(the "Manager"), located at One
Commerce Square, Philadelphia, PA 19103, furnishes investment management
services to each Fund, subject to the supervision and direction of the its
Board of Directors or Trustees.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had
been retained under an investment advisory contract to act as each Fund's
investment adviser, subject to the authority of the Board of Directors. Voyageur
was an indirect, wholly owned subsidiary of Dougherty Financial Group, Inc.
("DFG"). After the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") as a result of Lincoln National's acquisition of DFG.
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, the Funds' previous investment advisory agreements with
Voyageur were "assigned", as that term is defined by the Investment Company Act
of 1940, and the previous agreements therefore terminated upon the completion of
the acquisition. The Board of Directors or Trustees of those Funds unanimously
approved new advisory agreements at a meeting held in person on February 14,
1997, and called for a shareholders meeting to approve the new agreements. At a
meeting held on April 11, 1997, the shareholders of each Fund approved its
respective Investment Management Agreement with the Manager, an indirect
wholly-owned subsidiary of LNC, to become effective after the close of business
on April 30, 1997, the date the acquisition was completed.
Beginning May 1, 1997, the Manager, an indirect, wholly-owned
subsidiary of LNC, was retained as investment manager of Tax-Free Arizona
Intermediate Fund, Tax-Free California Intermediate Fund, Tax-Free Colorado
Insured Fund, Tax-Free Colorado Intermediate Fund, the Florida Funds, and
Tax-Free New York Fund. Voyageur was retained as investment manager for the
other Funds. On May 30, 1997, Voyageur was merged into the Manager and the
Manager became the investment manager for the other Funds.
The Investment Management Agreement into which each Fund's investment
manager has entered 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 Fund to which the Agreement relates, and
only if the terms and the renewal thereof have been approved by the vote of a
majority of the directors or trustees of the Funds 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 or trustees of the Funds or by the
Manager. Each Agreement will terminate automatically in the event of its
assignment.
Each Fund pays its investment manager a monthly investment advisory and
management fee equivalent on an annual basis to 0.50% of its average daily net
assets except each Tax-Free Intermediate Fund pays 0.40% of its average daily
net assets.
The Manager makes and implements all investment decisions on behalf of
the Funds. The Manager pays the Funds' rent and the salaries of all directors or
trustees, officers and employees of the Funds who are affiliated with both the
Manager and the Funds. The Funds pay all of their other expenses. Set forth
below is certain information regarding the investment advisory and
administrative services fees and the amounts waived, if any, by each Fund to
Voyageur during the indicated fiscal periods.
95
<PAGE>
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
---------- -------------- -------------
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund
1/1/96-12/31/96 $ 1,119,609 $ 307,939 $ None
1/1/95-12/31/95 $ 1,223,121 $ 299,757 $ 60,000
1/1/94-12/31/94 $ 1,298,673 $ 289,690 None
Tax-Free Arizona Fund
1/1/96-12/31/96 $ 55,464 $ 36,595 $ 90,000
1/1/95-12/31/95(4) $ 14,301 $ 15,541 $ 29,842
Tax-Free California Insured Fund
1/1/96-12/31/96 $ 192,101 $ 75,853 $ 75,000
1/1/95-12/31/95 $ 184,315 $ 67,135 $ 90,000
11/1/94-12/31/94(1) $ 23,717 $ 9,550 $ 33,267
11/1/93-10/31/94 $ 111,570 $ 52,328 $ 163,898
Tax-Free California Fund
1/1/96-12/31/96 $ 7,369 $ 21,559 $ 40,001
1/1/95-12/31/95(5) $ 4,468 $ 13,974 $ 18,442
Tax-Free Colorado Fund
1/1/96-12/31/96 $ 1,865,515 $ 426,237 $ None
1/1/95-12/31/95 $ 1,944,802 $ 441,178 None
1/1/94-12/31/94 $ 2,039,009 $ 409,511 None
Tax-Free Florida Intermediate Fund
1/1/96-12/31/96 $ 11,429 $ 21,512 $ 32,941
1/1/95-12/31/95 $ 2,665 $ 10,995 $ 13,660
1/1/94-12/31/94 (3) $ 956 $ 11,264 $ 12,220
Tax-Free Florida Insured Fund
1/1/96-12/31/96 $ 1,074,026 $ 314,165 $ 25,000
1/1/95-12/31/95 $ 1,235,118 $ 325,819 $ 480,000
11/1/94-12/31/93 (1) $ 204,833 $ 76,709 $ 250,000
11/1/93-10/31/94 $ 1,481,786 $ 350,992 $ 805,000
Tax-Free Florida Fund
1/1/96-12/31/96 $ 29,915 $ 30,812 $ 60,727
1/1/95-12/31/95(6) $ 10,974 $ 15,010 $ 25,984
Tax-Free Idaho Fund
1/1/96-12/31/96 $ 131,410 $ 62,657 $ 130,000
1/1/95-12/31/95(7) $ 38,282 $ 29,996 $ 68,278
Tax-Free Iowa Fund
1/1/96-12/31/96 $ 217,160 $ 93,979 $ 5,000
1/1/95-12/31/95 $ 193,451 $ 85,579 $ 45,000
9/1/94-12/31/94 (1) $ 56,650 $ 34,707 $ 91,357
9/1/93-8/31/94 $ 127,361 $ 70,832 $ 198,193
Tax-Free Kansas Fund
1/1/96-12/31/96 $ 60,154 $ 39,146 $ 30,000
1/1/95-12/31/95 $ 47,512 $ 14,005 $ 50,000
11/1/94-12/31/94 (1) $ 5,550 $ 5,993 $ 11,543
11/1/93-10/31/94 $ 22,132 $ 18,251 $ 40,383
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
---------- -------------- -------------
<S> <C> <C> <C>
Tax-Free Minnesota Intermediate Fund
1/1/96-12/31/96 $ 281,038 $ 110,484 None
1/1/95-12/31/95 $ 298,529 $ 114,999 None
3/1/94-12/31/94 (2) $ 272,884 $ 104,431 None
1/1/94-2/28/94 (2) $ 49,861 $ 16,471 None
Minnesota Insured Fund
1/1/96-12/31/96 $ 1,518,301 $ 355,578 None
1/1/95-12/31/95 $ 1,541,687 $ 329,546 $ 25,000
1/1/94-12/31/94 $ 1,561,406 $ 366,842 $ 925,000
Tax-Free Minnesota Fund
1/1/96-12/31/96 $ 2,222,690 $ 472,689 None
1/1/95-12/31/95 $ 2,229,862 $ 499,083 None
1/1/94-12/31/94 $ 2,241,071 $ 460,255 None
Tax-Free Missouri Insured Fund
1/1/96-12/31/96 $ 290,247 $ 125,437 $ 95,000
1/1/95-12/31/95 $ 250,578 $ 111,588 $ 170,000
11/1/94-12/31/94 (1) $ 32,651 $ 20,078 $ 50,000
11/1/93-10/31/94 $ 173,907 $ 79,615 $ 253,522
Tax-Free New Mexico Fund
1/1/96-12/31/96 $ 107,784 $ 51,384 None
1/1/95-12/31/95 $ 108,209 $ 46,835 None
11/1/94-12/31/94 (1) $ 17,494 $ 12,232 $ 29,726
11/1/93-10/31/94 $ 108,865 $ 47,287 $ 135,000
Tax-Free New York Fund
10/1/96-12/31/96 (10) $ 17,615 $ 5,447 $ 23,062
10/1/95-9/30/96 $ 93,048 $ N/A $ 24,580
10/1/94-9/30/95 $ 99,309 $ N/A $ 63,096
7/1/94-9/30/94 $ 26,011 $ N/A $ None
7/1/93-6/30/94 $ 111,126 $ N/A $ 14,541
Tax-Free North Dakota Fund
1/1/96-12/31/96 $ 175,239 $ 86,034 None
1/1/95-12/31/95 $ 179,121 $ 75,910 None
1/1/94-12/31/94 $ 180,617 $ 80,745 $ 157,087
</TABLE>
97
<PAGE>
<TABLE>
<CAPTION>
Investment Administrative Fees Absorbed
Advisory Services or
Fees Fees Waived
---------- -------------- -------------
<S> <C> <C> <C>
Tax-Free Oregon Insured Fund
1/1/96-12/31/96 $ 124,769 $ 59,737 $ 65,000
1/1/95-12/31/95 $ 103,343 $ 42,931 $ 75,000
11/1/94-12/31/94 (1) $ 12,840 $ 6,649 $ 19,489
11/1/93-10/31/94 $ 49,537 $ 33,740 $ 83,277
Tax-Free Utah Fund
1/1/96-12/31/96 $ 21,935 $ 25,695 $ 30,000
1/1/95-12/31/95 $ 20,769 $ 18,829 $ 35,000
11/1/94-12/31/94 (1) $ 3,184 $ 1,757 $ 4,941
11/1/93-10/31/94 $ 20,384 $ 17,294 $ 37,678
Tax-Free Washington Insured Fund
1/1/96-12/31/96 $ 12,662 $ 21,966 $ 34,628
1/1/95-12/31/95 $ 10,374 $ 12,752 $ 23,126
11/1/94-12/31/94 (1) $ 1,422 $ 2,369 $ 3,791
11/1/93-10/31/94 $ 7,561 $ 13,824 $ 21,385
Tax-Free Wisconsin Fund
1/1/96-12/31/96 $ 141,262 $ 67,833 $ 10,000
1/1/95-12/31/95 $ 123,548 $ 49,595 None
9/1/94-12/31/94 (1) $ 31,634 $ 22,386 $ 54,020
9/1/94-8/31/94 $ 46,460 $ 31,486 $ 77,946
</TABLE>
(1) Effective December 31, 1994, the Fund changed its fiscal year end to
December 31.
(2) Effective February 28, 1994, Tax-Free Minnesota Intermediate Fund changed
its fiscal year end to February 28 and, effective December 31, 1994,
changed back to December 31.
(3) Period from May 1, 1994 (commencement of operations) to December 31, 1994.
(4) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(5) Period from March 3, 1995 (commencement of operations) to December 31,
1995.
(6) Period from March 2, 1995 (commencement of operations) to December 31,
1995.
(7) Period from January 4, 1995 (commencement of operations) to December 31,
1995.
(8) Period from September 7, 1995 (commencement of operations) to December 31,
1995.
(9) Period from September 8, 1995 (commencement of operations) to December 31,
1995.
(10) Effective December 31, 1996, Tax-Free New York Fund changed its fiscal year
from September 30 to December 31.
98
<PAGE>
Except for those expenses borne by the Manager under the Investment
Management Agreements and the Distributor under the Distribution Agreements, the
Funds are responsible for all of their own expenses. Among others, these include
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 December 31, 1996, the ratios of operating expenses to
average daily net assets for Class A Shares, Class B Shares and Class C Shares
of each Fund were as follows:
<TABLE>
<CAPTION>
Fund Class A Shares Class B Shares Class C Shares
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund 0.82% 1.59% 1.70%
Tax-Free Arizona Fund 0.46 1.11 1.21
Tax-Free California Insured Fund 0.27 0.50 0.78
Tax-Free California Fund 0.82 1.21 1.58
Tax-Free Colorado Fund 0.78 1.58 1.66
Tax-Free Florida Intermediate Fund 0.66 1.48 1.55
Tax-Free Florida Insured Fund 0.73 1.24 N/A
Tax-Free Florida Fund 0.33 0.76 1.15
Tax-Free Idaho Fund 0.60 1.11 1.33
Tax-Free Iowa Fund 0.92 1.61 1.75
Tax-Free Kansas Fund 0.83 1.61 1.77
Tax-Free Minnesota Intermediate Fund 0.89 1.56 1.30
Minnesota Insured Fund 0.92 1.56 1.68
Tax-Free Minnesota Fund 0.92 1.50 1.67
Tax-Free Missouri Insured Fund 0.71 1.29 1.62
Tax-Free New Mexico Fund 0.88 1.61 1.74
Tax-Free New York Fund 0.97 1.87 1.84
Tax-Free North Dakota Fund 0.88 1.36 1.75
Tax-Free Oregon Insured Fund 0.71 1.25 1.55
Tax-Free Utah Fund 0.68 1.44 N/A
Tax-Free Washington Insured Fund 0.44 1.21 1.37
Tax-Free Wisconsin Fund 0.98 1.66 1.75
</TABLE>
The ratios reflect the impact of each Class' 12b-1 Plan and the
voluntary waiver and payment of fees noted above. See Summary of Expenses in the
Prospectus for current fee waivers and reimbursements.
By California regulation, the Manager is required to waive certain fees
and reimburse the Fund for certain 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 Fund. For the fiscal year ended December 31, 1996, no such reimbursement
was necessary or paid for any Fund.
Distribution and Service
The Distributor, Delaware Distributors, L.P. (which formerly conducted
business as Delaware Distributors, Inc.), located at 1818 Market Street,
Philadelphia, PA 19103, serves as the national distributor of each Fund's shares
under separate Distribution Agreements dated March , 1997. The Distributor is
an affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by each Fund on behalf of its Class A Shares,
Class B Shares and Class C Shares under the 12b-1 Plans for each such Class.
The Transfer Agent, Delaware Service Company, Inc., another affiliate
of the Manager located at 1818 Market Street, Philadelphia, PA 19103, serves as
each Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to a Shareholders Services Agreement dated April 30, 1997. The Transfer
Agent also provides accounting services to the Funds pursuant to the terms of a
separate Fund Accounting Agreement. The Transfer Agent is also an indirect,
wholly owned subsidiary of Delaware Management Holdings, Inc.
99
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of the Funds are managed under the direction
of its Board of Directors.
Certain officers and directors of the Funds hold identical positions in
each of the other funds in the Delaware Group. As of July 31, 1997, the officers
and directors of each investment company, as a group, owned less than 1% of the
of the outstanding shares of each class of the Funds.
As of July 31, 1997, management believes the following accounts held 5%
or more of a Class of shares of a Fund:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund MLPF&S for the sole benefit of its 1,573,834 9.19%
Class A Shares customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd fl.
Jacksonville FL 32246-6484
Tax-Free Arizona Insured Fund Robert D Wickwire TTEE 41,059 11.40%
Class B Shares Robert D. Wickwire Rev
6050 N. Camino Esplendora
Tucson AZ 85718-4509
BA Investment Services, Inc. 23,217 6.44%
185 Berry St., 3rd Fl. #2640
San Francisco CA 94107-1729
Sally B. Schumacher TTEE 19,069 5.29%
Schumacher Trust
8101 N. Mummy Mountain Rd.
Paradise Valley AZ 85253-2241
Pru Sec FBO Mary Dehn Van Dessel TTEE 18,410 5.11%
Sun City West AZ 85375
Tax-Free Arizona Insured Fund Dean Witter for the benefit of the Arp Trust 1986 19,929 33.96%
Class C Shares Survivors Trust
Mary Arp & Carol Linda Dodge TTEES
Church St. Station - P.O. Box 250
New York NY 10277
BA Investment Services, Inc. 10,745 18.31%
185 Berry St., 3rd Fl. #2640
San Francisco CA 94107-1729
Jane Ellen Cooper TTEE 5,845 9.96%
John D & Jane Ellen Cooper TR
P.O. Box 401
Paulden AZ 86334-0401
Roy L Carson & Marian L Carson JT TEN 3,964 6.75%
2116 W. Comstock
Chandler AZ 85224-1712
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Arizona Insured Fund Harriet J. Welch TTEE 3,712 6.32%
Class C Shares The Welch Family Trust
15612 E. Willis
Gilbert AZ 85296-1379
Tax-Free Arizona Fund Prudential Securities Inc. FBO Gaylord Rubin & 208,678 21.71%
Class A Shares Beverly Rubin
Phoenix AZ 85018
Dorothy H. Green TTEE 76,768 7.98%
5002 E. Mesquite Wood Court, Ste 700
Phoenix AZ 85044-1722
MLPF&S for the sole benefit of its customers 55,988 5.82%
Attn: Fund Administration
4800 Deer Lake Drive E., 3rd Fl.
Jacksonville FL 32246-6484
Tax-Free Arizona Fund Prudential Securities Inc. FBO Gaylord Rubin & 25,609 7.99%
Class B Shares Beverly Rubin
Phoenix AZ 85018
Rauscher Pierce REFSNES FBO Virginia Strickland TTEE 24,209 7.55%
Strickland Family Trust
7500 N. Calle Sin Envidia
Tucson AZ 85718-7300
Sally B. Schumacher TTEE 20,071 6.26%
Schumacher Trust
8101 N. Mummy Mountain Rd.
Paradise Valley AZ 85253-2241
PaineWebber FBO Gilberth Barnes & Clare Collord 17,876 5.58%
Barnes TTEE
210 West Palmaire Avenue
Phoenix AZ 85021-8750
Tax-Free Arizona Fund Margaret L Minder Ureban TTEE 22,415 75.53%
Class C Shares 6710 Mamaronick Drive
Tucson AZ 85718-2606
PaineWebber for the benefit of Carol J. Griffin and 4,600 15.50%
Dale Griffin JT/WROS
6738 N. Shadow Run Drive
Tucson AZ 85704-6930
Marion F Stewart 1,648 5.55%
2536 N. Tyndall
Tucson AZ 85719-2958
Tax-Free California Insured MLPF&S for the sole benefit of its customers 172,304 6.56%
Fund Class A Shares Attn: Fund Administration
4800 Deer Lake Drive E., 3rd Fl.
Jacksonville FL 32246-6484
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free California Insured Alex Brown & Sons Incorporated 4,326 48.33%
Fund Class C Shares P.O. Box 1346
Baltimore MD 21203-1346
C. Robert Tyler 2,689 30.04%
Elizabeth Tyler JT TEN
P.O. Box 1194
Grass Valley CA 95945-1194
Alex Brown & Sons Incorporated 1,056 11.79%
P.O. Box 1346
Baltimore MD 21203-1346
Elizabeth Tyler 879 9.82%
C. Robert Tyler JT TEN
P.O. Box 1194
Grass Valley CA 95945-1194
Tax-Free California Fund Dain Bosworth Inc. FBO William C. Johnson 28,662 14.23%
Class A Shares P.O. Box 7106
Rancho Santa Fe CA 92067-7106
Thelma Beam & Edith Ramsey TTEES 25,568 12.69%
250 Raylow Ave.
Manteca CA 95336-4832
The Five R's 23,466 11.65%
Edmund B. Richards
Brian J. Richards
5949 Hollister Ave.
Goleta CA 93117-3610
Edythe London TTEE 14,390 7.14%
2920 Neilson Way Apt. 306
Santa Monica CA 90405-5369
Tax-Free California Fund PaineWebber for the benefit of Paula L Dutra 20,736 6.05%
Class B Shares P.O. Box 1006
Woodbridge CA 95258-1006
Tax-Free California Fund Margie M. Bartel TTEE 4,086 36.04%
Class C Shares 555 E. Memory Lane Apt. D308
Santa Ana CA 92706-1707
Long Q. Nguyen 3,846 33.93%
Thoa K. Nguyen JT TEN
3229 Adelanto Lane
San Jose CA 95135-1059
PaineWebber for the benefit of John R. Pruett & 2,414 21.29%
Yvonne M. Pruett JTWROS
219 Forest Creek Lane
San Ramon CA 94583-1250
Carolyn Carter, Trustee 989 8.72%
P.O. Box 1535
Colfax CA 95713-1535
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Colorado Fund Everen Clearing Corp. 29,971 5.43%
Class B Shares William J. Keller
111 East Kilbourn Ave.
Milwaukee WI 53202-6609
Tax-Free Colorado Fund Dorothy E. Radant TTEE 8,639 6.11%
Class C Shares 1332 Cresent Dr.
Wausau WI 54401-2631
Dean Witter for the benefit of Bette J. Storms & 16,991 12.02%
William W. Storms JTTEN
3855 Hermitage Ave.
Colorado Springs CO 80906-7213
Tax-Free Florida Intermediate US Clearing Corp. 38,244 13.95%
Fund Class A Shares 26 Broadway
New York NY 10004-1798
MLPF&S for the sole benefit of its customers 25,558 9.33%
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Fl.
Jacksonville FL 32246-6484
Tax-Free Florida Intermediate Smith Barney Inc. 15,358 17.47%
Fund Class B Shares 388 Greenwich St.
New York NY 10013-2375
John A. Dragseth TTEE 5,512 6.27%
3623 SE Old St. Lucie Blvd.
Stuart FL 34996-5116
WCG Investment Partnership 5,473 6.23%
Attn: Howard Wolofsky
c/o Reflections
3400 NE 34th Street, Ste 1010
Ft. Lauderdale FL 33308-3751
Pauline B. Butler 5,464 6.22%
450 Avenue F SE
Winter Haven FL 33880-3751
PaineWebber for the benefit of Michael Nadir 5,446 6.20%
P.O. Box 1031
Elfers FL 34680-1031
James R. Dunn 4,873 5.54%
746 Riverside Dr.
Ormond Beach FL 32176-7814
Tax-Free Florida Intermediate Pru. Sec Inc. FBO Mrs. Jun L Mason 5,209 100.00%
Fund Class C Shares 1180 Reef Rd. Apt. A19
Vero Beach FL 32963-4306
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Florida Insured Fund MLPF&S for the sole benefit of its customers 1,987,147 12.86%
Class A Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Florida Insured Fund MLPF&S for the sole benefit of its customers 38,360 10.80%
Class B Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Florida Fund MLPF&S for the sole benefit of its customers 98,824 17.82%
Class A Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Florida Fund MLPF&S for the sole benefit of its customers 24,949 14.00%
Class B Shares Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville FL 32246-6484
Anita R. Alexander & John E. Alexander 19,683 11.05%
259 Courtyard Blvd. Box 259-102
Sun City Center FL 33573-4700
NFSC FEBO Robert K. Sedgwick TTEE 14,031 7.87%
7711 Sundown Court
Bayonet Point FL 34667-3074
Edward Duffy & Edward L. Duffy Jr. 11,956 6.71%
Priscilla Brennan & Kevin Duffy
Mary Stuck JT TEN
7740 Parkway Blvd.
Hudson FL 34667-1268
PaineWebber for the benefit of Mrs. Ann E. Greene & 9,643 5.41%
Miss Terry A. Warren JRWROS
1745 SW 2nd Ave.
Boca Raton FL 33432-7230
PaineWebber for the benefit of Eugene A. Wildes & 9,570 5.37%
Rosalind B. Wildes Co-TTEES
11 Loggerhead Lane
Tequesta FL 33469-1550
Tax-Free Florida Fund Mary J. Manns 10,349 87.49%
C Shares 3629 Killarney Plaza CT
Tallahassee Fl 32308-7109
Prudential Securities Inc. FBO 1,479 12.50%
Anna Demato
2100 Springdale Blvd.
Apt. Y 215
Palm Springs FL 33461-6385
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Idaho Fund MLPF&S for the sole benefit of its customers 728,242 25.48%
Class A Shares Attn: Fund Administration
4800 Deer Lake Drive E, 3rd Fl.
Jacksonville FL 32246-6484
Audrey Ann Shayne 190,733 6.67%
4760 Rivervista Place
Boise ID 83703-1954
Tax-Free Idaho Fund MLPF&S for the sole benefit of its customers 252,770 44.12%
Class B Shares Attn: Fund Administration
4800 Deer Lake Drive E, 3rd Fl.
Jacksonville FL 32246-6484
Tax-Free Idaho Fund Joseph Daltoso 10,449 13.51%
Class C Shares 1225 Warm Spring Ave.
Boise ID 83712-7952
Archie Lurus & Georgia Lurus JT/WROS 9,979 12.84%
2391 N. 55th E
Idaho Falls ID 83401-5762
Herbert W. Runner 5,803 7.46%
Rosamond S. Runner JT TEN
828 Wade Circle
Boise ID 83705-5944
Dale E. Sisson- TRSTE 4,676 6.01%
Martha S. Sisson- TRSTE
1815 Westland Drive
Boise ID 83704-7258
Donaldson Lufkin Jenrette 4,242 5.45%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Tax-Free Iowa Fund Alex P. Despenas 64,345 26.23%
Class B Shares Ethel Despenas TEN COM
960 Briarstone
Mason City IA 50401-4642
Garry L. Waline 16,088 6.55%
Kathleen A. Waline JTTN
301 C Street Apt. 2
Toledo IA 52342-2411
Stanley A. Collins 12,490 5.09%
Clarice T. Collins TEN COM
P.O. Box 1705
Mason City IA 50402-1705
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Iowa Fund Donald R. Kurtz 10,568 13.17%
Class C Shares Mildred Kurtz JTTEN
1010 Plane Street
Burlington IA 52601-3172
Mary E Aringdale 5,412 6.74%
Robert F. Aringdale JT TEN
2924 Sunnyside Avenue
Burlington IA 52601-2367
David W. Oberbroeckling and 5,163 6.43%
Julia A. Oberbroeckling JT WROS
3702 Wisconsin Avenue
Davenport IA 52806-6723
Fern L Morrison 4,802 5.98%
Doyle D Morrison POA
TOD Doyle D Morrison Delores J Reed
421 Leffler
West Burlington IA 52655-1210
Marian W. Palmer 4,570 5.69%
TOD Sara Beth Palmer
904 Oak Street
Burlington IA 52601-4607
John A Reid 4,366 5.44%
Box 219
Greene IA 50636-0219
Theodore E Upton and 4,050 5.04%
Jane F. Upton JT WROS
1226 Dehner Street
Burlington IA 52601-2745
Tax-Free Kansas Fund Thomas B. Robinson 57,302 6.15%
Class A Shares 6401 Norwood Drive
Shawnee Mission KS 66208-1826
MLPF&S For the Sole Benefit 56,854 6.11%
Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Kansas Fund MLPF&S For the Sole Benefit 30,865 10.55%
Class B Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
William T Martin TTEE 23,323 7.9%
William T Martin TR
The Forum Apt 124
3501 W. 95th Street
OP KS 66206-2000
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Kansas Fund Gilbert D Sears 3,959 42.61%
Class C Shares TOD Megan R Fishpool
Lisa Papadopoulos
Tricia R Sears
213 E Parliament
Smith Center KS 66967-3110
Harold L Smith 2,514 27.06%
TOD Sheryl S Olson
David A Smith
Jayne A Radley & Marcia L Vaughn
446 Clinton
Haysville KS 67060-1132
Johann A Zacharias 1,734 18.66%
Marcia J Higginson JTTEN
3713 JP Drive
Hays KS 67601-1541
Randall L Hockett 500 5.39%
1721 North 73rd Terrace
#8
Kansas City KS 66112-2339
Tax-Free Minnesota MLPF&S For the Sole Benefit 608,510 11.37%
Intermediate Fund Of its Customers
Class A Shares Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Tax-Free Minnesota Patricia Anderson PER REP 12,728 18.70%
Intermediate Fund EST Anthony J Kelly
Class B Shares 2235 Rockwood Avenue
Apt# 910
St Paul MN 55116-3100
NFSC FEBO #BAH-547972 9,603 14.11%
Larry C Jordan
1633 Eustis
St Paul MN 55108-1219
Lucille E Edelen 6,397 9.40%
2712 Pillsbury Ave S Apt 204
Minneapolis MN 55408-1562
James Kuskey 5,687 8.35%
Mary Kuskey
1723 Clarence Street
Maplewood MN 55109-4512
Russell E Roos 4,808 7.06%
Helen Shirley Rood JT TEN
TOD Cheryl A & Scott A & Douglas R Roos 504 S
Freeman Luverne MN 56156-2007
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Minnesota David B Bishoff 4,624 6.79%
Intermediate Fund Sophie G Bishoff JTTN
Class B Shares 2221 Youngman Avenue
St Paul MN 55116-3055
Lois M Hoffman TTEE Lois M Hoffman 4,588 6.74%
Trust U/A 1/1/96
2265 Youngman Ave #203E
St Paul MN 55116-3054
George V Modersbach 3,729 5.48%
2235 Rockwood Ave Apt 711
St Paul MN 55116-3132
Tax-Free Minnesota Bradley E Bakken TTEE 16,786 15.00%
Intermediate Fund Bradley E Bakken Revocable Trust
Class C Shares UAD December 17 1993
10100 Windsor Lane
Minnetonka MN 55343
Nicholas Edloff 10,617 9.49%
Mary Edloff JT TEN
1315 Goodrich
St Paul MN 55105-2708
Donaldson Lufkin Jenrette 8,355 7.46%
Securities Corporation Inc
P.O. Box 2052
Jersey City NJ 07303-2052
Donaldson Lufkin Jenrette 6,996 6.25%
Securities Corporation Inc
P.O. Box 2052
Jersey City NJ 07303-2052
Robert P Fischer 6,462 5.77%
2390 Pagel Road
Mendota Heights MN 55120-1637
Minnesota Insured Fund The Drifter Fam Limited Prtnrshp 27,561 8.83%
Class C Shares Gopher Machine & Eng Co Gen Partner
c/o Firstar Ctr Attn George Benz
101 E 5th Street Suite 2104
Saint Paul MN 55101-1808
Lucille P Weimert 18,541 5.94%
238 North Plainview Ave
Mankato MN 56001-5549
Tax-Free Minnesota MLPF&S For The Sole Benefit 2,330,603 7.06%
Fund Class A Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Minnesota Erik J Russell 12,417 6.33%
Fund Class C Shares 2800 83rd Lane North
Minneapolis MN 55444-1537
Tax-Free Missouri Insured Corelink Financial Inc 276,169 5.98%
Fund Class A Shares 1855 Gateway Blvd Ste 750
Concord CA 94520-3290
MLPF&S For The Sole Benefit 276,151 5.98%
Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonvile FL 32246-6484
Tax-Free Missouri Insured Corelink Financial Inc 399,867 37.87%
Fund Class B Shares 1855 Gateway Blvd Ste 750
Concord CA 94520-3290
Tax-Free Missouri Insured Walter A Gawrych 9,838 47.45%
Fund Class C Shares Wendy D Gawrych JT TEN
12816 Pointe Drive
St Louis MO 63127-1742
George A Rhodes 5,000 24.11%
TOD Russell G Rhodes
1359 E Stoneridge Dr
Springfield MO 65803-3753
Bryan E Jaynes 3,002 14.48%
6434 Alamo Avenue
Apt #2W
St Louis MO 63105-3142
James M Brown 2,088 10.07%
4223-A Summit Knoll Dr
St Louis MO 63129-7532
Tax-Free New Mexico Fund MLPF&S For the Sole Benefit 331,254 18.92%
Class A Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Tax-Free New Mexico Fund Arnold A & Helen G Elsbernd TTEES 11,555 13.26%
Class B Shares Elsbernd Family Trust UAD 8-25-95
5525 Edwards Dr NE
Albuquerque MN 87111-1986
Nicholas & Jeanne Chintis TR 9,964 11.43%
FBO Chintis Family Trust
P.O. Box 2332
Silver City N 88062-2332
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax- Free New Mexico Fund Adele A Anderson TTEE For The 7,484 8.58%
Class B Shares Adele A Anderson Rev Living Trust
2916 Cutler Avenue NE
Albuquerque NM 87106-1715
Byrd T Mooney 7,256 8.32%
610 E 16th Street
Farmington NM 87401-6307
Donaldson Lufkin Jenrette 7,200 8.26%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Claude E Leyendecker 5,308 6.09%
P.O. Box 1846
Deming NM 88031-1846
PaineWebber For The Benefit of 5,284 6.06%
Lewis G Helm
Berry J Helm JTWROS
8213 Cherry Hills Dr NE
Albuquerque NM 87111-1010
Louie B Campanella TR 4,677 5.36%
Louie B Campanella Trust
102 Lytton Circle
Las Cruces NM 88001-7409
Tax-Free New Mexico Fund Donaldson Lufkin Jenrette 6,700 26.88%
Class C Shares Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
R Harold Wingo 3,486 13.99%
Ethel J Wingo JT Ten
TOD David N Wingo & Raymond M Wingo
725 Collier Avenue
Raton NM 87740-3307
Bob Harris 3,133 12.57%
Kathy R Harris
712 S 5th Street
Raton NM 87740-4129
Title Services Inc 2,874 11.53%
Attn Bob Harris
P.O. Box 696
Raton NM 87740-0696
Donaldson Lufkin Jenrette 2,818 11.30%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free New Mexico Fund Kathleen Porter Harris 1,982 7.95%
Class C Shares TOD Bob Harris
712 S 5th Street
Raton NM 87740-4129
Worth Wilkins 1,669 6.69%
Mollie Wilkins
P.O. Box 37
Raton NM 97740-0037
Tax-Free New York Fund Claudia Schellenberg 2,682 22.46%
Class B Shares 32-43 90th St Apt 202
Flushing NY 11369-2312
Donaldson Lufkin Jenrette 1,529 12.81%
Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Ralph L Warren 1,308 10.96%
Anne C Warren JT WROS
RR 3 Box 1760
Oneonta NY 13820-9402
Lewco Securities Corp 1,052 8.81%
34 Exchange Place 4th Floor
Jersey City NJ 07302-3901
Lewco Securities Corp 1,052 8.81%
34 Exchange Place 4th Floor
Jersey City NJ 07302-3901
Key Clearing Corp 1,000 8.37%
P.O. Box 93971
Cleveland OH 44101-5971
John Mitchell 934 7.82%
Madeleine Mitchell JT WROS
155 S Fordham RD
Hicksville NY 11801-6039
Arthur T Weinisch 837 7.01%
Deborah A Weinisch JT WROS
27 Beachview Pl
Ronkonkoma NY 11779-3011
Tax-Free New York Fund Donaldson Lufkin Jenrette 5,091 99.99%
Class C Shares Securities Corporation Inc.
P.O. Box 2052
Jersey City NJ 07303-2052
Tax-Free North Dakota Wilkota and Company 203,626 7.25%
Fund Class A Shares 1st Natl Bank & TR Co of Williston
P.O. Box 1827
Williston ND 58802-1827
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free North Dakota MLPF&S For The Sole Benefit 9,725 12.22%
Fund Class B Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Edward D Jones & Co F/A/O 9,297 11.68%
Arthur N Lee
P.O. Box 2500
Maryland Heights MO 63043-8500
Susan K Krueger 4,802 6.03%
P.O. Box 716
West Fargo ND 58078-0716
Wesley W Weeding 4,683 5.88%
Geraldine M Weeding JTTEN
331 W 6th Street
West Fargo ND 58078-1533
Tax-Free North Dakota Jacob N Gust 2,360 66.57%
Fund Class C Shares Barbara A Olive JT TEN
4614 81st N
Fargo ND 58102-7501
Debbie S Kolegraf 1,064 30.00%
Kim M Kolegraf JT TEN
1673 Pocatello Drive
Bismarck ND 58504-6456
Tax-Free Oregon Insured Dorothy McCue 50,476 8.88%
Fund Class B Shares 2098 Law Lane
Eugene OR 97401-2347
Tax-Free Oregon Insured PaineWebber For The Benefit of 10,378 22.20%
Fund Class C Shares Daniel Oseran & Tracy Oseran JTTEN
4500 SW Humphrey
Portland OR 97221
PaineWebber 10,309 22.05%
FBO Herbert Bodner TR FBO The Bodner Fam Trust
1419 NW 14th Portland OR 97209-2816
Kenneth E Hansen and 7,566 16.18%
Melanie L Hansen JT WROS
1444 4th Street
Astoria OR 97103-5335
PaineWebber 5,186 11.09%
FBO Harold & Ruth Saltzman TR
6130 SW Thomas St
Portland OR97221-1223
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Oregon Insured Edward D Jones and Co F/A/O 3,638 7.78%
Fund Class C Shares Carol Roesch
P.O. Box 2500
Maryland Heights MO 63043-8500
Tax-Free Utah Fund MLPF&S For The Sole Benefit 24,437 8.32%
Class A Shares Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonvile, FL 32246-6484
Smith Barney Inc. 19,292 6.57%
388 Greenwich Street
New York NY 10013-2375
Prudential Securities FBO Janet G 14,841 5.05%
Parberry TTEE Arden B Gundersen and
Valoise Gundersen Trust UA DTD
3276 English Way
Sandy UT 84093-2138
Tax-Free Utah Fund Prudential Securities FBO 23,454 49.46%
Class B Shares William T Logan & Sally M Logan JT TEN
1216 Aerie Drive
Park City UT 84068
Smith Barney Inc. 10,903 22.99%
388 Greenwich Street
New York NY 10013-2375
Prudential Securities Inc. FBO 9,278 19.56%
Mrs. Carol A Mensel TTEE
Revocable Inter Vivos Trust
1270 N Cottonwood Circle
Heber UT 84032-1127
Tax-Free Washington Smith Barney Inc. 13.619 5.91%
Insured Fund Class A 388 Greenwich Street
Shares New York NY 10013-2375
Tax-Free Washington PaineWebber For The Benefit Of 21,971 30.96%
Insured Fund Class B Hogin Family Trust
Shares Richard D & Mariann Hogin TTEES
7624 N Panorama Dr
Spokane WA 99208-8436
PaineWebber For The Benefit Of 7,536 10.62%
Arne L Filan
40 South Division
Walla Walla WA 99362-2408
PaineWebber For The Benefit Of 4,823 6.79%
Lemuel T Dazey & Romona G Dazey
TTEES For The
3021 W Wilcox Dr
Pasco WA 99301-3232
</TABLE>
113
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Washington PaineWebber For The Benefit Of 4,808 6.77%
Insured Fund Class B Adrien L Casey & Virginia P Casey JTWROS
Shares 1934 Scarpelli Dr
Walla Walla WA 99362-4534
PaineWebber For The Benefit Of 3,975 5.60%
David H Olson & Evis Olson
Trustees For The David H & 1231 S 2nd Avenue
Walla Walla WA 99362-4120
Fred G Campbell 3,551 5.00%
P.O. Box 491
Davenport WA 99122-0491
Tax-Free Washington PaineWebber FBO 1,973 36.67%
Insured Fund Class C Delbert L Moore
Shares 1702 Moore Rd
Colfax WA 99111
Walter G Neiman 1,952 36.30%
2041 Cloverdale Rd
Kalama WA 98625-9737
PaineWebber FBO 1,453 27.01%
Leonard F Jansen
2027 E Upriver Dr Apt S-31
Spokane WA 99207-5186
Tax-Free Wisconsin Fund James Kadlec 13,383 8.16%
Class B Shares Kadlec Qualified Terminable
Interest Trust
3720 Elm Dr
La Crosse WI 54601-8325
Joyce M Weigel 11,615 7.08%
5387 Mariners Cove Dr Apt 309
Madison WI 53704-7604
Lydia M Aschenbrener 11,470 6.99%
3939 S 92nd Street
C-203
Greenfield WI 53228-2140
MLPF&S For The Sole Benefit 10,989 6.70%
Of its Customers
Attn Fund Administration
4800 Deer Lake Dr E 3rd Floor
Jacksonville FL 32246-6484
Robert G Woller TTEE 10,933 6.67%
Robert G Woller Trust
P.O. Box 95
Pound WI 54161-0095
</TABLE>
114
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Tax-Free Wisconsin Fund Edward J Saur 9,256 5.64%
Class B Shares Veronica Saur JT TEN
P.O. Box 66
Kellnersville WI 54215-0066
Tax-Free Wisconsin Fund Alan R & Harriet S Hyman TTEES 13,590 20.72%
Class C Shares Alan R & Harriet S Hyman Rev Liv Tr
1244 Dartmouth Road
Madison WI 53705-2214
Robert P Fahey 8,774 13.38%
5370 Irish Lane
Madison WI 53711-5518
Adeline B Straus TTEE 6,333 9.65%
Adeline B Strauss Tr UAD Jan 8 1997
2108 Edgewood Court
Kaukauna WI 54130-1806
Dean Witter For The Benefit Of 5,634 8.59%
Eugene Cudewicz
3856 E Somens Avenue
Cudahy WI 53110-1728
Beverly Kneebone 5,410 8.25%
1505 Stemp Terrace
Madison WI 53711-3658
</TABLE>
115
<PAGE>
DMH Corp., Delaware Voyageur Holdings, Inc., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Management Trust Company, Delaware
International Holdings Ltd., Founders Holdings, Inc., Delaware International
Advisers Ltd., Delaware Capital Management, Inc. and Delaware Investment &
Retirement Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National was completed. DMH and the
Manager are indirect, wholly owned subsidiaries, and subject to the ultimate
control, of Lincoln National. Lincoln National, with headquarters in Fort Wayne,
Indiana, is a diversified organization with operations in many aspects of the
financial services industry, including insurance and investment management.
As noted under Investment Management Agreements, after the close of
business on April 30, 1997, Voyageur became an indirect, wholly owned subsidiary
of Lincoln National as a result of Lincoln National's acquisition of DFG.
Certain officers and directors of the Funds hold identical positions in
each of the other funds in the Delaware Group. Directors and principal officers
of the Funds are noted below along with their ages and their business experience
for the past five years. Unless otherwise noted, the address of each officer and
director is One Commerce Square, Philadelphia, PA 19103.
*Wayne A. Stork (60)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of each of the seven investment companies, 26 other investment
companies in the Delaware Group, Delaware Management Holdings,
Inc., DMH Corp., Delaware International Holdings Ltd. and
Founders Holdings, Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
Richard G. Unruh, Jr. (57)
Executive Vice President of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group, Delaware Management Holdings, Inc. and Delaware Capital
Management, Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
*Director affiliated with the Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
116
<PAGE>
Paul E. Suckow (49)
Executive Vice President/Chief Investment Officer, Fixed Income of each
of the seven investment companies, each of the other 26
investment companies in the Delaware Group, Delaware
Management Company, Inc. and Delaware Management Holdings,
Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
Walter P. Babich (69)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (58)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance
and Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group,
Inc., New York, from 1988 to 1990. Mr. Knerr founded The
Publishing Group, Inc. in 1988.
Ann R. Leven (56)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (76)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware
Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
117
<PAGE>
Thomas F. Madison (61)
Director and/or Trustee of each of the seven investment companies and
26 other investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
* Jeffrey J. Nick (44)
Director and/or Trustee of each of the seven investment companies and
26 other investment companies in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was
Managing Director of Lincoln National UK plc and from 1989 to
1992, he was Senior Vice President responsible for corporate
planning and development for Lincoln National Corporation.
Charles E. Peck (71)
Director and/or Trustee of each of the seven investment companies and
each of the other 26 investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer
of The Ryland Group, Inc., Columbia, MD.
*Director affiliated with the Funds' investment manager and considered an
"interested person" as defined in the 1940 Act.
118
<PAGE>
David K. Downes (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of each of the seven investment companies, each of the
other 26 investment companies in the Delaware Group, Delaware
Management Holdings, Inc., Delaware Capital Management,
Inc., Founders CBO Corporation and Delaware Distributors L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH
Corp., Delaware Distributors, Inc., Founders Holdings, Inc.
and Delaware International Holdings Ltd.
Chairman/ Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc. President/Chief Executive Officer/Chief Financial
Officer and Director of Delaware Service Company, Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer
of Equitable Capital Management Corporation, New York, from
December 1985 through August 1992, Executive Vice President
from December 1985 through March 1992, and Vice Chairman from
March 1992 through August 1992.
George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of each of the
seven investment companies, each of the other 26 investment
companies in the Delaware Group, Delaware Management Holdings,
Inc. and Delaware Distributors, L.P.
Executive Vice President, Secretary General Counsel and Director of
Delaware Management Trust Company.
Senior Vice President, Secretary General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc. and Delaware Capital Management, Inc.
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.
Joseph H. Hastings (47)
Senior Vice President/Corporate Controller of each of the seven
investment companies, each of the other 26 investment
companies in the Delaware Group and Founders Holdings, Inc.
Senior Vice President/Corporate Controller/Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc., and Delaware International Holdings,
Inc.
Chief Financial Officer/Treasurer of Delaware Investment &
Retirement Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/ Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
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.
119
<PAGE>
Michael P. Bishof (34)
Senior Vice President/Treasurer of each of the seven investment
companies, each of the other 26 investment companies in the Delaware
Group, Delaware Distributors, Inc. and Founders Holdings, Inc.
Senior Vice President/ Investment Accounting of Delaware Management
Company, Inc. and Delaware Service Company, Inc.
Senior Vice President/Manager of Investment Accounting of Delaware
International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995,
a Vice President for CS First Boston Investment Management,
New York, NY from 1993 to 1994 and an Assistant Vice President
for Equitable Capital Management Corporation, New York, NY
from 1987 to 1993.
Patrick P. Coyne (33)
Vice President/Senior Portfolio Manager of Tax-Free Fund, Inc., of
nine other investment companies 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.
Mitchell L. Conery (38)
Vice President/Senior Portfolio Manager of Tax-Free Fund, Inc.,
each of the tax-exempt and the fixed-income funds in the
Delaware Group and Delaware Capital Management.
Before joining the Delaware Group in 1997, Mr. Conery was an
investment officer with Travelers Insurance from 1995 through
1996 and a research analyst with CS First Boston from 1992 to
1995.
Elizabeth H. Howell (35)
Vice President/Senior Portfolio Manager of Tax-Free Funds, Inc. and
Delaware Management Company, Inc.
Before joining Delaware Group in 1997, Ms. Howell was a senior
portfolio manager with Voyageur Fund Managers, Inc.
Andrew M. McCullagh, Jr.(48)
Vice President/Senior Portfolio Manager of Tax-Free Funds, Inc. and
Delaware Management Company, Inc.
Before joining Delaware Group in 1997, Mr. McCullagh was a senior
portfolio manager with Voyageur Asset Management LLC.
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<PAGE>
The following is a compensation table listing for each director or
trustee entitled to receive compensation, the aggregate compensation expected to
be received from each investment company noted below during the actual fiscal
year, the total compensation received from all Delaware Group investment
companies for the fiscal year ended December 31, 1996, and an estimate of annual
benefits to be received upon retirement under the Delaware Group Retirement Plan
for Directors/Trustees as of December 31, 1996.
<TABLE>
<CAPTION>
Total
Compensation
from all 18
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Delaware
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual Group
Funds Funds ment Free Funds ment Funds Funds II Investment
Director/Trustee Inc.(1) Inc.(1) Trust(1) Inc.(1) Trust II(1) Inc.(1) Inc.(1) Companies
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Thacher Longstreth $1,252 $1,323 $1,063 $582 $483 $826 $1,080 $46,187
Ann R. Leven $1,354 $1,435 $1,140 $596 $484 $872 $1,159 $54,323
Walter P. Babich $1,334 $1,413 $1,125 $593 $484 $863 $1,143 $53,323
Anthony D. Knerr $1,334 $1,413 $1,125 $593 $484 $863 $1,143 $53,323
Charles E. Peck $1,252 $1,323 $1,063 $582 $483 $826 $1,080 $49,323
Thomas F. Madison(2) $1,252 $1,323 $1,063 $582 $483 $826 $1,080 N/A
</TABLE>
Pension or Retirement Benefits Accrued
as Part of each Investment Company's Expenses
<TABLE>
<CAPTION>
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual
Funds Funds ment Free Funds ment Funds Funds II
Director Inc. Inc. Trust Inc. Trust II Inc. Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Thacher Longstreth none none none none none none none
Ann R. Leven none none none none none none none
Walter P. Babich none none none none none none none
Anthony D. Knerr none none none none none none none
Charles E. Peck none none none none none none none
Thomas F. Madison none none none none none none none
</TABLE>
Estimated Annual Benefits Upon Retirement*
<PAGE>
<TABLE>
<CAPTION>
Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur Voyageur
Tax Free Insured Invest- Inter. Tax Invest- Mutual Mutual
Funds Funds ment Free Funds ment Funds Funds II
Director Inc. Inc. Trust Inc. Trust II Inc. Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Thacher Longstreth $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Ann R. Leven $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Walter P. Babich $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Anthony D. Knerr $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Charles E. Peck $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Thomas F. Madison $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
</TABLE>
(1) The current Board of Directors was elected by shareholders of Mutual
Funds III, Inc. on April 11, 1997 and began serving on May 1, 1997.
With the exception of Thomas F. Madison, none of the current directors
had served on the prior Board. Compensation figures are estimates of
payments for Mutual Funds III, Inc.'s current fiscal year.
(2) Thomas F. Madison also received $6,126 from Voyageur Tax Free Funds,
Inc., $7,080 from Voyageur Insured Funds, Inc., $4,817 form Voyageur
Investment Trust, $911 from Voyageur Intermediate Funds, Inc., $36 from
Voyageur Investment Trust II, $1,462 from Voyageur Mutual Funds, Inc.
and $4,682 from Voyageur Mutual Funds II, Inc. for his service on the
previous Boards of Directors/Trustees during the last fiscal year.
* 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 April 30, 1997, he or
she would be entitled to annual payments totaling $30,000, in the
aggregate, from all of the funds in the Delaware Group, based on the
number of funds in the Delaware Group as of that date.
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<PAGE>
EXCHANGE PRIVILEGE
The exchange privileges available for shareholders of each Fund's
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. Each 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 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 relevant Fund receives written notice from the
shareholder to the contrary.
Shareholders or their investment dealers of record may contact the
Shareholder Service Center at 800-523-1918 to effect an exchange. The
shareholder's current Fund account number must be identified, as well as the
registration of the account, the share or dollar amount to be exchanged and the
fund into which the exchange is to be made. Requests received on any day after
the time the offering price and net asset value are determined will be processed
the following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent or, as relevant, your Client Services
Representative.) Certain funds are not available for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Group. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and each Fund reserve the right
to record exchange instructions received by telephone and to reject exchange
requests at any time.
As described in the Funds' Prospectus, neither the Funds nor their
Transfer Agent is responsible for any shareholder loss incurred in acting upon
written or telephone instructions for redemption or exchange of Fund shares
which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), each Fund will refuse any new timing
arrangements, as well as any new purchases (as opposed to exchanges) in Delaware
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<PAGE>
Group funds from Timing Firms. A Fund reserves the right to temporarily or
permanently terminate the exchange privilege or reject any specific purchase
order for any person whose transactions seem to follow a timing pattern who: (i)
makes an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) makes more than two exchanges out of
the Fund per calendar quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1/4 of 1% of the Fund's net assets. Accounts
under common ownership or control, including 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. Each Fund reserves the right to apply these same
restrictions to the account(s) of any person whose transactions seem to follow a
timing pattern (as described above).
Each Fund also reserves the right to refuse the purchase side of an
exchange request by any Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if a
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to a Fund and therefore may be
refused.
Except as noted above, only shareholders and their authorized brokers
of record will be permitted to make exchanges or redemptions.
* * *
Following is a summary of the investment objectives of the other
Delaware Group funds:
Delaware Fund seeks long-term growth by a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. Devon Fund
seeks current income and capital appreciation by investing primarily in
income-producing common stocks, with a focus on common stocks the Manager
believes have the potential for above average dividend increases over time.
Trend Fund seeks long-term growth by investing in common stocks issued
by emerging growth companies exhibiting strong capital appreciation potential.
Small Cap Value Fund seeks capital appreciation by investing primarily
in common stocks whose market values appear low relative to their underlying
value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return Fund
seeks long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to principal.
Blue Chip Fund seeks to achieve long-term capital appreciation. Current income
is a secondary objective. It seeks to achieve these objectives by investing
primarily in equity securities and any securities that are convertible into
equity securities. Quantum Fund seeks to achieve long-term capital appreciation.
It seeks to achieve this objective by investing in equity securities of
medium-to large-sized companies expected to grow over time that meet the Fund's
"Social Criteria"
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<PAGE>
strategy.
Delchester Fund seeks as high a current income as possible by investing
principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Strategic Income Fund seeks to
provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities.
U.S. Government Fund seeks high current income by investing primarily
in long-term U.S. government 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 USA Fund seeks high current income exempt from federal income
tax by investing in municipal bonds of geographically-diverse issuers. Tax-Free
Insured Fund invests in these same types of securities but with an emphasis on
municipal bonds protected by insurance guaranteeing principal and interest are
paid when due. Tax-Free USA Intermediate Fund seeks a high level of current
interest income exempt from federal income tax, consistent with the preservation
of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while maintaining
a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital.
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation. Global Assets Fund seeks to achieve
long-term total return by investing in global securities which will provide
higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers located or operating in emerging countries.
Enterprise Fund seeks to provide maximum appreciation of capital by
investing in medium-sized companies which have a dominant position within their
industry, are undervalued, or have potential for growth in earnings. U.S. Growth
Fund seeks to maximize capital appreciation by investing in companies of all
sizes which have low dividend yields, strong balance sheets and high expected
earnings growth rates relative to their industry. World Growth Fund seeks to
maximize total return (capital appreciation and income), principally through
investments in an internationally diversified portfolio of equity securities.
New Pacific Fund seeks long-term capital appreciation by investing primarily in
companies which are domiciled in or have their principal business activities in
the Pacific Basin. Federal Bond Fund seeks to maximize current income consistent
with preservation of capital. The fund attempts to achieve this objective by
investing primarily in securities issued by the U.S. government, its agencies
and instrumentalities. Corporate Income Fund seeks to
124
<PAGE>
provide high current income consistent with preservation of capital. The fund
attempts to achieve this objective primarily by investing in a diversified
portfolio of investment grade fixed-income securities issued by U.S.
corporations.
Delaware Group Premium Fund, Inc. offers fifteen funds available
exclusively as funding vehicles for certain insurance company separate accounts.
Decatur Total Return Series seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. Delchester Series seeks as high a
current income as possible by investing in rated and unrated corporate bonds,
U.S. government securities and commercial paper. Capital Reserves Series seeks a
high stable level of current income while minimizing fluctuations in principal
by investing in a diversified portfolio of short- and intermediate-term
securities. Cash Reserve Series seeks the highest level of income consistent
with preservation of capital and liquidity through investments in short-term
money market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware Series seeks a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. International
Equity Series seeks long-term growth without undue risk to principal by
investing primarily in equity securities of foreign issuers that provide the
potential for capital appreciation and income. Value Series seeks capital
appreciation by investing in small- to mid-cap 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.
Trend Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over time. Emerging Markets Series seeks to achieve long-term capital
appreciation by investing primarily in equity securities of issuers located or
operating in emerging countries. Convertible Securities Series seeks a high
level of total return on its assets through a combination of capital
appreciation and current income by investing primarily in convertible
securities. Quantum Series seeks to achieve long-term capital appreciation by
investing primarily in equity securities of medium to large-sized companies
expected to grow over time that meet the Series' "Social Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a high
level of current income consistent with the prudent investment risk by investing
in U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Minnesota High Yield Municipal Bond Fund seeks to
provide a high level of current income exempt from federal income tax and the
Minnesota personal income tax primarily through investment in medium and lower
grade municipal obligations. National High Yield Municipal Fund seeks to provide
a high level of income exempt from federal income tax, primarily through
investment in medium and lower grade municipal obligations.
Aggressive Growth Fund seeks long-term capital appreciation, which the
Fund attempts to achieve by investing primarily in equity securities believed to
have the potential for high earnings growth. Although the Fund, in seeking its
objective, may receive current income from dividends and interest, income is
only an incidental consideration in the selection of the Fund's investments.
Growth Stock Fund has an objective of long-term capital appreciation. The Fund
seeks to achieve its objective from equity securities diversified among
individual companies and industries. Tax-Efficient Equity Fund seeks to obtain
for taxable investors a high
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<PAGE>
total return on an after-tax basis. The Fund will attempt to achieve this
objective by seeking to provide a high long-term after-tax total return through
managing its portfolio in a manner that will defer the realization of accrued
capital gains and minimize dividend income.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
126
<PAGE>
GENERAL INFORMATION
The Manager is the investment manager of each Fund. The Manager also
provides investment management services to certain of the other funds in the
Delaware Group. The Manager, through a separate division, also manages private
investment accounts. While investment decisions for each Fund are made
independently from those of the other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for each Fund.
Delaware International, or its affiliate Delaware also manages the
investment options for Delaware Medallion(sm) III Variable Annuity. Medallion is
issued by Allmerica Financial Life Insurance and Annuity Company (First
Allmerica Financial Life Insurance Company in New York and Hawaii). Delaware
Medallion offers fifteen different investment series ranging from domestic
equity funds, international equity and bond funds and domestic fixed income
funds. Each investment series available through Medallion utilizes an investment
strategy and discipline the same as or similar to one of the Delaware Group
mutual funds available outside the annuity. See Delaware Group Premium Fund,
Inc., above.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, 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 each Fund and for the
other mutual funds in the Delaware Group.
The following table sets forth the aggregate dollar amount of
underwriting commissions paid by each Fund for the fiscal periods indicated and
the amount of such commissions retained by the Underwriter.
<TABLE>
<CAPTION>
Underwriting Commissions
Total Underwriting Commissions Retained by Underwriter
-------------------------------------- -----------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year ended year ended year ended year ended year ended year ended
12/31/96 12/31/95 12/31/94 12/31/96 12/31/95 12/31/94
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Arizona Insured Fund $339,087 $804,383 $2,007,707 $40,338 $103,168 $272,585
Tax-Free Arizona Fund 104,978 20,987 N/A 13,217 2,901 N/A
Tax-Free California Insured Fund
12/31/95 (1) 107,617 231,679 61,913 14,226 34,177 8,043
10/31/94 N/A N/A 434,743 N/A N/A 58,732
Tax-Free California Fund 11,751 19,639 N/A 1,641 2,554 N/A
Tax-Free Colorado Fund 525,069 721,452 2,513,880 68,666 117,743 346,636
Tax-Free Florida Intermediate Fund 6,853 3,866 0 1,233 741 0
Tax-Free Florida Insured Fund
12/31/95 (1) 174,064 357,154 39,051 20,261 48,112 5,589
10/31/94 N/A N/A 1,497,591 N/A N/A 207,722
Tax-Free Florida Fund 41,214 42,789 N/A 5,271 6,121 N/A
Tax-Free Idaho Fund 313,894 338,974 N/A 32,689 62,968 N/A
Tax-Free Iowa Fund
12/31/95 (1) 167,735 223,046 101,383 26,641 40,943 18,061
8/31/94 N/A N/A 1,352,653 N/A N/A 249,929
Tax-Free Kansas Fund
12/31/95 (1) 55,360 104,287 9,935 7,686 14,394 1,572
10/31/94 N/A N/A 175,196 N/A N/A 24,852
Tax-Free Minnesota Intermediate Fund
12/31/95 (1) 71,429 47,098 126,433 5,306 8,399 22,538
2/28/94 N/A N/A 67,700 N/A N/A 12,408
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
Underwriting Commissions
Total Underwriting Commissions Retained by Underwriter
-------------------------------------- -----------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
year ended year ended year ended year ended year ended year ended
12/31/96 12/31/95 12/31/94 12/31/96 12/31/95 12/31/94
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tax-Free Minnesota Fund 650,734 812,687 1,781,640 69,682 114,391 246,291
Minnesota Insured Fund 454,762 658,955 1,938,352 33,673 86,858 269,910
Tax-Free Missouri Insured Fund
12/31/95 (1) 211,558 316,387 37,792 29,607 53,274 5,375
10/31/94 N/A N/A 467,540 N/A N/A 65,646
Tax-Free New Mexico Fund
12/31/95 (1) 45,937 77,084 7,174 6,724 15,700 1,424
10/31/94 N/A N/A 302,834 N/A N/A 50,348
Tax-Free New York Fund 465 0
Tax-Free North Dakota Fund 38,688 65,566 188,974 5,425 10,960 27,132
Tax-Free Oregon Insured Fund
12/31/95 (1) 149,165 265,488 30,428 20,166 42,930 4,107
10/31/94 N/A N/A 398,064 N/A N/A 55,282
Tax-Free Utah Fund
12/31/95 (1) 4,575 10,693 1,003 800 1,782 201
10/31/94 N/A N/A 75,407 N/A N/A 12,223
Tax-Free Washington Insured Fund
12/31/95 (1) 17,167 26,941 3,265 2,196 3,915 380
10/31/94 N/A N/A 26,890 N/A N/A 3,895
Tax-Free Wisconsin Fund
12/31/95 (1) 107,671 139,886 101,720 11,170 25,338 18,121
8/31/94 N/A N/A 487,555 N/A N/A 71,314
</TABLE>
- -----------------------
(1) Effective 12/31/94, the Fund changed its fiscal year end to 12/31.
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<PAGE>
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
Fund 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 Transfer Agent also
provides accounting services to the Funds. Those services include performing all
functions related to calculating the Fund's net asset value and providing all
financial reporting services, regulatory compliance testing and other related
accounting services. For its services, the Transfer Agent is paid a fee based on
total assets of all funds in the Delaware Group for which it provides such
accounting services. Such fee is equal to 0.25% multiplied by the total amount
of assets in the complex for which the Transfer Agent furnishes accounting
services, where such aggregate complex assets are $10 billion or less, and 0.20%
of assets if such aggregate complex assets exceed $10 billion. The fees are
charged to each fund, including the Fund, on an aggregate pro-rata basis. The
asset-based fee payable to the Transfer Agent is subject to a minimum fee
calculated by determining the total number of investment portfolios and
associated classes.
Norwest Bank Minnesota, N.A. ("Norwest"), Sixth Street & Marquette
Avenue, Minneapolis, Minnesota 55402 is custodian of each Fund's securities and
cash. As custodian for a Fund, Norwest maintains a separate account or accounts
for the Fund; receives, holds and releases portfolio securities on account of
the Fund; receives and disburses money on behalf of the Fund; and collects and
receives income and other payments and distributions on account of the Fund's
portfolio securities.
129
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Capitalization
The Board of Directors has allocated the following number of shares to
each Fund and their respective classes:
<TABLE>
<CAPTION>
<S> <C>
Voyageur Insured Funds, Inc. 10 trillion
Delaware-Voyageur Tax-Free Arizona Insured Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free Colorado Insured Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Minnesota Insured Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Voyageur Intermediate Tax Free Funds, Inc. 10 trillion
Delaware-Voyageur Tax-Free Arizona Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free California Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free Colorado Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Voyageur Mutual Funds II, Inc. 10 trillion
Delaware-Voyageur Tax-Free Colorado Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Voyageur Tax Free Funds, Inc. 10 trillion
Delaware-Voyageur Tax-Free Minnesota Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
Delaware-Voyageur Tax-Free North Dakota Fund 10 billion
A Class 1 billion
B Class 1 billion
C Class 1 billion
</TABLE>
Voyageur Investment Trust and Voyageur Investment Trust III each has a
present unlimited authorized number of shares of beneficial interest with no par
value allocated to each Class.
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While all shares have equal voting rights on matters affecting each
corporate entity, each Fund would vote separately on any matter, such as any
change in its own investment objective and policies or action to dissolve the
Fund and as prescribed by the 1940 Act. Shares of a Fund have a priority in the
assets of the Fund, and in gains on and income from the portfolio of the Fund.
Class A Shares, Class B Shares and Class C Shares of each Fund represent a
proportionate interest in the assets of a Fund 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 Fund
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.
Beginning June 9, 1997, the names of the Funds have changed as follows:
<TABLE>
<CAPTION>
Previous Name New Name
<S> <C>
Voyageur Arizona Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Arizona Intermediate Fund
Voyageur Arizona Insured Tax Free Fund Delaware-Voyageur Tax-Free Arizona Insured Fund
Voyageur Arizona Tax Free Fund Delaware-Voyageur Tax-Free Arizona Fund
Voyageur California Limited Term Tax Free Fund Delaware-Voyageur Tax-Free California Intermediate Fund
Voyageur California Insured Tax Free Fund Delaware-Voyageur Tax-Free California Insured Fund
Voyageur California Tax Free Fund Delaware-Voyageur Tax-Free California Fund
Voyageur Colorado Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Colorado Intermediate Fund
Voyageur Colorado Insured Tax Free Fund Delaware-Voyageur Tax-Free Colorado Insured Fund
Voyageur Colorado Tax Free Fund Delaware-Voyageur Tax-Free Colorado Fund
Voyageur Florida Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Florida Intermediate Fund
Voyageur Florida Insured Tax Free Fund Delaware-Voyageur Tax-Free Florida Insured Fund
Voyageur Florida Tax Free Fund Delaware-Voyageur Tax-Free Florida Fund
Voyageur Idaho Tax Free Fund Delaware-Voyageur Tax-Free Idaho Fund
Voyageur Iowa Tax Free Fund Delaware-Voyageur Tax-Free Iowa Fund
Voyageur Kansas Tax Free Fund Delaware-Voyageur Tax-Free Kansas Fund
Voyageur Minnesota Limited Term Tax Free Fund Delaware-Voyageur Tax-Free Minnesota Intermediate Fund
Voyageur Minnesota Insured Fund Delaware-Voyageur Minnesota Insured Fund
Voyageur Minnesota Tax Free Fund Delaware-Voyageur Tax-Free Minnesota Fund
Voyageur Missouri Insured Tax Free Fund Delaware-Voyageur Tax-Free Missouri Insured Fund
Voyageur New Mexico Tax Free Fund Delaware-Voyageur Tax-Free New Mexico Fund
Voyageur New York Tax Free Fund Delaware-Voyageur Tax-Free New York Fund
Voyageur North Dakota Tax Free Fund Delaware-Voyageur Tax-Free North Dakota Fund
Voyageur Oregon Insured Tax Free Fund Delaware-Voyageur Tax-Free Oregon Insured Fund
Voyageur Utah Tax Free Fund Delaware-Voyageur Tax-Free Utah Fund
Voyageur Washington Insured Tax Free Fund Delaware-Voyageur Tax-Free Washington Insured Fund
Voyageur Wisconsin Tax Free Fund Delaware-Voyageur Tax-Free Wisconsin Fund
</TABLE>
Noncumulative Voting
Each investment company's shares have noncumulative voting rights which
means that the holders of more than 50% of the shares an investment company
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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APPENDIX A
SPECIAL FACTORS AFFECTING THE FUNDS
The following information is a brief summary of particular state
factors effecting the Funds and does not purport to be a complete description of
such factors. The financial condition of a state, its public authorities and
local governments could affect the market values and marketability of, and
therefore the net asset value per share and the interest income of the
respective state Fund, or result in the default of existing obligations,
including obligations which may be held by a Fund. Further, each state faces
numerous forms of litigation seeking significant damages which, if awarded, may
adversely affect the financial situation of such state or issuers located in
such state. It should be noted that the creditworthiness of obligations issued
by local issues may be unrelated to the creditworthiness of a state, and there
is no obligation on the part of a state to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by a state.
Bond ratings received on a state's general obligation bonds, if any,
are discussed below. Moody's, S&P and/or Fitch Investors Service, Inc. provide
an assessment/rating of the creditworthiness of an obligor. The debt rating is
not a recommendation to purchase, sell, or hold a security, inasmuch as it does
not comment as to market price or suitability for a particular investor. The
ratings are based on current information furnished by the issuer or obtained by
the rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstance. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised or
withdrawn entirely by any such rating agencies, if in their respective
judgments, circumstances so warrant. The ratings are based, in varying degrees,
on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of, and provisions of, the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement(s) under the laws
of bankruptcy and other laws affecting creditors rights.
A revision or withdrawal of any such credit rating could have an effect
on the market price of the related debt obligations. An explanation of the
significance and status of such credit ratings may be obtained from the rating
agencies furnishing the same. In addition, a description of Moody's and S&P's
bond ratings is set forth in Appendix A hereto.
The information contained below is based primarily upon information
derived from state official statements, Certified Annual Financial Reports,
state and industry trade publications, newspaper articles, other public
documents relating to securities offerings of issuers of such states, and other
historically reliable sources. It has not been independently verified by the
Funds. The Funds make no representation or warranty regarding the completeness
or accuracy of such information. The market value of shares of any Fund may
fluctuate due to factors such as changes in interest rates, matters affecting a
particular state, or for other reasons.
Factors Affecting Arizona Funds
General Economic Conditions. Progressing from its traditional reliance
on a cyclical construction industry, Arizona's economic base is maturing and
diversifying.
One of the nation's leaders in employment growth, Arizona created close
to 335,000 jobs during 1990-95. After climbing by 6.2% in 1994, during which
the state's economy produced the second-highest number of jobs of any year in
Arizona history, job creation in Arizona is leveling off with employment growth
of 4.2% in 1995-96, although this compares favorably with the national figure of
2.3%. Arizona's wage and salary employment grew 5.4% in 1995 and is forecast to
increase by 4.3% in 1996, 3.7% in 1997 (adding more than
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153,000 new jobs since 1995) and 3.0% in 1998.
Arizona ranked third in the nation in personal income growth during
1990-95. Personal income growth is estimated at 8% in 1996, 6.7% in 1997, and
6.1% in 1998.
Overall, Arizona's forecast is for continued but moderate rates of
growth in employment and personal income. The numbers suggest a positive
outlook, although less so in 1996 and 1997 than in 1994 and 1995. By 1997
employment growth is expected by Arizona to be less than half of Arizona's 1994
growth rate.
Continued job growth is forecast by Arizona to be accompanied by strong
population growth. During the last ten years, Arizona's population grew at an
average rate of 3.5% to a total of 4.1 million people. Arizona's population grew
by an estimated 2.8% in 1994 and 3.5% in 1995. That rate is expected by Arizona
to drop back to 2.5% in 1996 and 2.6% between January of 1997 and January of
1998.
Budgetary Process. Annually, no later than five days after the regular
Legislative session convenes, the Governor must submit a budget to the
Legislature. Before July 1 the budget is enacted through the passage of a
General Appropriations Act, a Capital Outlay Bill and various Omnibus
Reconciliation Bills (ORBs). The reconciliation bills are used for statutory
adjustments that must be implemented to carry out the adopted budget. Upon
presentation, the Governor has five days to sign the bills into law, veto it in
its entirety, line-item veto individual items of appropriations, or allow the
bill to become law without his signature. The Legislature may, with a two-thirds
vote, override a veto or line-item veto.
The Budget Reform Act of 1993 initiated a one-and two-year budget
review process for State agencies beginning with the FY 1996/FY 1997. Agencies
selected for annual review and appropriation are designated as Major Budget
Units (MBUs). MBUs can be described as agencies with difficult issues requiring
frequent and critical reviews and, ultimately, more resources. The 16 MBUs
account for over 90% of the total General Fund expenditures. Agencies selected
for biennial review and appropriation are designated as Other Budget Units
(OBUs). In 1996, combined MBU and OBU in the General Fund totaled $4.38 billion,
and is estimated at $4.77 billion in 1997.
Revenues and Expenditures. The General Fund closed fiscal year 1996
with a $399.9 million ending balance, setting a new record for the state, and
the Executive plan for fiscal year 1997 anticipates a $254.9 million balance.
Overall, fiscal year 1996 revenues exceeded the spring 1996 forecast by about
$95.3 million. While there were many offsetting changes in the various revenue
sources, the most notable were in corporate and individual income taxes.
Revertments were anticipated to be about $75 million in spring 1996. The final
closing of the books revealed total revertments of $112 million - a $37 million
increase. However, some revertments will be administratively adjusted during
fiscal year 1997 to pay bills.
Fiscal Year 1997. In April 1996, when the fiscal year 1997 budget was
adopted, the consensus revenue estimate was $4.72 billion. The current Executive
forecast for fiscal year 1997 is $60 million higher, at $4.78 billion.
The major revenue source remaining essentially unchanged from the
spring 1996 forecast is transaction privilege taxes, still forecast to produce
$2.21 billion for fiscal year 1997. As of November 1996, fiscal year 1997 YTD
revenue collections were up 3.4% over the previous year and support the present
Executive General Fund forecast. All three major revenue categories - individual
income taxes, corporate income taxes and transaction privilege taxes - showed
gains on a year-over-year basis. The most significant impact on fiscal year 1997
revenues will be the $200 million property tax reduction enacted in 1996, which
has decreased revenues by some 3.2%. Overall, the Executive anticipates a 3.4%
or $163.2 billion increase in base revenues of the current FY 1997 estimate.
This compares to the 2.4%, or $112.5 million increase in base revenues between
fiscal year 1996 and fiscal year 1997.
Fiscal Year 1998. The Executive is recommending a base operating budget
of $4.94 billion for fiscal year 1998, an increase of approximately $168.7
million. The majority of recommended expenditures for fiscal year 1998 are in
the area of education. The K-12 budget (Department of Education) and the higher
education
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budgets (Community Colleges and University system) account for 57% (over $2.8
billion) of the General Fund operating budget. Additionally, the health and
welfare area accounts for over 23% (more than $1.1 billion), the protection and
safety area accounts for over 12% ($579 million), and other areas of government
account for less than 8% of the General Fund operating budget.
The Executive fiscal plan for fiscal year 1998 is based on revenue
estimates, yet still provides for Executive-initiated program changes of $59.6
million; a $100 million income tax reduction to continue the Governor's
phase-out of that revenue source; an $84.7 million capital program; and a $28.0
million employee compensation package. The Executive projects a fiscal year 1998
ending balance of $11.2 million.
Significant Litigation. In response to the court's ruling in the
Roosevelt v. Bishop case in 1994, the Executive recommended $30 million for the
first-year implementation of a capital assistance program for Arizona's schools.
The program is designed to help school districts that lack bonding capacity due
to low value or rapid growth. It requires an application that includes
documentation of need and is submitted to a capital equity board. Income is
provided for in a Capital Equity Fund which contains monies appropriated by the
Legislature and $30 million annually from the Common School Land Fund (Permanent
State School Fund). The Permanent State School Fund consists of revenues from
the proceeds of the sale of natural resources or property from lands that have
been granted by the United States to the State of Arizona for the support of
common schools. In future years, the Capital Equity Fund may contain monies
remitted by school districts for the repayment of loans. Funds are used to
assist school districts with capital needs. For fiscal year 1999, the Governor
recommends $40.5 million be appropriated from the Permanent State School Fund,
which includes the $30 million appropriated to the Capital Equity Fund.
Debt Administration and Limitation. The State is not permitted to issue
general obligation debt. The particular source of payment and security for each
of the Arizona Tax Exempt Obligations is detailed in the debt instruments
themselves and in related offering materials. There can be no assurances with
respect to whether the market value or marketability of any of the Arizona Tax
Exempt Obligations issued by an entity other than the State of Arizona will be
affected by financial or other conditions of the State or of any entity located
within the State. In addition, it should be noted that the State of Arizona, as
well as counties, municipalities, political subdivisions and other public
authorities of the State, are subject to limitations imposed by Arizona's
Constitution with respect to ad valorem taxation, bonded indebtedness and other
matters. For example, the State legislature cannot appropriate revenues in
excess of 7% of the total personal income of the State in any fiscal year. These
limitations may affect the ability of the issuers to generate revenues to
satisfy their debt obligations.
Although most of the Arizona Tax Exempt Obligations are revenue
obligations of local governments or authorities in the State, there can be no
assurance that the fiscal and economic conditions referred to above will not
affect the market value or marketability of the Arizona Tax Exempt Obligations
or the ability of the respective obligors to pay principal of and interest on
the Arizona Tax Exempt Obligations when due.
Factors Affecting California Funds
General Economic Conditions. California's economy is the largest among
the 50 states and one of the largest in the world. This diversified economy has
major components in agriculture, manufacturing, high-technology, trade,
entertainment, tourism, construction and services. Total State gross domestic
product of $1 trillion in 1997 will be larger than all but seven nations in the
world and California will become the first state to produce over one trillion
dollars worth of goods and services in a single year.
After suffering through a severe recession, California's economy has
been on a steady recovery since the start of 1994. In 1996, California had eight
consecutive months of record high employment levels. Employment grew over
330,000 non-farm jobs in 1996, and is expected to add another 330,000 jobs in
1997. The strongest growth has been in high technology and export-related
industries, including computer software, business services, electronics,
entertainment and tourism, all of which have offset the recession-related losses
which were heaviest in aerospace and defense-related industries (which accounted
for two-thirds of the job losses), and finance and insurance. Residential
housing construction, with new permits rising from 94,000 units in 1996 to
110,000 in 1997, is weaker than in previous recoveries, but has been growing
slowly since 1993.
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The State's July 1, 1994 population of 32.1 million represented over
12% of the total United States population. California's population is
concentrated in metropolitan areas. As of July 1, 1994, the 5-county Los Angeles
area accounted for 48% of the State's population, with 15.6 million residents,
and the 10-county San Francisco Bay Area represented 21% with a population of
6.7 million. The June 1996 population projection forecasts 33.9 million
California residents in July 1998.
California enjoys a large and diverse labor force. For the year 1996,
the total civilian labor force was 15,496,000 with 14,372,000 individuals
employed and 1,124,000, or 7.3%, unemployed. In comparison, the unemployment
rate for the United States during the same time was 5.4%.
Budgetary Process. The State's fiscal year begins on July 1 and ends on
June 30. The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Under the State Constitution, money may be drawn from the Treasury only through
an appropriation made by law. The primary source of the annual expenditure
authorizations is the Budget Act as approved by the Legislature and signed by
the Governor. The Budget Act must be approved by a two-thirds majority vote of
each House of the Legislature. The Governor may reduce or eliminate specific
line items in the Budget Act or any other appropriations bill without vetoing
the entire bill. Such individual line-item vetoes are subject to override by a
two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except K-14 education) must be
approved by a two-thirds majority vote in each House of the Legislature and be
signed by the Governor. Bills containing K-14 education appropriations only
require a simple majority vote. Continuing appropriations, available without
regard to fiscal year, may also be provided by statute or the State
Constitution. Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
Revenues and Expenditures. The moneys of the State are segregated into
the General Fund and approximately 600 Special Funds. The General Fund consists
of revenues received by the State Treasury and not required by law to be
credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General Fund may be
expended as a consequence of appropriation measures enacted by the Legislature
and approved by the Governor, as well as appropriations pursuant to various
constitutional authorizations and initiative statutes.
Moneys on deposit in the State's Centralized Treasury System are
invested by the Treasurer in the Pooled Money Investment Account ("PMIA"). As of
January 31, 1996, the PMIA held approximately $17.31 billion of State moneys,
and $10.60 billion of moneys invested for 2,366 local governmental entities
through the Local Agency Investment Fund ("LAIF"). The total assets of the PMIA
as of January 31, 1996 were $27,912,100,000. The Treasurer does not invest in
leveraged products or inverse floating rate securities. The investment policy
permits the use of reverse repurchase agreements subject to limits of no more
than 10% of PMIA. All reverse repurchase agreements are cash matched either to
the maturity of the reinvestment or an adequately positive cash flow date which
is approximate to the maturity date. The average life of the investment
portfolio of the PMIA as of January 31, 1996 was 233 days.
Special Fund for Economic Uncertainties. The Special Fund for Economic
Uncertainties ("SFEU") is funded with General Fund revenues and was established
to protect the State from unforeseen revenue reductions and/or unanticipated
expenditure increases. Amounts in the SFEU may be transferred by the State
Controller as necessary to meet cash needs of the General Fund. The State
Controller is required to return moneys so transferred without payment of
interest as soon as there are sufficient moneys in the General Fund. For
budgeting and accounting purposes, any appropriation made from the SFEU is
deemed an appropriation from the General Fund. For year-end reporting purposes,
the State Controller is required to add the balance in the SFEU to the balance
in the General Fund so as to show the total moneys then available for General
Fund purposes. Inter-fund borrowing has been used for many years to meet
temporary imbalances of receipts and
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disbursements in the General Fund. As of June 30, 1995, the General Fund did not
have any outstanding loans from Special Funds (but did have $4 billion of
external loans represented by the 1994 Revenue Anticipation Warrant, Series C
and D which matured on April 25, 1996). As of June 30, 1996, the General Fund
Reserve for Economic Uncertainties was $234.6 million.
Proposition 13. The primary units of local government in California are
the counties. Counties are responsible for the provision of many basic services,
including indigent health care, welfare, courts, jails and public safety in
unincorporated areas. There are also about 480 unincorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. A recent California Supreme Court decision has upheld the
constitutionality of an initiative statute, previously held invalid by lower
courts, which requires voter approval for "general" as well as "special" taxes
at the local level. Counties, in particular, have had fewer options to raise
revenues than many other local government entities, yet have been required to
maintain many services.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding local K-12 schools and
community colleges. Under the pressure of the recent recession, the Legislature
has eliminated the remnants of this post-Proposition 13 aid to entities other
than K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced mandates for local services. Many
counties continue to be under severe fiscal stress. While such stress has in
recent years most often been experienced by smaller, rural counties, larger
urban counties, such as Los Angeles, have also been affected.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution (the
"Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds. Article XIII B
prohibits the State from spending "appropriations subject to limitation" in
excess of the Appropriations Limit. "Appropriations subject to limitation," with
respect to the State, are authorizations to spend "proceeds of taxes," which
consist of tax revenues, and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such proceeds
exceed "the cost reasonably borne by that entity in providing the regulation,
product or service," but "proceeds of taxes" exclude most state subventions to
local governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain other
non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
Orange County, CA. On December 6, 1994, Orange County, together with
its pooled investment funds (the "Pools") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in their investments, causing a liquidity crisis for
the Pools and Orange County. More than 200 other public entities, most of which,
but not all, are located in Orange County, were also depositors in the Pools.
Orange County has reported the Pools' loss at about $1.69 billion, or about 23%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Pools, including Orange County, faced interim
and/or extended cash flow difficulties because of the bankruptcy filing and may
be required to reduce programs or capital projects. Orange County has embarked
on a fiscal recovery plan based on sharp reductions in services and personnel,
and rescheduling of outstanding short term debt using certain new revenues
transferred to Orange County from other local governments pursuant to special
legislation enacted in October, 1995. The State has no existing obligation with
respect to any outstanding obligations or securities of Orange County or any of
the other participating entities.
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Litigation Generally. The State is a party to numerous legal
proceedings, many of which normally occur in governmental operations. In the
consolidated state case of Malibu Video Systems, et al. v. Kathleen Brown and
Abramovitz, et al., a stipulated judgment has been entered requiring return of
$119 million plus interest to specified special funds over a period of up to
five years beginning in fiscal year 1996-1997. The lawsuit challenges the
transfer of monies from special fund accounts within the State Treasury to the
State's General Fund pursuant to the Budget Acts of 1991, 1992, 1993, and 1994.
Plaintiffs allege that the monetary transfers violated various statutes and
provisions of the State Constitution.
Fiscal Year 1996-1997. On January 10, 1996, the Governor released his
proposed budget for the fiscal year 1996-97. The Governor requested total
General Fund appropriations of about $45.2 billion, based on projected revenues
and transfers of about $45.6 billion, which would leave a budget reserve in the
SFEU at June 30, 1997 of about $400 million. The Governor renewed a proposal,
which had been rejected by the Legislature in 1995, for a 15% phased cut in
individual and corporate tax rates over three years (the budget proposal assumes
this will be enacted, reducing revenues in 1996-97 by about $600 million). There
was also a proposal to restructure trial court funding in a way which would
result in a $300 million decrease in General Fund revenues. The Governor
requested legislation to make permanent a moratorium on cost of living increases
for welfare payments, and suspension of a renters tax credit, which otherwise
would go back into effect in the 1996-97 fiscal year. The Governor further
proposed additional cuts in certain health and welfare programs, and assumed
that cuts previously approved by the Legislature will receive federal approval.
Other proposals included an increase in funding for K-12 schools under
Proposition 98, for state higher education systems (with a second year of no
student fee increases), and for corrections. The Governor's Budget projected
external cash flow borrowing of up to $3.2 billion, to mature by June 30, 1997.
Revised estimates were published in the Governor's Budget Summary for fiscal
year 1997-98. These estimates and projections are based upon various assumptions
which may be affected by numerous factors, including future economic conditions
in the State and the nation, and there can be no assurance that the estimates
will be achieved.
Preliminary General Fund revenues and transfers for fiscal year 1996-97
are $48.4 billion, a 4.56% increase from the prior year. Expenditures are
estimated at $48.4 billion, a 6.6% increase. The Governor's Budget Summary for
fiscal year 1997-98 projects a positive balance of $197 million in the budget
reserve, the SFEU, at June 30, 1997. Special Fund revenues are estimated at
$13.54 billion and appropriated Special Fund expenditures at $13.59 billion. As
of June 30, 1996, the General Fund balance was $685.4 million. The estimate for
June 30, 1997 is $648 million.
Overall, General Fund revenues and transfers represent about 78% of
total revenues. The remaining 22% are special funds, dedicated to specific
programs. The three largest revenue sources (personal income, sales, and bank
and corporation) account for about 73% of total revenues.
Several important tax changes were enacted in 1996. The bank and
corporation tax was reduced by 5%, and a number of targeted business tax
incentives were put into place.
1997-98 Fiscal Year. The Governor's proposed budget for fiscal year
1997-98 keeps General Fund spending below revenues. The budget provides for
General Fund revenues and transfers of $50.7 billion, a 4.65% increase from
1996-97, and expenditures of $50.3 billion, a 4% increase. The budget provides
for a General Fund Reserve for Economic Uncertainties of $553 million. The
balance in the General Fund at the end of fiscal year 1998 is forecast at $1,004
million. Special Fund revenues are estimated to be $14 billion and appropriated
Special Fund expenditures are projected at $14.3 billion.
K-12 education remains the state's top funding priority -- nearly
42 cents of every General Fund dollar is spent on K-12 education. Education,
public safety, and health and welfare expenditures constitute nearly 93% of all
state General Fund expenditures. General Fund expenditures for 1997-98 are
proposed in the following amounts and programs: $20.9 billion or 41.6% for K-12
education, $14.6 billion or 28.9% for health and welfare, $6.5 billion or 12.9%
for higher education, and $4.3 billion, or 8.5% for youth and correctional
programs. The remaining expenditures are in areas such as business,
transportation, housing, and environmental protection.
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The following are principal features of the Governor's 1997-98
budget proposal:
For fiscal year 1997-98, the Governor's budget proposes a further
10% reduction in the bank and corporation tax rate phased in over a two-year
period beginning with the 1998 tax year. This would implement the balance of the
Governor's proposal last year for a 15% bank and corporation tax reduction. In
addition, the Governor's Budget proposes that the State conform with recent
federal changes in the allowable number of Subchapter S shareholders. Combined,
these tax reduction proposals are estimated to reduce taxes by $93 million
during 1997-98, and $336 million during 1998-1999.
The Governor has proposed a $200 million bond to capitalize an
Infrastructure Bank to help finance infrastructure projects related to business
development. The budget also proposes $939,000 to create three new offices --
two in Asia and one in South America -- to provide California companies with
representation and assistance in these emerging markets.
Building on the 1996 class-size reduction initiative, the Budget
proposes $304 million to reduce class size in an additional grade, and funding
is provided to meet facilities-related costs of class size reduction in 1996-97.
An additional $57 million is proposed for improved reading instruction in grades
four through eight.
The Budget includes the second year of the Citizens' Option for
Public Safety Program, through which $100 million will be provided to local
governments to increase frontline law enforcement.
The Budget provides a $35 million Infant Health Protection
Initiative, designed to protect children from abuse or neglect from
substance-abusing parents. The budget also provides $15.3 million to increase
immunizations for low-income children.
Debt Administration and Limitation. The State Treasurer is
responsible for the sale of debt obligations of the State and its various
authorities and agencies. The State Constitution prohibits the creation of
indebtedness of the State unless a bond law is approved by a majority of the
electorate voting at a general election or a direct primary. General obligation
bond acts provide that debt service on general obligation bonds shall be
appropriated annually from the General Fund and all debt service on general
obligation bonds is paid from the General Fund. Under the State Constitution,
debt service on general obligation bonds is the second charge to the General
Fund after the application of moneys in the General Fund to the support of the
public school system and public institutions of higher education. Certain
general obligation bond programs receive revenues from sources other than the
sale of bonds or the investment of bond proceeds. The State had $17,913,271,000
aggregate principal amount of general obligation bonds outstanding, and
$8,383,864,000 authorized and unissued, as of December 31, 1996. Outstanding
lease revenue bonds totaled $5.845 billion as of June 30, 1996, and are
estimated to total $6.398 billion as of June 30, 1997.
From July 1, 1995 to December 15, 1995, the State issued
approximately $461 million in general obligation bonds and $44 million in
revenue bonds. Refunding bonds, which are used to refinance existing debt,
accounted for $81 million of the general obligation bonds and the entire $44
million of the revenue bonds. The Legislature placed two general obligation bond
measures totaling $5 billion on the March, 1996 statewide ballot. Additional
bond measures may be placed on the November 1996 ballot.
General Fund general obligation debt service expenditures for
fiscal year 1995-96 were $1.911 billion, and are estimated at $1.953 billion and
$1.979 billion for fiscal years 1996-97 and 1997-98, respectively.
The State's general obligation bonds have received ratings of "A1"
by Moody's Investors Service, "A" by Standard & Poor's Ratings Group and "A+" by
Fitch Investors Service, Inc.
Factors Affecting Colorado Funds
General Economic Conditions. Colorado entered the Union on August 1,
1876, and was called the "Centennial State" in honor of the 100th anniversary of
the Declaration of Independence. It is the eighth largest
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state in the nation, with an area of 104,247 square miles. The main feature of
the state's geography is the Continental Divide, extending northeast to
southwest and roughly bisecting Colorado into the Eastern and Western Slopes.
The major rivers of Colorado are the Arkansas, Platte, Rio Grande, and Colorado.
Colorado enjoys an average of nearly 300 days of sunshine per year.
Precipitation varies from 8 inches per year in lower elevations to 23 inches in
the mountains, with a yearly statewide average of 16.5 inches.
The U.S. Bureau of Census estimates Colorado's population in 1996
at 3.821 billion. This represents a 2.0% increase over the 1995 estimate of
3.747 billion. Colorado's population growth is predicted at 1.9% in 1997 and
1.8% in 1998, both years higher than the 1.2% estimated national rate for 1997
and 1998. A large part of Colorado's current growth is related to growth in the
West and to decentralization trends that emanate from California.
As the primary services center for the Rocky Mountain region, the
state suffered a sharp recession in the mid-to-late 1980s because of
retrenchment in the energy sector. Real estate values dropped sharply, with
evidence of overbuilding in commercial and residential sectors. Office vacancy
rates in the Denver area soared, and the state lost significant jobs in mining
and construction.
Colorado's economic vitality returned and was evident through the
1991-1992 national recession and more recent recovery. Wage and salary
employment growth topped 5.1% in 1994, but dropped to 4.7% in 1995 and an
estimated 2.5% in 1996. Personal income grew 8% in 1995 but dropped to an
estimated 6.3% in 1996. The state has added nearly 318,500 jobs during
1990-1995, mostly in service, trade, and government with an additional 45,200
estimated for 1996, a 2.5% increase from 1995, but lower than the 5.1% and 4.7%
increases in 1994 and 1995, respectively. Construction employment has been
strong, bolstered by the recently completed Denver International Airport
construction, but activity has shifted to other public infrastructure projects
and single-family homes. Estimates for 1996 show employment is now diversified
among service (29.7%), trade (24.5%), government (16.2%), and manufacturing
(10.5%). Housing starts have dramatically increased from 14,100 units permitted
in 1991 to an estimated 41,400 in 1996. Conversely, the state's mining sector
has recorded the loss of about 6,200 jobs since 1990. Transportation,
communications and public utilities, as well as retail trade has been strong,
growing 9% and 7.1%, respectively, in 1995. Income levels, while below their
early 1980s peak, are rising, with per capita personal income at 103% of the
national average.
The Colorado economy will continue to chalk up gains in 1997 but
not at the pace of the last three years. Absorbing the job cuts at Union Pacific
Railroad, USWEST, and Fitzsimmon's Army Medical Center will curtail growth. The
Colorado economy has now achieved more sustainable growth rates, but employment
will begin to tail off at the turn of the century. While construction job losses
at the airport largely have been absorbed into other public infrastructure
projects and residential housing, the construction sector is likely to lose jobs
as population growth slows. Projections of 2.4% employment growth and 6.4%
growth in personal income for 1997 are still strong by national standards, but
represent a slowdown from recent growth. The state unemployment rate should stay
below the national rate.
Significant Litigation. On June 19, 1995, the Colorado Supreme
Court affirmed the December 1993 Arapahoe County District Court decision in
favor of the Littleton School District. The Bolt v. Littleton School District
case was a class action lawsuit brought by three taxpayers residing in the
District. Plaintiffs argued that Littleton School District's 1993 property tax
millage rate increase violated Amendment 1. The Amendment states that all
Districts must obtain voter approval in advance of any new tax, tax rate
increase, or mill levy above that for the prior year, unless annual District
revenue is less than annual payments on G.O. bonds, pensions, and final court
judgments, with certain exceptions. The School District increased its 1993 mill
levy to pay debt service on its Series 1985 G.O. bonds. In affirming the Trial
Court's ruling in favor of the District, the Supreme Court reasoned that the
increase in the District's bond redemption mill levy for 1993 did not violate
the provisions of Amendment 1 because the District already received voter
approval for the tax rate increase when the Bonds originally were authorized by
voters at an election in 1984. The ruling has significance for the Colorado
municipal bond market because it upholds the right of Municipalities to increase
property tax millage rates to pay debt service on G.O. bonds issued before
Amendment 1.
The Littleton ruling follows another important ruling by the
Colorado Supreme Court in September,
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1995 in the case of Bickel v. City and County of Boulder and Boulder Valley
School District. In that case the court upheld the right of Municipalities to
request and obtain voter approval to issue G.O. bonds after passage of Amendment
1. Together, the Boulder and Littleton cases settle two of the most
controversial Amendment 1 issues and should lead to a more orderly primary and
secondary market for Colorado municipal bonds.
Budgetary Process. The financial operations of the legislative,
judicial, and executive branches of the state's government, with the exception
of custodial funds or federal moneys not requiring matching state funds, are
controlled by annual appropriation made by the General Assembly. The
Transportation Department's portion of the Highway Fund is appropriated to the
State Transportation Commission. Within the legislative appropriation, the
Commission may appropriate the specific projects and other operations of the
Department. In addition, the Commission may appropriate available fund balance
from their portion of the Highway Fund.
The legislative appropriation is constitutionally limited to the
unrestricted funds held at the beginning of the year plus revenues estimated to
be received during the year as determined by the modified accrual basis of
accounting. The Governor has line item veto authority over the Long
Appropriations Bill, but the General Assembly may override each individual line
item veto by a two-thirds majority vote in each house. For budgetary purposes,
cash funds are all funds received by the state that are neither general purpose
revenues, nor revenues received from the federal government. General and cash
fund appropriations, with the exception of capital construction, lapse at
year-end unless executive action is taken to roll-forward all or part of the
remaining unspent budget authority. Appropriations that meet the strict criteria
for roll-forward are reserved at year-end. Capital construction appropriations
are generally available for three years after appropriations.
Revenues and Expenditures. Audited GAAP financial statements for
the year-ended June 30, 1996 report an unreserved general fund balance of $368.5
million, or about 8.4% of general fund expenditures, and after setting aside
reserve monies, as required by statute, the ending fund balance was $211.8
million. This is in contrast to the unreserved general fund balance of just
$16.3 million in 1991 but lower than $488.5 million in 1995. In fiscal 1996,
challenged to deliver on a 1988 plan to increase the state's contribution toward
primary and secondary education, the state budget provided approximately $1.6
billion to K-12 education. Revenue growth was 6.8% in 1996, and 6.9% estimated
in 1997, with sales tax collections growing 8.1% in fiscal 1996 and an estimated
5.0% in 1997, while individual income taxes grew 10.1% in fiscal 1996 and are
projected to grow 9.1% in 1997.
For fiscal year 1996, general fund expenditures exceeded revenues
by $142.5 million due to actions taken during the 1996 legislative session.
There has been a change in managing the TABOR (Article X) Reserve: the state
controller transferred $196 million to the Controlled Maintenance Trust Fund
(CMTF) at the end of fiscal year 1996, with the balance in this fund satisfying
the state's Article X reserve requirement. Also, the legislature increased the
amount of the General Fund transfer to the Capital Construction Fund (up to $159
million from $120.3 million in fiscal year 1995).
For fiscal year 1997, appropriations are right at the 6%
expenditure limit of $4,151.9 million, or $235 million more than current-year
spending. Factoring in the first year of the Governor's revenue spending plan
for highways, the ending fund balance, after reserves, is estimated to increase
by $27.8 million to $396.3 million. After set-asides for required reserves, the
ending fund balance is projected to be $230.2 million, more than 5% of total
expenditures.
The Amendment 1 constitutional revenue and spending limit will not
affect the fiscal 1997 or 1998 budget, because projected revenues and
expenditures fall below limits. With slower population growth, the long-term
projections suggest a convergence of revenues with the amendment's limits.
General fund revenues for fiscal year 1997-98 are estimated to grow
by 4.5%, or $207.2 million, compared to the projected 6.9% growth rate for
1996-97. This lower growth rate is primarily due to the Governor's proposal to
eliminate intergovernmental transfers from the state's largest hospitals. After
reserve set-asides, the state is estimated to have an ending fund balance of
$159.7 million.
The State Controller may allow certain over expenditures of
the legal appropriation with the
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approval of the Governor. If the State Controller restricts the subsequent year
appropriation, the agency is required to seek a supplemental appropriation from
the General Assembly or reduce their subsequent year's expenditures. As provided
by statute, there is unlimited authority for Medicaid over expenditures. The
Department of Human Services is allowed $1 million in over expenditures not
related to Medicaid and unlimited over expenditures for self-insurance of its
workers' compensation plan. An additional $1 million over expenditure is allowed
for the Judicial Branch. State statute also allows over expenditures up to $1
million in total for the remainder of the executive branch.
Debt Administration and Limitation. The Constitution prohibits
Colorado from incurring G.O. debt, and most long-term financing takes the form
of lease purchase obligations. The state relies on general fund appropriations
for pay-as-you-go capital projects, with $159 million transferred to the capital
construction fund in 1996 and $116 million estimated in 1997. Since 1988, the
State's master lease purchase program primarily has been used to finance new
correctional facilities. Lottery revenues are intended for repayment on these
obligations, but deficiencies are appropriated from the general fund. In
November 1992, Colorado voters approved an amendment that redirects lottery
revenues to outdoor recreation. After 1998, alternate general fund resources
will need to be allocated for future lease payments, but the annual lease
payment obligation by then is only about $2.5 million. The State supports
affordable housing through the Colorado Housing Finance Authority, whose G.O.s
ultimately are secured by the State's moral obligation pledge.
The Funds Management Act (the "Act") was enacted to allow the State
to provide for temporary cash flow deficits caused by fluctuations in revenues
and expenditures. Under the Act the State Treasurer is authorized to sell Tax
and Revenue Anticipation Notes which are payable from the future anticipated
pledged revenues. The law directs the State Auditor to review information
relating to the Notes and report this information to the General Assembly. On
July 6, 1996, the State Treasurer issued General Fund Tax Revenue Anticipation
Notes (the "Notes") in the amount of $400 million. These Notes have a maturity
date of June 27, 1997 and are not subject to redemption prior to maturity. The
amount due at maturity is $418,000,000 consisting of the Note principal of
$400,000,000 and interest of $18,000,000. To ensure the payment of the Notes,
the Treasurer has agreed to deposit pledged revenues into the Account so that
the balance on June 15, 1997, will be no less than the amount to be repaid. The
Note agreement also provides remedies for holders of the Notes in the event of
default.
Since the State of Colorado does not have G.O. debt, it does
not have S&P, Moody's or Fitch ratings.
Factors Affecting Florida Funds
General Economic Conditions. Florida is the twenty-second (22nd)
largest state with an area of 54,136 square miles and a water area of 4,424
square miles. The State is 447 miles long (St. Marys River to Key West) and 361
miles wide (Atlantic Ocean to Perdido River) and has tidal shoreline of almost
2,300 miles. Florida has grown dramatically since 1980 and in 1994, ranked
fourth among the fifty states with an estimated population of 13.9 million. By
1996, Florida's population increased to 14.4 million, with projections of 15
million by 1999. The State's strong population growth is one fundamental reason
why its economy has typically performed better than the nation as a whole. Since
1984, the United States has had an average population increase of about 1.0%
annually, while Florida's average annual rate of increase is around 2.3%.
However, during 1992-96, Florida's annual net migration increase averaged 1.82%
and is predicted at 1.8% for 1997-98. Yet, Florida has been, and continues to
be, the fastest growing of the eleven (11) largest states.
While many of the Nation's senior citizens choose Florida as their
place of retirement, the State is also recognized as attracting a significant
number of working age people. Since 1985, the prime working age population
(18-44) has grown at an average annual rate of 2.2%. Florida's economic assets,
such as competitive wages and low per capita taxes, have attracted new
businesses and consequently have created many new job opportunities. The share
of Florida's total working age population (18-59) to total population is
approximately 54%.
Over the years, Florida's personal income has grown and has
generally outperformed both the U.S. as a whole and the southeast in particular.
The reasons for this are two fold. First, Florida's population has
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expanded. Second, the State's economy since the early seventies has diversified
in such a way as to provide a broader economic base. As a result, Florida's
personal income has tracked closely with the national average and, historically,
above that of the southeast. From 1985 through 1994, Florida's per capita income
rose an average of 5.2% per year, while the national per capita income increased
an average of 5.1%. Real personal income increased 4.5% in 1995-96 and is
estimated to increase 4.2% in 1996-1997 and increase 4.4% in 1997-1998, while
real income per capita peaked at 2.6% in 1995-96 and is projected to grow at
2.3% in 1996-1997 and 2.6% in 1997-1998.
In recent years, the State's service sector employment has
accounted for approximately 85% of total non-farm employment. While structurally
the southeast and the nation are endowed with a greater proportion of
manufacturing jobs, which tend to pay higher wages, service jobs, historically,
tend to be less sensitive to business cycle swings. Florida has a concentration
of manufacturing jobs in high-tech and high value-added sectors, such as
electrical and electronic equipment, as well as printing and publishing. The
State's manufacturing sector has kept pace with the U.S., at about 2.7% of total
U.S. manufacturing employment since the eighties.
Total non-farm employment is expected to increase 2.9% or 180,000
jobs in 1996-97 and remain stable at 2.9% or 183,500 new jobs in 1997-98. The
strongest areas in job growth in Florida in fiscal year 1997-98 are expected to
be in services and a combination of retail and wholesale trade. Services are
forecast to lead the economy, growing 4.3% (93,500 jobs) in fiscal year 1997-98,
and accounting for about 51% of total new jobs in that year. Services are the
single largest source of employment in Florida, making up about 35% of the total
in fiscal year 1997-98.
Wholesale and retail trade is projected to increase 2.9% in fiscal
year 1997-98 (47,100 new jobs), which parallels general economic growth. This
sector is the second largest, with about 25% of all jobs in the state, and is
anticipated to contribute about 26% of the new jobs created in fiscal year
1997-98. Construction will exhibit modest growth of 2.5% (7,800 new jobs)
reflecting stable construction activity supported by population growth.
Manufacturing, with slightly more than 7% of total jobs, will have the slowest
positive growth rate among the major sectors in fiscal year 1997-98, at less
than 1% (2,800 new jobs).
As the State's economic growth has slowed from its previous highs,
the unemployment rate has tracked above the national average. More recently,
Florida's unemployment rate has been below the national average. Florida's
unemployment rate was 5.5% in 1995 and as of November 1996, the rate was 4.8%,
giving an 11-month average of 5.3%. The national unemployment rate was 5.6% in
1995 and averaged 5.4% in 1996.
Tourism is one of Florida's most important industries.
Approximately 41 million people visited the State in 1995. In terms of business
activities and State tax revenues, tourists in Florida effectively represented
additional residents, spending their dollars predominantly at eating and
drinking establishments, hotels and motels, and amusements and recreation parks.
The State's tourist industry over the years has become more sophisticated,
attracting visitors year-round, thus, to a degree, reducing its seasonality.
Besides a sub-tropical climate and clean beaches that attract people in the
winter months, the State has added, among other attractions, a variety of
amusement and educational theme parks. This diversification has helped to reduce
the seasonal and cyclical character of the industry and has effectively
stabilized tourist related employment as a result. By the end of fiscal year
1996, 41.4 million domestic and international tourists are expected to have
visited the State. In 1997-1998, tourist arrival should reach a high of 43.9
million, representing 3.2% growth from 1996-97. The current Florida Economic
Consensus Estimating Conference forecast shows that the Florida economy is
expected to decelerate along with the nation, but will continue to outperform
the U.S. as a whole as a result of relatively rapid population growth.
Budgetary Process. The budgetary process is an integrated,
continuous system of planning, evaluation and controls. Individual state
agencies prepare and submit appropriation requests to the Office of Planning and
Budgeting, Executive Office of the Governor, no later than September 1 of the
year next preceding Legislative consideration. After an evaluation of the
agencies' requests, the Office of Planning and Budgeting, Executive Office of
the Governor, makes recommendations to the Governor that are within previously
established policy guidelines of the Governor and revenue estimate. Florida
Statutes provides that
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financial operations of the State covering all receipts and expenditures be
maintained through the use of three funds - the General Revenue Fund, Trust
Funds, and Working Capital Fund. The General Revenue Fund receives the majority
of State tax revenues. Monies for all funds are expended pursuant to
appropriations acts. The Trust Funds consist of monies received by the State
which under law or trust agreement are segregated for a purpose authorized by
law. Revenues in the General Fund which are in excess of the amount needed to
meet appropriations may be transferred to the Working Capital Fund. The Florida
Constitution adds a fourth fund, the Budget Stabilization Fund. The Florida
Constitution and Statutes mandate that the State budget as a whole, and each
separate fund within the State budget be kept in balance from currently
available revenues each State Fiscal year (July 1-June 30). The Governor and
Comptroller are responsible for insuring that sufficient revenues are collected
to meet appropriations and that no deficit occurs in any State fund.
Revenues and Expenditures. Financial operations of the State of
Florida covering all receipts and expenditures are maintained through the above
described four fund types - General Revenue Fund, Trust Funds, Working Capital
Fund, and Budget Stabilization Fund. In fiscal year 1997-1998, an estimated 40%
of total direct revenues to these funds will be derived from State taxes and
fees. Federal funds and other special revenues account for the remaining
revenues. Major sources of tax revenues to the General Revenue Fund are the
sales and use tax, corporate income tax, intangible personal property tax, and
beverage tax, which are estimated to amount to 72%, 8%, 4%, and 3%,
respectively, of total General Revenue funds available.
State expenditures are categorized for budget and appropriation
purposes by type of fund and spending unit, which are further subdivided by line
item. For fiscal year 1997-1998, the Governor recommended appropriations from
the General Revenue Fund for education, health and welfare, and public safety
amounted to approximately 52%, 26%, and 16%, respectively, of total General
Revenue funds available.
Estimated fiscal year 1996-97 General Revenue plus Working Capital
and Budget Stabilization funds available to the State total $16,601.7 million.
Of the total General Revenue plus Working Capital and Budget Stabilization funds
available to the State, $15,566.9 million of that is Estimated Revenues. With
effective General Revenues plus Working Capital Fund appropriations at $15,582.2
million, unencumbered reserves at the end of 1996-97 are estimated at $610.1
million. Estimated fiscal year 1997-98 General Revenue plus Working Capital and
Budget Stabilization funds available total $17,384.9 million, a 4.7% increase
over 1996-97. The $16,301.5 million in Estimated Revenues represents an increase
of 4.7% over the previous year's Estimated Revenues.
The State Treasurer is responsible for investing the General
Revenue Fund and trust fund monies. Authorized investments include certificates
of deposits in Florida banks and savings and loan associations, direct
obligations of the United States Treasury, commercial paper and banker's
acceptances, medium-term corporate notes and co-mingled and mutual funds. Among
other functions, the Treasurer also serves as administrator of the Florida
Security for Public Deposit Program. This program encompasses all governmental
entities in the State. Participating banks and savings and loan associations
guarantee government deposits and pledge collateral at levels varying between
50% and 125%. Acceptable collateral includes obligations of the United States
Government and its agencies, obligations of the State of Florida and its
political subdivisions, and obligations of several states.
Debt Administration. By law, the State of Florida is not authorized
to issue obligations to fund governmental operations. State bonds, pledging the
full faith and credit of the State of Florida may be issued only to finance or
refinance the cost of State fixed capital outlay projects upon approval by a
vote of the electors. Article III, Section 11(d) of the Florida Constitution
provides that revenue bonds may be issued by the State of Florida or its
agencies without a vote of the electors only to finance or refinance the cost of
State fixed capital outlay projects which shall be payable solely from funds
derived directly from sources other than State tax revenues.
Florida maintains a bond rating from Moody's Investors Services
(Aa), Standard and Poor's Corporation (AA) and Fitch Investors Service, Inc.
(AA) on all of its general obligation bonds. As of June 30, 1996, the state's
net outstanding debt totaled $9.2 billion. Approximately 67% of Florida's debt
is full faith and credit bonds while the remaining 33% is comprised of revenue
bonds pledging a specific tax or revenue. Debt
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was issued to finance capital outlay for educational projects of local school
districts, community colleges and state universities, environmental protection
and highway construction.
Factors Affecting Idaho Fund
General Economic Conditions. State Government in Idaho originates
from the State Constitution adopted at the constitutional convention of August
6, 1889, and ratified by the people in November of the same year. Congress
approved the Constitution and admitted Idaho to the Union on July 3, 1890.
Idaho, located in the northwestern portion of the United States, is bordered by
Washington, Oregon, Nevada, Utah, Wyoming, Montana and Canada. Idaho's land area
consists of 83,557 square miles of varied terrain including prairies, rolling
hills and mountains with altitudes ranging from 736 feet to 12,662 feet.
With close of 1996, Idaho completed the tenth consecutive year of
economic expansion, maintaining one of the fastest annual growth rates of
employment and income among all states; employment is estimated to increase
nearly 4% and personal income increased 6.3% during 1996. However, the rapid
employment increases enjoyed by the state for the last ten years have already
begun to slow and are anticipated to continue slowing to the 2.7% range. The
unemployment rate dropped from 5.4% in 1995 to 5.0% in 1996, its lowest level
since 1978. Personal income is expected to drop to 5.3% in 1997, but then begin
to grow at rates of 5.7% and 6.1% during 1998 and 1999, respectively. Idaho's
population growth, which peaked at 3.0% in 1994, is expected to taper gradually
to 2.2% over the next few years, which will have a dampering effect on the
state's housing industry.
Exports. Exports of agricultural and manufactured goods played an
ever increasingly important role in Idaho's economic performance. With Japan,
the United Kingdom, Canada, Singapore, and Taiwan as the state's biggest
customers, Idaho's export value rose from $1.9 billion in 1993 to $2.3 billion
in 1994, a 21% increase; non-farm exports rose 20% in that period to $1.32
billion, creating an estimated 5,000 new jobs; exports climbed 187% from 1987 to
1993. Idaho ranked thirty-second among the states in the total value of goods
and services exported in 1994. Japan was Idaho's best customer importing $263
million worth of goods and services; the United Kingdom increased its imports
from Idaho 31% to $183 million and Canada came in third at $161 million for a
34% increase over 1993.
The jobs supported by Idaho's recent experiences in exports markets
are relatively evenly distributed between farm and manufacturing jobs. The
return to the state government from its investment in promoting Idaho products
abroad is elevated tax revenues. In 1996, the state tax revenues increased 5% to
$1.35 billion, a decrease from the 10% gain in 1995; taxable sales rose 10.5% in
1994 to $10.5 billion, the third year of double digit growth. State tax revenues
are expected to grow only 1.7% in fiscal year 1997 to $1.374 billion, but
increase to $1.449 billion or 5.5% in 1998. Approximately 35.5% of the revenues
for fiscal year 1998 are expected to come from sales tax.
Importance of Water. Although located in the arid West, Idaho has
large water resources which have dominated its history and development and may
prove equally important to its future. There are 26,000 miles of rivers and
streams and more than 2,000 natural lakes. Three of Idaho's rivers--Clearwater,
the Kootenai and the Salmon--are more than half as large as the Colorado. The
Snake Plain Aquifer is one of the largest fractured basalt aquifers in the
world. Equally important to quantity is the quality of Idaho's waters, which
remains outstanding. The drop in elevation of rivers like the Snake allow
valuable hydropower production, allowing the State some of the lowest
electricity rates in the nation.
Agriculture. Idaho has traditionally been an agriculture state.
Livestock, beef, dairy cattle, and sheep are important to the economy, while the
major crops of Idaho's farmers include potatoes, wheat, barley, sugar beets,
peas, lentils, seed crops and fruit. According to recent estimates, agricultural
related products make up 16% of Idaho's Gross State Product, making them key
elements in Idaho's economic performance. The improvement in water conditions
will help Idaho farmers on the supply side of the market; the third wheat crop
of over 100 million bushels is predicted for 1995. The combination of improved
demand and supply conditions pushed wheat prices to well above the $4.00 level
during 1994. In Idaho's most famous agricultural market, potatoes, 1994
production rose 6.4% to 134.3 million cwt and for Idaho's largest cash crop,
beef, production rose 7%. When all market factors are taken into consideration,
including an expected reduction of 2% in the
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nation's wheat production, the outlook for Idaho's agricultural industry
improves in 1995, with the state's beef production increasing at least 3% and
wheat production matching or exceeding previous records. The net result is
growth in farm proprietor income and agricultural employment. From December 1993
to December 1994 agricultural employment increased 18.1% to 25,240 driven by a
39.2% increase in hired workers. In recent years, the growth in agricultural
employment has slowed. From December 1995 to December 1996, total agricultural
employment increased only 0.3% to 26,930 and the number of hired workers
increased only 0.6%.
Service Producing Sector. By the most important economic measures,
the service producing sector is the heart of Idaho's economy; it accounts for
68% of Gross State Product and 78% of all nonagricultural jobs. For 1996, and
the next three years, employment growth in the service producing sector is
expected to slow from its 1995 rate of 4.2% to 3.6% in 1996 and around 2.9% the
next few years. Within the service producing sector, the weakest performer is
expected to be the federal government, which will have stable employment with
some decreases due to downsizing of services and employees. The retail trade and
services sector recorded the largest gains in 1996, at 3.8% and 6.2%,
respectively, with such increases continuing in the 3.2% and 4.5% range,
respectively. State and local governments, including public education, are
expected to expand at an average of 2% per year over the forecast period in
response to population pressures. This is lower than the 3-4% growth rates in
previous years. The remaining components of the service producing sector,
including the finance, insurance, transportation, communication and public
utility industries, are expected to continue to have mixed experiences with
employment; growth partly offset by right-sizing. The net result is that these
industries are expected to average around 2.0% per year employment growth
through 2000.
Goods Producing Sector. The goods producing sector, composed of
manufacturing, mining, and construction, had two of the star performers in the
state's ten years of economic expansion; electronics and construction. Both of
these industries have begun to slow and are expected to have substantially
slower growth rates in 1997; the goods producing sector will be a consistent
rather than spectacular performer. Metal mining employment has increased 25%
since 1994, with metal prices determining demand. Overall, this sector's
employment gains are expected to decline from the 4.7% level for 1996 to 0.2%
and 1.4% for 1997 and 1998, respectively. The causes of the dramatic shifts are
some restructuring in microelectronics, the economic hardships suffered in
resource based industries and a slowing in residential construction. Even with
offsetting job creation at some electronic firms in other goods producing
industries, this sector will have to wait until 2000 for employment to recover a
2% growth rate.
Budgetary Process. In the fall of each year, all agencies of the
State submit requests for appropriations to the Governor's Office, Division of
Financial Management, so a budget may be prepared for the upcoming legislative
session. The budget is generally prepared by agency, fund, program, and object.
The budget presentation includes information on the past year, current year
estimates, and requested appropriations for the next fiscal year.
The Governor's proposed budget is presented to the legislature for
review, change, and preparation of the annual appropriation acts for the various
agencies. The legislature enacts annual appropriations for the majority of funds
held in the state treasury. These budgets are adopted in accordance with State
statutes. Both houses of the legislature must pass the appropriation acts by a
simple majority vote. The appropriation acts become law upon the Governor's
signature, or 10 days after the end of the session if not signed by the
Governor.
For funds that are annually appropriated, the State's central
accounting and reporting system controls expenditures by appropriation
line-item. At no time can expenditures exceed appropriations, and financially
related legal compliance is assured. At fiscal year end, unexpended
appropriation balances may: (1) revert to unreserved fund equity balances and be
available for future appropriations; (2) be reappropriated as part of the
spending authority for the future year; or, (3) may be carried forward to
subsequent years as outstanding encumbrances with the approval of the Division
of Financial Management.
Revenues and Expenditures. Fiscal Year 1996. General Fund
revenue in fiscal year 1996 was $1,351.3 million. There was an additional $2.926
million due to carryover from the prior fiscal year. Fund transfers reduced
funds available by $2.652 million. Net General Funds available in fiscal year
1996 totaled
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$1,349.3 million. Total General Fund revenue growth was $64.2 million, or 5% in
fiscal year 1996. Strongest growth was in sales tax and income tax.
Expenditures in fiscal year 1996 consisted of $1,348.8 million in
original appropriations, plus $4.71 million in supplementals and
reappropriations, less $16.2 million in reversions and holdbacks. Net
expenditures in fiscal year 1996 were $1,337.6 million. An ending balance of
$11.7 million was carried over into fiscal year 1997.
In response to the major flood in northern Idaho in 1996, the
Governor issued Executive Order 96-04 that authorized transfers from the Budget
Reserve Fund and the Water Pollution Control Fund to meet the state and local
match requirement of federal grants. Subsequently, $1 million from each fund was
transferred. In addition, the Legislature authorized a $.04 per gallon increase
on the gasoline tax with the first $6 million to be used as match on
infrastructure reconstruction and repair. As of November 30, 1996, state revenue
for this fund was $3.88 million and the total expended was $3.48 million.
Fiscal Year 1997. Total funds available to the General Fund in
fiscal year 1997 are estimated to be $1,405.3 million. This consists of an
estimated $11.7 million carryover from fiscal year 1996, plus $4.99 million
transferred in from other funds and $1,374 million in base revenues, less $2.65
million in transfers to other funds. The Governor is recommending that the
Legislature give the State Board of Examiners the authority to transfer up to
$17.25 million from the Budget Reserve on June 30, 1997 in order to fund the
fiscal year 1997 holdback of funds for public schools. General Fund expenditures
and fund transfers authorized for fiscal year 1997 are $1,405.3 million. This
leaves no General Fund carryover in fiscal year 1998.
The revised fiscal year 1997 Executive revenue forecast of $1,374
million reflects 1.7% growth over fiscal year 1996. The revised base General
Fund revenue forecast for fiscal year 1997 consists primarily of sales and
income tax receipts. Product taxes account for a little over 1% of General Fund
revenues, and miscellaneous receipts account for approximately 5% of General
Fund revenues.
General Fund expenditures in fiscal year 1997 consist of $1,412.6
million in original appropriations, plus $2.25 million in reappropriations, less
$17.71 million in executive branch holdbacks, plus $8.13 million in net
supplementals. The executive holdback does not include the public schools, the
state treasurer, or the Catastrophic Health Care Program. The majority of
supplementals go toward privatization of medical services, additional inmate
housing costs, and juvenile offender private placement costs.
Fiscal Year 1998. The amount of total funds available to the
General Fund in fiscal year 1998 is estimated to be $1,449.6 million. This
consists entirely of General Fund revenue from individual income tax, sales tax,
corporate income tax, and miscellaneous revenue. General Fund expenditures
authorized for fiscal year 1998 are $1,448.8 million. This leaves an estimated
free-fund balance of $771,000 in the General Fund at the end of fiscal year
1998.
The original Executive revenue forecast of $1,449.6 million for
fiscal year 1998 reflects 5.5% growth over fiscal year 1997. General Fund
revenues consist primarily of sales tax generating 35.5% or $514.3 million of
total revenue and income tax representing 50.5% or $732.3 million. The net
growth rate for total General Fund revenue in fiscal year 1998 is 3.2%.
Expenditures in fiscal year 1998 consist of $1,382.7 million in
base spending plus $66.1 million in salary increases, inflation adjustments and
non-standard adjustments, replacement capital outlays, annualizations, and
enhancements. Above base increases in public school expenditures are the largest
item of increase, with $15.53 million provided as a lump sum. A state worker
salary increase of 2% accounts for $7.8 million of increase above the base.
Replacement capital outlay and related operating expenditures are $6.1 million
and enhancements are $41.8 million. Inflationary adjustments for transportation
and medical costs, annualizations and other nonstandard adjustments total $14.2
million.
Debt Administration and Limitation. The State has no
outstanding general obligation bond debt. By law, if the General Fund cash flow
shortages exist for more than 30 days, the State Treasurer must issue a tax
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anticipation note to correct the shortfall. The State Treasurer has issued
internal tax anticipation notes which are notes issued by the General Fund to
borrow monies from other available State funds or accounts. Internal tax
anticipation notes were not issued in fiscal years 1988 through 1994. In the
past ten fiscal years the State Treasurer has issued "External" tax anticipation
notes which were sold in the open market. All Notes issued by the State must
mature not later than the end of the then current fiscal year. Each Note when
duly issued and paid for will constitute a valid and binding obligation of the
State of Idaho. The faith and credit of the State of Idaho are solemnly pledged
for the payment of the Notes.
Series 1994 Notes. The State issued $200 million in Tax
Anticipation Notes ("TANs") on July 5, 1994, which mature on June 29, 1995. The
1994 Notes were issued in anticipation of the income and revenues and taxes to
be received by the General Fund during the fourth quarter of the 1995 fiscal
year. As required by law, all income and revenues from the taxes collected
during the fourth quarter of the 1995 fiscal year shall be deposited into the
Note Payment Account as received until the monies therein together with
investment earnings shall be sufficient to pay principal and interest on the
Notes at maturity. Sufficient monies to redeem the Series 1994 Notes with full
payment of interest at maturity have been deposited into the Note Payment
Account held by an escrow agent. These monies will be transferred to the paying
agent on June 29, 1995, for payment of the Series 1994 Notes.
Series 1995 Notes. The $200 million TANs are being issued to fund
the State's anticipated cash flow shortfalls during the fiscal year ending June
30, 1996. The 1996 fiscal year General Fund cash flow (before borrowing) is
estimated to have a negative balance at the end of the months of July through
March and May with the greatest ending month cash deficit estimated to be
$244,670,000 at the end of November. However, each month's mid-month cash
deficit is estimated to be greater than the end-of-the-month deficit balance.
This situation occurs because only approximately 20% of the month's revenues are
received during the same period. The majority of taxes are received during the
second half of the month because of statutorily established dates for tax
payments. A primary factor in the heavy percentage of first half expenditures
are the required dates for General Fund transfers to the public schools. The
greatest projected mid-month deficit for the 1996 fiscal year is $296,613,000
occurring on November 15, 1995. Moody's Investors Service and Standard and
Poor's corporation have assigned the 1995 Notes the rating of MIG-1 and SP-1+
respectively.
Factors Affecting Iowa Fund
General Economic Conditions. For Iowans, 1996 was a year of
continued but slow growth and economic consolidation following several years of
substantial growth. Iowa's seasonally adjusted unemployment rate increased from
3.8% in December 1996, to 3.6% in January 1997, according to a report released
by the Iowa Department of Employment Services (DES). The statewide jobless rate
was also reported at 3.6% in January 1996. The State's Department of Employment
Services measures the number of individuals in non-farm payroll jobs from state
unemployment tax records. In January 1997, 17,300 more Iowans were working at
payroll jobs than one year earlier. Of this increase, 14,800 was in services,
3,400 was in transportation, 2,400 in durable goods, and 900 in construction.
The retail trade sector, after years of expansion, decreased 1,500 from January
1996 to January 1997, indicating signs of leveling-off. Manufacturing as a whole
decreased 300 over the year. According to the Iowa Economic Forecasting Council,
payroll employment is expected to grow by 10,290, or .7% in 1997, and by another
11,520 or 0.8% in 1998.
During the late-1980's and early 1990's Iowa became a major
exporting state. Despite its inland location, Iowa has been a major supplier to
the world's markets for industrial machinery, instruments and measurement
devices, electronics, specialized transportation equipment, chemicals and
pharmaceuticals, processed food products, farm commodities and livestock. During
the years 1991-1993, the value of Iowa's factory exports increased a compounded
rate of 9% per year. In 1994, factory exports increased 17% to $3.4 billion
while farm exports fell to $2.4 billion. The drop in farm exports in 1994 was
tied to the flood in 1993 and the diminished size of the crop that went into
storage. Even though the circumstances were unique, the facts were clear:
factory exports surpassed farm exports for the first time in Iowa's history. In
1995, the export of factory goods accounted for $4.1 billion, or 51% of the $8.1
billion total exports from Iowa. For the first half of 1996, the value of
factory exports grew by 17% over the value exported during the same period in
1995. At this rate of growth, 1996 factory exports could grow to $4.7 billion
for the year.
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One of the issues addressed by the Governor and the General
Assembly during Fiscal Year 1995, was the increasing amount of property taxes
levied to support expenditures for mental health. Legislation was passed which
provides significant property tax relief through a process of managed care and
through increased State assistance which will ultimately finance 50% of the
mental health expenditures funded by property taxes. This legislation
established a new Mental Health/Developmental Disabilities Fund at the county
level and provided State appropriations for mental health property tax relief in
the amount of $61 million, $78 million and $95 million for fiscal years 1996,
1997, and 1998 respectively. The amount of property taxes that may be levied in
this fund is limited and the property taxes must be reduced dollar for dollar
for each dollar of mental health property tax relief the counties receive. In
addition to the $17 million increase already enacted, in January of 1997, the
Governor recommended the appropriation for fiscal year 1998 be increased $6.2
million, 2.89% of net expenditures, and an additional $6.5 million for fiscal
year 1999, to adjust for inflation.
The second item of property tax relief was the elimination of
property taxes on industrial machinery, equipment and computers acquired after
January 1, 1994, and a phase-out of the property taxes on existing industrial
machinery, equipment and computers. For fiscal years 1997 through 2006, county
auditors may file claims with the State for partial replacement of lost taxes.
For fiscal year 1998-99, the Governor proposed an across-the-board
reduction of personal income tax rates by 10%. This would allow Iowans to keep
an additional $200 million a year. The Governor proposed that, when passed in
the spring of 1997, tax rates be reduced to 5% retroactive to January 1, 1997,
with the remaining 5% effective January 1, 1998. The Governor also recommended a
15% income tax reduction for the Family Opportunity Plan unveiled in 1994.
Budgetary Process. The current statewide accounting system was
implemented in 1983 and has been periodically upgraded and modified. As part of
that implementation, and on an ongoing basis, emphasis has been placed on the
adequacy of internal and budgetary controls. Internal controls are in place to
provide reasonable, but not absolute, assurance that assets are safeguarded
against unauthorized use or disposition, and that financial records from all
appropriate sources are reliable for preparing financial statements and
maintaining accountability. All claims presented for payment must be certified
by the appropriate department that the expenditure is for a purpose intended by
law and a sufficient unexpended appropriation balance is available. The
automated statewide accounting system also performs various edits to assure
appropriation authorizations are not exceeded. For programs supported totally or
in part with federal or other funds, expenditures can not exceed the sum of
appropriations and additional dedicated revenue that is received. If dedicated
revenue is not received as expected, expenditures must be reduced in a like
manner.
Revenues and Expenditures. Most State operations are accounted for
through the following Governmental fund types: General, Special Revenue, and
Capital Projects. Total General Fund receipts for fiscal year 1996 were $4,404.5
million, a 6.03% increase from the prior year. Of this amount, $4,038.9 million
came from special taxes, with 49.5% from personal income tax and 30% from sales
tax. The Cash Reserve increased 5% from the previous fiscal year to $201.6
million. Total net refunds of taxes paid for fiscal year 1996 were $382.1
million.
Total General Fund appropriations for fiscal year 1996 were
$3,855.4 million. Approximately 41.4% or $1.6 billion was for education, and
18.9% or $727.7 million was for human services.
Total General Fund receipts for fiscal year 1997 are estimated at
$4,627 million, a 5% increase. Of this amount, $4,261.8 is predicted to come
from special taxes, with 49.5% from personal income tax and 29.9% from sales
tax. The cash reserve for fiscal year 1997 is estimated to increase 5% to $215
million. Total net refunds of taxes paid for fiscal year 1997 are estimated at
$387.9 million.
Total General Fund appropriations for fiscal year 1997 are
estimated at $4,134.7 million, a 7.2% increase from fiscal year 1996.
Approximately 43% is dedicated to education and 18.1% to human services. Ongoing
spending is about 8% less than total available revenue, leaving a $346 million
unspent general fund balance in fiscal year 1997, the largest in the nation.
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Debt Administration and Limitation. The Constitution of the State
of Iowa prohibits the State from exceeding a maximum of $250 thousand in general
obligation debt without voter approval. However, State law authorizes the
issuance of Tax and Revenue Anticipation Notes (TRANS), provided that the total
issuance does not exceed anticipated revenue receipts for the fiscal year and
that the total issuance matures during the fiscal year. For the first time in
the last ten years, it was not necessary this year for the State to issue TRANS.
Revenue bonds issued by various authorities of the State totaled
$1,255.9 million outstanding at fiscal year-end 1995. This amount consisted of
$7.8 million of internal service revenue bonds, $559.9 million of component unit
- - proprietary funds revenue bonds (housing and higher education), $519.1 million
in revenue bonds issued by the three State universities (for facilities), and
$106.5 million and $62.5 million in various bonds issued by the Iowa Finance
Authority for the Underground Storage Tank Program and the Department of
Corrections, respectively.
Certificates of Participation (COPS), issued by the State and
outstanding at fiscal year-end, amounted to $135.2 million. COPS represents an
ownership interest of the certificate holder in a lease purchase agreement.
Other financing arrangements payable, excluding COPS, totaled $3.8 million at
June 30, 1995. State agencies, including the universities, have also entered
into capital leases and installment purchase agreements for various purposes.
Total long-term capital leases and installment purchases outstanding on June 30,
1995, was $38.2 million.
Since the State of Iowa does not have G.O. debt, it does not
have S&P, Moody's or Fitch ratings.
Factors Affecting Kansas Fund
General Economic Conditions. Kansas is the 14th largest state in
terms of size with an area in excess of 82,000 square miles. It is rectangular
in shape and is 411 miles long from east to west and 208 miles wide. The
geographic center of the 48 contiguous states lies within its borders. Kansas
became the 34th state in 1861 and Topeka was chosen to be the capitol later that
year. The population of the State of Kansas has grown from 2,477,588 in 1990 to
2,554,047 in 1994. This represents a percentage increase of 3.1%. In comparison,
the growth in population of the United States was 4.7%.
In 1996, jobs across Kansas were up 2.3%, for a net increase of
27,100 new jobs. There was a 3.8% growth rate from October 1995 to October 1996.
National job growth for the same period was 2.1%. Total non-farm employment as
of October 1996 was 1,233,200. This was 19,000 higher than the previous year.
Trade led growth with the addition of 8,700 new jobs. Manufacturing employment
rose by 4,600 over the year, primarily from increased production of aircraft and
parts. More business in special trade contracting and heavy construction added
3,600 construction jobs during the year. Services employment rose by 2,300, with
substantial increases in social, management, and business services.
Transportation-utilities added 2,100 jobs, primarily from growth in
communications firms. Gains in banking and insurance provided most of the 1,500
new jobs in the finance division. Mining edged up only 100 over the year.
Government had the only decrease, down 3,900 from October 1995.
During 1995 and 1996, the Kansas unemployment rate decreased from
4.4% to an estimated 3.9%, respectively. This compares favorably with a national
unemployment rate in 1995 and 1996 of 5.6% and an estimated 5.4%, respectively.
Budgetary Process. The Governor is statutorily mandated to present
spending recommendations to the Legislature. "The Governor's Budget Report"
reflects expenditures for both the current and upcoming fiscal years and
identifies the sources of financing for those expenditures. The Legislature uses
"The Governor's Budget Report" as a guide as it appropriates the money necessary
for state agencies to operate. Only the Legislature can authorize expenditures
by the State of Kansas. The Governor recommends spending levels, while the
Legislature chooses whether to accept or modify those recommendations. The
Governor may veto legislative appropriations, although the Legislature may
override any veto by two-thirds majority vote.
The state "fiscal year" runs from July 1 to the following June 30
and is numbered for the calendar year in which it ends. The "current fiscal
year" is the one which ends the coming June. The "actual fiscal year"
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is the year which concluded the previous June. The "budget year" refers to the
next fiscal year, which begins the July following the Legislature's adjournment.
In "The FY 1997 Governor's Budget Report," the actual fiscal year is fiscal year
1995, the current fiscal year is fiscal year 1996, and the budget year is fiscal
year 1997. By law, "The Governor's Budget Report" must reflect actual year
spending, the Governor's revised spending recommendations for the current fiscal
year, state agency spending requests for the budget year, and the Governor's
spending recommendations for the budget year. The budget recommendations cannot
include the expenditure of anticipated income attributable to proposed
legislation.
Revenues and Expenditures. The State General Fund is the largest of
the "uncommitted" revenue sources available to the state. It is also the fund to
which most general tax receipts are credited. The Legislature may spend State
General Fund dollars for any purpose. All revenues coming into the state
treasury not specifically authorized by statute or the constitution to be placed
in a separate fund are deposited in the State General Fund.
Fiscal Year 1996. The Governor's fiscal year 1996 budget
recommendations total $7.9 billion from all funding sources and approximately
$3.47 billion from the State General Fund. The budget includes a total of
44,697.9 state employees, a reduction of 118.7 from the amount approved by the
1995 Legislature. These recommendations reflect significant changes to the
budget approved by the 1995 Legislature. In September 1995, the Governor
announced the need for a 1.5% across-the-board reduction to the budgets of most
agencies funded through the State General Fund. This action was necessary
because of a shortfall of approximately $25 million in estimated fiscal year
1995 receipts and resulting downward revisions to the consensus revenue estimate
made for fiscal year 1996. In addition to the 1.5% reduction, significant
savings were available in agency budgets because of a reduction in the funding
requirements for group health insurance rates for state employees and in the
funding necessary for the state share of local option school budgets. In total,
these adjustments allow the Governor to recommend a budget which maintains the
targeted 7.5% ending balance for fiscal year 1996 while providing only necessary
supplemental appropriations to maintain commitments to higher education and
public schools. In addition, the Governor directed all agencies under his
supervision to reduce their workforce by 2% in fiscal year 1996 through
attrition and retirements. The salary savings attributable to those reductions
will be identified at the end of the fiscal year.
Fiscal Year 1997. The fiscal year 1997 budget recommendations
include all funding source expenditures of $7.8 billion, a reduction of almost
$100 million from fiscal year 1996. The largest single source of fiscal year
1997 receipts is the State General Fund, with 46.6% of the total receipts.
Individual income taxes account for the largest source of State General Fund
revenue, totaling $1.410 billion (39.9%) in fiscal year 1997. The next largest
category, sales and use taxes, is projected to generate $1.392 billion (39.5%)
for the State General Fund during fiscal year 1997. State General Fund
expenditure recommendations for fiscal year 1997 are $3.52 billion, an increase
of 1.4%. The Governor recommends that $1,923.7 million, or 54.6% of State
General Fund expenditures be used for aid to local units of government.
Federal grants represent 21.9% of total receipts from all funding
sources, with 42 state agencies receiving $1.7 billion in fiscal year 1997. Of
the $1.7 billion, 50.4% will go to the Department of Social and Rehabilitation
Services. This is followed by the Department of Transportation, 15.4%, the
Department of Education, 12%, the Regents institutions, 5.8%, and the Department
of Health and Environment, 4.3%. The remaining 12.1% is distributed to 29 other
agencies. Agency service charges include revenues received for services provided
by state agencies. This includes charges for inspections, examinations, and
audits; fees collected for tuition and fees at the Regents institutions; and
admissions to the Kansas State Fair. This revenue category represents 6.6% of
total receipts for fiscal year 1997.
Dedicated sales tax receipts represent revenues from four taxes
that are collected for a specific purpose and are deposited in special revenue
funds, rather than the State General Fund. Taxes on motor fuels and vehicle
registrations as well as a dedicated sales tax of one-quarter of a cent are
credited to the State Highway Fund. A statewide property tax of 1.5 mills is
assessed for construction and maintenance of state buildings at Regents
institutions and state hospitals. This revenue category represents 5.1% of total
receipts for fiscal year 1997.
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Other special revenue receipts include license fees, interest
earnings on special revenue funds, non-federal grants, the sale of state
property, and numerous other miscellaneous revenue sources. This revenue
category represents 8.9% of total receipts for fiscal year 1997. Non revenue
receipts are collections and reimbursements not considered revenue. Examples
include collections by the Department of Human Resources for the payment of
unemployment benefits and collections by KPERS for payment of retirement
benefits. Collections made by SRS from absent parents for child support are also
included in this category. This category represents 8.5% of total receipts for
fiscal year 1997. Lottery ticket sales account for the remaining 2.4% of total
receipts for fiscal year 1997 from all funding sources.
It was clear from the beginning of the fiscal year 1997 budget
process that the revenues available to state government could not support
continuation of existing levels of service for all agencies. A variety of
factors contributed to the austerity of the fiscal year 1997 budget. First and
most important, for the past two fiscal years, the State General Fund ending
balance was significantly above the 7.5% ending balance target, allowing
expenditures to exceed receipts in both fiscal years 1995 and 1996. In simple
terms, fiscal year 1997 cannot exceed receipts while complying with the ending
balance requirements. The expenditures in fiscal year exceeded receipts by
$106.6 million. In effect, the first claim on projected increases in State
General Fund receipts for fiscal year 1997 will be to correct this imbalance.
Second, a variety of factors required significant additional funding for the
school finance formula including enrollment growth, the second year of increased
aid requirements to offset motor vehicle tax reductions passed by the 1995
Legislature, the remainder of the Real Estate Settlement Procedures Act (RESPA)
adjustment, and growth in capital improvement aid. In addition, growth in inmate
populations required additional staff and funding for correctional institutions.
Further, caseload and cost increases in various populations served by SRS
seriously affected the fiscal year 1997 budget.
Debt Administration and Limitation. The State of Kansas finances a
portion of its capital expenditures with various debt instruments. Of capital
expenditures that are debt-financed, revenue bonds and loans from the Pooled
Money Investment Board finance most capital improvements for buildings, and
certificates of participation and "third-party" financing pay for most capital
equipment. The Kansas Constitution makes provision for the issuance of general
obligation bonds subject to certain restrictions; however, no bonds have been
issued under this provision for may years. No other provision of the
Constitution or state statute limits the amount of debt that can be issued. As
of June 30, 1995, the state had authorized but unissued debt of $27,230,000.
Although, the state has no General Obligation debt rating, it seeks
an underlying rating on specific issues of at least "AA-" from Standard & Poor's
and "A1" from Moodys. The ratings for the most recently issued fixed rate bonds
issued by the Kansas Department of Transportation were "Aa" and "AA" from Moody
and Standard & Poor's respectively. The Kansas Development Finance Authority is
currently working with the rating agencies to obtain a rating indicator for the
State of Kansas.
The Kansas Department of Transportation issues debt to finance
highway projects. The Comprehensive Highway Program began during fiscal year
1989. The 20-year bonds will be retired with motor fuel taxes, motor vehicle
registration fees, retail sales and compensating use taxes, and accrued
interest. During fiscal years 1994 and 1995, the state sold bonds totaling
approximately $151 million and $167.1 million. respectively. Again, the largest
use of the bond proceeds was $125 million and $140 million for the Comprehensive
Highway Program for these two years, respectively.
Other State of Kansas debt is issued by the Kansas Development
Finance Authority (KDFA), an independent instrumentality of the state which was
created in 1987 for this purpose. The Governor's budget recommendations for
Regents institutions are a significant departure from the traditional way
revenues from the Educational Building Fund (EBF) have been used for
construction projects at the state's universities. Based on concerns for the
aging buildings on the state's campuses, the Governor recommends that KDFA issue
bonds in fiscal year 1997 in the amount of $156.5 million to address a wide
variety of rehabilitation and repair projects at the universities. With interest
earnings, the total project costs would be an estimated $163.6 million. Debt
service over the 15-year period will total $228.4 million, with each year's debt
service payment over the next 15 years totaling $15 million. No project paid
with bond proceeds will have a life-expectancy of less than 20 years, so as to
"keep ahead" of the bonded indebtedness. Because the current cost of borrowing
money is less than the
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projected cost of inflation for construction, it is more cost-effective to
perform the repairs now and leverage the EBF, rather than incurring higher
annual repair costs in the future. Rehabilitation and repair projects at the
campuses include compliance with the Americans with Disability Act Accessibility
Guidelines and life safety codes, energy conservation projects, and improvements
to classrooms, in addition to the typical repairs made to aging buildings.
Bonds totaling $4.4 million were issued by KDFA in November 1990 to
begin Energy Conservation Improvements Program authorized by the 1990
Legislature. The bonds are retired by utility cost savings from the energy
conservation improvements undertaken. Projects financed with the bond proceeds
consist of improvements at many of the state universities, the Department of
Administration, the Department of Social and Rehabilitation Services, the
Highway Patrol, and the Department of Corrections. An amount of $5,000 was
appropriated from the State General Fund to the Department of Administration,
the paying agent, for fiscal year 1992 to begin retirement of the debt service.
The second series of bonds, issued in June 1992, totaled $3.6 million. On
October 1, 1993, a third series of bonds totaling $4,370,000 under the Energy
Conservation Improvements Program was issued. In August 1995, the fourth series
of bond, totaling $2,734,000 was issued. For fiscal year 1997, the debt service
totals $1,785,007 from the State General Fund, $1,340,000 for principal and
$445,007 for interest. To date, $15.1 million in bonds has been issued by the
Kansas Development Finance Authority for these projects. A fifth bond issue
estimated to total $4.8 million is scheduled for early 1996.
Factors Affecting Minnesota Funds
General Economic Conditions. Diversity and a significant natural
resource base are two important characteristics of the Minnesota economy.
Generally, the structure of the State's economy parallels the structure of the
United States economy as a whole. There are, however, employment concentrations
in durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. During the period from 1980 to 1990, overall
employment growth in Minnesota lagged behind national employment growth, in
large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1996. Since 1980, Minnesota per capita income generally
has remained above the national average, but tightness in local labor markets
may reduce the rate of personal income growth below that of the national average
in the future. In 1995, Minnesota's per capita personal income exceeded the
national average by 3%. The State's annual unemployment rate has been less than
the national unemployment rate every year since 1985. In 1995 and 1996, the
Minnesota unemployment rate was 3.7% and 3.6%, respectively, compared to rates
of 5.6% and 5.4%, respectively, for the nation.
Revenue and Expenditures. The State relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve, imposing
a sales tax on purchases by local governmental units, and making other budgetary
adjustment. The Minnesota Department of Finance November 1996 Forecast has
projected that, under current laws, the State will complete its current biennium
June 30, 1997 with a $502.4 million budgetary balance, which consists of a $350
million cash flow account balance, plus a $261 million budget reserve. Total
General Fund expenditures and transfers for the biennium are projected to be
$18.8 billion. State expenditures for education finance (K-12), post-secondary
education, and human services in the biennium ending June 30, 1997 are not
anticipated to be sufficient to maintain program levels of the previous
biennium. The State is party to a variety of civil actions that could adversely
affect the State's General Fund. In addition, substantial portions of State and
local revenues are derived from federal expenditures, and reductions in federal
aid to the State and its political subdivisions and other federal spending cuts
may have substantial adverse effects on the economic and fiscal condition of the
State and its local governmental units. Risks are inherent in making revenue and
expenditure forecasts. Economic or fiscal conditions less favorable than those
reflected in State budget forecasts and planning estimates may create additional
budgetary pressures.
National economic growth for the remainder of the decade is
predicted to generate a corresponding growth in state revenues without
increasing tax rates. Minnesota's revenues are expected to grow by $1.4 billion,
7.4% in the 1998-99 biennium, and 8.1% in the following biennium. Since the
state forecast is based on
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a strong 2.4% annual growth rate, a return to a more moderate growth rate,
similar to the 2.0% rate of growth in 1995, would materially reduce forecast
revenues.
The state's budget reserve for the 1998-99 biennium is doubled to
$522 million (an increase from $261 million in fiscal year 1997) or 5% of fiscal
year 1999 spending to protect against economic uncertainty.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective obligors to make timely payment of the principal and interest on
Minnesota Tax Exempt Obligations that are held by a Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in
federal and State income tax laws, including rate reductions, could adversely
affect the value and marketability of Minnesota Municipal Tax Exempt Obligations
that are held by a Fund. See "Distributions to Shareholders and Taxes; Minnesota
State Taxation" in the Prospectus.
The state issued $439.6 million of new general obligation bonds,
and $170.6 million of general obligation bonds were redeemed during 1996,
leaving an outstanding balance of $2.2 billion. General obligation bonds
authorized but unissued as of June 30, 1996 were $1.101 billion.
The most recent ratings applicable to General Obligation bonds
issued by the State of Minnesota are as follows: "Aaa" by Moody's; "AA+" by S&P
and "AAA" by Fitch Investors Service.
Factors Affecting Missouri Fund
General Economic Conditions. Missouri was organized as a territory
in 1812 and was admitted to the Union as the 24th state on August 10, 1821. The
State ranks 19th in size with a total area of approximately 69,697 square miles.
Missouri is a central mid-western state located near the geographic center of
the United States. Bordered by Iowa on the north, Arkansas on the south,
Illinois, Kentucky and Tennessee across the Mississippi River on the east, and
Nebraska, Kansas and Oklahoma on the west, Missouri is one of only two states
which shares it boundaries with as many as eight states.
As a major manufacturing, financial, and agricultural state,
Missouri's economic health is tied closely to that of the nation. The economic
outlook is for continued improvement in fiscal year 1997. Missouri's personal
income, which directly impacts individual income tax and sales tax, rose at a
5.4% rate during fiscal year 1996. The Missouri economy has produced exceptional
job growth over the past three years. Missouri's employment stood at 2,768,620
as of November 1996, an increase of 13% or 300,000 since January of 1993. At the
end of November 1996, the state unemployment rate was 4.0% which compares
favorably to the national unemployment rate of 5.0%. The preliminary 1996
average unemployment rate for Minnesota is 4.1% and for the U.S., 5.4%.
Budgetary Process. Annually, all State agencies submit budget
requests for the following appropriation year to the Division of Budget and
Planning of the Office of Administration. The Division Budget and Planning
prepares the Executive Budget and an estimate of general revenues. The Executive
Budget contains the budget amount which is recommended and submitted to the
General Assembly by the Governor within thirty days after the General Assembly
convenes in each regular session.
The General Assembly appropriates money after consideration of both
the Executive Budget and the revenue estimate. The legislative appropriations
are subject to the Governor's approval or veto, except for the funding of public
debt and public education which the Governor is prohibited by the Constitution
of Missouri from vetoing. The Governor may control the rate at which an
appropriation is expended by allotment or other means and may limit the
expenditures for any State agencies below their appropriations, whenever actual
revenues are less than the revenue estimated upon which the appropriations were
based. The Governor has line-item veto power, except for appropriations for
public debt and public education.
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Revenues and Expenditures. Balancing Missouri's budget in fiscal
year 1996 was achieved through sound financial management. The growing economy
produced general revenues that were better than projected. The Governor and
General Assembly adopted a conservative State budget meeting mandated
expenditure increases and providing limited funding for new and expanded
program. In future years, Missouri will focus on controlling the growth of
mandatory programs though welfare reform, managed care, and cost-effective
alternatives. Major funding priorities include education, corrections, economic
development, mental health, children's services, and repairs and upgrades to
existing state facilities.
The State of Missouri completed fiscal year 1996 in excellent
financial condition due to strong revenue collections and efficient management
of State programs. Net general revenue collections increased over fiscal year
1995 due to a strong national and state economy. Expenditures were lower than
anticipated in fiscal year 1996 as prudent state agency managers did not use all
available spending authority. General revenue collections in fiscal year 1996
were $5,442 million, 7.5% above fiscal year 1995 collections. General Revenue
expenditures in fiscal year 1996 for the operating budget were $5,287.5 million.
The fiscal year 1997 budget is conservatively based upon general revenue
collections of $5,753.2 million.
Final calculations made pursuant to Article X of the Missouri
Constitution show that total state revenues for Fiscal Year 1996 exceeded the
total state revenue limit by $229.1 million. Therefore, in accordance with
Article X, the entire amount of excess revenues will be refunded to Missouri
income taxpayers in calendar year 1998. Litigation has delayed the refund of
$147.2 million triggered in Fiscal Year 1995. The Office of Administration
projects that total state revenues will exceed the total state revenue limit by
approximately $155 million in Fiscal Year 1997.
The State ended fiscal year 1996 with an ending balance (surplus)
of $335.4 million for the General Revenue Fund. The unreserved fund balance of
the General Fund improved due to revenue collection which were slightly better
than projections. The ending General Fund balance for fiscal year 1997 is
projected at $132.8 million.
Federal court-ordered payments for the St. Louis and Kansas City
desegregation plans were $289.6 million in fiscal year 1996 which is about 4.9%
of the State's general revenue budget. The estimate for fiscal year 1997 is
$257.9 million. Desegregation expenditures, court orders, and other developments
are continually monitored to provide the best possible anticipation and forecast
of future costs.
Debt Administration and Limitation. Pursuant to the Missouri State
Constitution, the General Assembly may issue general obligation bonds solely for
the purpose of (1) refunding outstanding bonds; or, (2) upon the recommendation
of the Governor, for a temporary liability by reason of unforeseen emergency or
of deficiency in revenue in an amount not to exceed $1 million for any one year
and to be paid in not more than five years or as otherwise specifically
provided. When the liability exceeds $1 million, the General Assembly, or the
people by initiative, may submit the proposition to incur indebtedness to the
voters of the State, and the bonds may be issued if approved by a majority of
those voting. Before any bonds so authorized are issued, the General Assembly
shall make adequate provisions for the payment of the principal and interest and
shall provide for an annual tax on all taxable property in an amount sufficient
for that purpose.
The State has had a clear debt payment record since 1869 when it
arranged for payment of railroad bond interest which had been in default from
1861 to 1867. Missouri did no other significant borrowing until 1922, after
which the debt climbed to $124,700,000 in 1936. Thereafter, the State's debt
declined through 1956. In 1956, the voters approved a constitutional amendment
authorizing $75 million principal amount of bonds for the purpose of repairing
existing buildings or constructing new buildings at the State's correctional
institutions, the State training schools, State hospitals and State schools and
other eleemosynary institutions and institutions of higher education. Missouri
voters have, subsequently, approved constitutional amendments providing for the
issuance of general obligation bonds used for a number of purposes.
The amount of general obligation debt that can be issued by the
State is limited to the amount approved by popular vote plus the amount of $1
million. The State's debt limits at June 30, 1995, was $1,476,000,000 of which
$396,505 was unissued. The general obligation debt position of the State at June
30,
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1995 was: general obligation bonded debt (net of amount available in
governmental funds), $896,935,000; and, Debt per capita, $169.30. During fiscal
year 1995, $33,690,000 of the bonds were retired and $105 billion new bonds were
issued. At year end, the total general obligation debt outstanding was
$933,745,000. The interest rate range was .05-9.25%.
As of January 1, 1997, $198,620,000 principal remains outstanding
of the $200,000,000 issued fourth state building bonds (approved in August
1994); and $137,315,000 principal remains outstanding of the $439,494,240 issued
water pollution control bonds (both amounts excluding refunding issuances). With
the final $75 million issuance on December 1, 1987, all $600 million in third
state building bonds authorized by Missouri voters in 1982 were issued.
In fiscal year 1996 Missouri invested a total of $339.6 million in
its capital assets with appropriations for maintenance and construction projects
throughout the State. Appropriations for fiscal year 1997 are estimated at
$257.5 million. Capital improvements of $521.7 million are recommended for
fiscal years 1998-99 biennial budget. Of this amount, $60.5 million is for vital
maintenance and repairs to state-owned facilities to initiate the voter-approved
maintenance funding mechanism, including $15.3 million to be transferred to the
facilities maintenance reserve fund. Also included is $461.2 million for
planning, major renovation, new construction, land acquisition, and other
improvements. Amounts are designated to prison construction, projects at
elementary and secondary education institutions, and facilities for veterans.
The State's general obligation bond issues received triple "A"
ratings from Moody's Investors Service, Inc., Standard & Poor's Rating Group,
and Fitch Investors Service, Inc.
Factors Affecting New Mexico Fund
General Economic Conditions. The State of New Mexico, admitted as
the forty-seventh state on January 6, 1912, is the fifth largest state,
containing approximately 121,593 square miles. The State's climate is
characterized by sunshine and warm bright skies in both winter and summer. New
Mexico has a semiarid subtropical climate with light precipitation. At the time
of the official 1990 United States Census, the State's population was 1,515,069.
In 1995, the population had increased to 1,685,401, or 11.2% since 1990.
Major industries in the State are energy resources, tourism,
services, construction, trade, agriculture-agribusiness, government,
manufacturing, and mining. In 1994, the value of energy resources production
(crude petroleum, natural gas, uranium, and coal) was approximately $5.05
billion. From 1994-95, the value of construction contracts increased $3.12
billion. Major federally funded scientific research facilities at Los Alamos,
Albuquerque and White Sands are also a notable part of the State's economy.
The State has a thriving tourist industry. In 1994, there were
approximately 2.29 million visits to national parks and about 4.9 million visits
to State parks, in the State. According to a 1991 estimate by the U.S. Travel
Data Center, the State's tourist industry generated about $2.3 billion in
revenue and more than 38,370 jobs. However, 1995 was a slower year for tourism
and travel in New Mexico. Total gross receipts for hotels and other lodging
places dropped 1.4%, compared with a 5.6% gain in 1994. Air travel was also down
0.4%. In addition, visits to New Mexico's national parks and monuments, affected
partly by federal government shutdowns in the fall and winter, dropped 1.7%. One
of the State's most famous attractions is Carlsbad Cavern, which was made a
national monument in 1923 and designated a national park in 1930.
Agriculture is a major part of the State's economy, producing
$1.521 billion in 1995. As a high, relatively dry region with extensive
grasslands, the State is ideal for raising cattle, sheep, and other livestock.
Because of irrigation and a variety of climatic conditions, the State's farmers
are able to produce a diverse assortment of quality products. The State's
farmers are major producers of alfalfa hay, wheat, chile peppers, cotton, fruits
and pecans. Agricultural businesses include chile canneries, wineries, alfalfa
pellets, chemical and fertilizer plants, farm machinery, feed lots, and
commercial slaughter plants.
Budgetary Process. The State's government consists of the
three branches characteristic of the American political system: executive,
legislative and judicial. The executive branch is headed by the Governor who is
elected for a four-year term and may succeed him(her)self in office once.
Following a reorganization
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plan implemented in 1978 to reduce and consolidate some 390 agencies, boards and
commissions, the primary functions of the executive branch are now carried out
by sixteen cabinet departments, each headed by a cabinet secretary appointed by
the Governor.
The Board, in addition to other powers and duties provided by law,
has general supervisory authority over the fiscal affairs of the State and over
the safekeeping and depositing of all money and securities belonging to, or in
the custody of, the State. The Board has seven members consisting of the
Governor, the Lieutenant Governor, the Treasurer and four members appointed by
the Governor with the advice and consent of the Senate; no more than two such
appointed members may be from the same political party.
The Department of Finance and Administration, created in 1957 as
part of governmental reorganization measures of that year, is the principal
financial organization of State government and performs through its divisions
the duties and functions relating to State and local government financing and
general administration. On July 1, 1983, the Department of Finance and
Administration was reorganized into the DFA, which retained the prior name and
handles the State's financial functions, and the General Services Department,
which now handles the administrative functions. The executive and administrative
head of the DFA is the Secretary, who is appointed by the Governor with the
advice and consent of the Senate, and who also serves as Executive Officer of
the Board. In 1983, a Board of Finance Division was created in the DFA, to staff
and coordinate the functions of the Board.
The Legislature convenes in regular session annually on the third
Tuesday in January. Regular sessions are constitutionally limited in length to
sixty calendar days in odd-numbered years and thirty calendar days in
even-numbered years. In addition, special sessions of the Legislature may be
convened by the Governor under certain limited circumstances.
All State agencies are required to submit their budget requests to
the Budget Division of the DFA by September 1 of each year. Budget hearings are
scheduled for the purpose of examining the merits of budget requests through the
fall and are usually completed by the middle of December. Statutes require the
Budget Division to present comprehensive budget recommendations to the Governor
annually by January 2.
By statute, the Governor is required to submit a budget for the
upcoming fiscal year to the Legislature by the 25th legislative day. The State
budget is contained in a General Appropriation Bill which is first referred to
the House Appropriations and Finance Committee for consideration. The General
Appropriation Act may also contain proposals for supplemental and deficiency
appropriations for the current fiscal year. The Senate and the Senate Finance
Committee consider the General Appropriation Act after its approval by the House
of Representatives. Upon Senate passage, the Governor may sign the General
Appropriation Act, veto it, veto line items or veto parts of it. After the
Governor has signed the General Appropriation Act, the Budget Division of the
DFA approves the agency budgets and monitors the expenditure of the funds
beginning on July 1, the fist day of the fiscal year.
Revenues and Expenditures. The State derives the bulk of its
recurring General Fund revenues from five major sources: general and selective
sales taxes, income taxes, the emergency school tax on oil and gas production,
rents and royalties from State and federal land, and interest earnings from its
two Permanent Funds. Effective July 1, 1981, the Legislature abolished all
property taxes for State operating purposes.
Declines in oil and gas prices and in gas production have
contributed to a major restructuring of the State's tax base by the 1986, 1987,
1988, 1990, and 1993 Legislatures. Sales and income taxes were increased to
offset declines in severance tax and royalty revenue. However, economic growth
in 1993 and 1994 was substantially greater than expected and large surpluses
became available. The 1994 Legislature rolled back approximately one-half of the
1993 increases.
Fiscal Year 1995-1996. For the Fiscal Year ending June 30, 1996,
recurring revenue totaled $2.809 billion, an increase of 6.3% over the previous
fiscal year. Total General Fund Revenue was $2.757 billion, up 4.9% from fiscal
year 1995. The fiscal year 1996 revenue was below a December 1995 estimate by
approximately $2 million, or 0.1%. In general, weakness in broad-based taxes was
offset by strength in revenue
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related to the production of natural gas and crude oil. Strength relative to the
estimate was also evident for interest earnings, miscellaneous receipts and
reversions.
Preliminary results for fiscal year 1996 show recurring
appropriations at $2.77 billion, up 5.7% from the previous fiscal year.
Nonrecurring appropriations for fiscal year 1996 were $22 million, down 76% from
fiscal year 1995. The net transfer necessary from the operating reserve is $19.4
million and is within the $30 million transfer authority authorized by the 1996
legislature.
The 1996 legislature also established the risk reserve fund within
the general fund. General fund balances including the risk reserve fund are
projected to total $144 million. Without the risk reserve, balances would be
$28.1 million. The fiscal year 1996 balance in the operating reserve is $21.6
million, or only 0.8% of fiscal year 1996 total revenue.
Disaster allotments from the appropriation contingency fund totaled
over $5.4 million, primarily due to the drought and the severe wildfires
experienced during 1996 and the ending balance in the appropriation contingency
fund is $500,000 due to a reversion.
Fiscal Year 1996-1997. For fiscal year 1997, the Governor proposed
a budget which took into consideration spending requirements in Medicaid (an
18.2% increase, or $30.9 million) and in the criminal justice system (a 5.7%
increase, or $6.9 million), and placed a high priority on public school funding
(a 2.0% increase, or $26.2 million).
Estimated results for fiscal year 1997 show general fund total
receipts of $2.995 billion and recurring appropriations of $2.862 billion with
expenditures totaling $2.96 billion. The estimated fiscal year 1997 total ending
balance is $175 million, an increase of 23% over the preliminary 1996 results of
$144 million.
Debt Administration. The principal sources of funding for capital
projects by the State are surplus general fund balances, general obligation
bonds, and Severance Tax Bonds. Total funding of such capital projects for the
period 1983 to 1985 ranged from $170 million to $210 million per year. For the
period 1986 to 1990, capital appropriations were approximately $100 million per
year (except in 1987 when fund dropped to $57 million). The 1994 Legislature
authorized the largest capital program in the State's history, $383 million.
These authorizations fund a broad range of State and local capital needs for
various public school and higher education acquisitions as well as correction
facilities, museum and cultural facilities, health facilities, State building
repairs, water rights, wastewater and water systems, State parks, local roads,
and senior citizens facilities projects.
General Obligation Bonds. General obligation bonds of the State are
issued and the proceeds thereof appropriated to various purposes pursuant to an
act of the Legislature of the State. The State Constitution requires that any
law which authorizes general obligation debt of the State shall provide for an
annual tax levy sufficient to pay the interest and to provide a sinking fund to
pay the principal of the debts. General obligation bonds are general obligations
of the State for the payment of which the full faith and credit of the State are
pledged. The general obligation bonds are payable from "ad valorem" taxes levied
without limit as to rate or amount on all property in the State subject to
taxation for State purposes. For the fiscal year ended June 30, 1996, the total
amount outstanding on General Obligation Bonds was $193,660,867. Of this amount,
$31,325,867 is in interest.
The State of New Mexico General Obligation Capital Projects
Improvements Bonds Series 1995 in the principal amount of $66,265,000 are
authorized by the 1994 Capital Projects General Obligation Bond Act (the "Act")
passed by the State Legislature in 1994, have been approved by the voters in a
statewide election in November 1994 and will be issued pursuant to a resolution
of the State Board of Finance adopted on March 7, 1995. The proceeds of the
general obligation bonds will be used to pay the expenses incurred in the
preparation and sale of the general obligation bonds and to provide for certain
capital expenditures described in the Act. Proceeds will be distributed for the
following amounts and purposes: $3,674,732, certain senior citizen facility
improvements, equipment and vehicles; $59,851,200, certain State public
educational capital improvements and acquisitions; and, $2,500,000 for public
library acquisitions.
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Severance Tax Bonds. Severance Tax Bonds are not general
obligations of the State and the State is prohibited by law from using the
proceeds of property taxes as a source of payment of revenue bonds, including
Severance Tax Bonds. The State Treasurer keeps separate accounts for all money
collected as Severance Taxes, and is directed by State statute to pay Severance
Tax Bonds from monies on deposit in the Bonding Fund. Most of the 1994
authorizations were issued in a $16.8 million sale in 1994 to the New Mexico
State Treasurer and $92.1 million in a bond sale in August, 1994. For the fiscal
year ended June 30, 1996, the total amount outstanding on Severance Tax Bonds
was $454,065,280. Of this amount, $80,896,280 is in interest.
The Severance Tax Bonds, Series 1995A funds 55 projects for
schools, local governments, universities, and State agencies, including $1
million for University of New Mexico medical equipment; $525,000 for Department
of Health laboratories; $400,000 for an overpass in Albuquerque; $800,000 for a
local water system; and, $250,000 for a wastewater treatment plant in Anthony,
New Mexico. Following the issuance of the Severance Tax Bonds, Series 1995A,
Severance Tax Bonds in the principal amount of $8.1 million remain authorized
but unissued (including pre-1994 legislative authorizations). Total amount of
principal and interest due on Series 1995-B and Series 1996-A as of June 30,
1996 is $73,744,836 and $48,171,364, respectively.
Severance taxes have been collected by the State since the adoption
of the Severance Tax Act in 1937. Since 1959, certain severance tax receipts and
certain other monies determined by the Legislature have been deposited into the
Bonding Fund and used, in part, to retire bond issues which have funded a
variety of capital improvements in the State. The principle minerals extracted
from the State which contribute the largest portion of Severance Tax revenues
are natural gas, oil and coal. Severance Tax Collections on these three mineral
resources produced 98% of total fiscal year 1993-1994 Severance Tax Bonding Fund
tax collections. Severance Taxes from natural gas and oil together represent
approximately 80% of total fiscal year 1993-1994 Bonding Fund tax receipt.
Severance tax collections totaled $143 million in fiscal year 1996.
Moody's and S&P have assigned the bond ratings of "Aa1" and "AA+,"
respectively to General Obligation Bonds and "Aa" and "AA," respectively, to the
Severance Tax Bonds, Series 1995A.
Factors Affecting New York Fund
The following information is a brief summary of New York State and
New York City factors affecting the Fund and does not purport to be a complete
description of such factors. As described above, except during temporary
defensive periods, the Fund will invest at least 80% of the value of its net
assets in Tax-Exempt Obligations, the interest on which is exempt from federal
income, New York State and New York City personal income tax (except for New
York State and New York City franchise tax on corporations and financial
institutions, which is measured by income). Therefore, the financial condition
of New York State, its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of the Fund, or result in the default of existing
obligations, including obligations which may be held by the Fund. Further, New
York State and New York City face numerous forms of litigation seeking
significant damages which, if awarded, could adversely affect the financial
situation of New York State or New York City or issuers located in New York
State. It should be noted that the creditworthiness of obligations issued by
local issuers (including New York City) may be unrelated to the creditworthiness
of New York State, and that there is no obligation on the part of New York State
to make payment on such local obligations in the event of default in the absence
of a specific guarantee or pledge provided by New York State.
Bond ratings received on New York State's and New York City's
general obligation bonds are discussed below. Moody's Investors Service, Inc.
("Moody's") and/or Standard & Poor's Ratings Services ("S&P") provide an
assessment/rating of the creditworthiness of an obligor. The debt rating is not
a recommendation to purchase, sell, or hold a security, inasmuch as it does not
comment as to market price or suitability for a particular investor. The ratings
are based on current information furnished by the issuer or obtained by the
rating service from other sources it considers reliable. Each rating service
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information,
or based on other circumstance. There is no assurance that such ratings will
continue for any given period of time
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or that they will not be revised or withdrawn entirely by any such rating
agencies, if in their respective judgments, circumstances so warrant. The
ratings are based, in varying degrees, on the following considerations:
(1) Likelihood of default-capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation.
(2) Nature of, and provisions of, the obligation.
(3) Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other arrangement(s)
under the laws of bankruptcy and other laws affecting creditors rights.
A revision or withdrawal of any such credit rating could have an
effect on the market price of the related debt obligations. An explanation of
the significance and status of such credit ratings may be obtained from the
rating agencies furnishing the same. In addition, a description of Moody's and
S&P's bond ratings is set forth in Appendix A hereto.
The following information provides only a brief summary of the
complex factors affecting the financial situation in New York State and New York
City, is derived from sources that are generally available to investors and is
believed to be accurate. It is based on information drawn from the Annual
Information Statement of the State of New York dated June 23, 1995 and updates
thereto issued on July 28, 1995 and October 26, 1995, and from other
official statements and prospectuses issued by, and other information reported
by, the State of New York (the "State"), by its various public bodies (the
"Agencies"), and other entities located within the State, including the City of
New York (the "City"), in connection with the issuance of their respective
securities.
THE FUND MAKES NO REPRESENTATION OR WARRANTY REGARDING THE
COMPLETENESS OR ACCURACY OF SUCH INFORMATION. THE MARKET VALUE OF SHARES OF THE
FUND MAY FLUCTUATE DUE TO FACTORS SUCH AS CHANGES IN INTEREST RATES, MATTERS
AFFECTING NEW YORK STATE OR NEW YORK CITY, OR FOR OTHER REASONS.
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. Travel and tourism constitute an important part of
New York's economy. Relative to the nation, the State has a smaller share of
manufacturing and construction and a larger share of service-related industries.
The State is likely to be less affected than the nation as a whole during an
economic recession that is concentrated in manufacturing and construction, but
likely to be more affected during a recession that is concentrated more in the
service-producing sector.
The State historically has been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation as
a whole, gradually eroding its relative economic position. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
The City has also had to face greater competition as other major cities have
developed financial and business capabilities which make them less dependent on
the specialized services traditionally available almost exclusively in the City.
During the calendar years 1984 through 1991, the State's rate of
economic expansion was somewhat slower than that of the nation. In the 1990-91
recession, the economy of the State, and that of the rest of the Northeast, was
more heavily damaged than that of the nation as a whole and has been slower to
recover. The total employment growth rate in the State has been below the
national average since 1984. The unemployment rate in the State dipped below the
national rate in the second half of 1981 and remained lower until 1991; since
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then, it has been higher.
The State has had the second highest combined state and local tax
burden in the United States which has contributed to the decisions of some
businesses and individuals to relocate outside, or not locate within, the State.
However, the State's 1995-96 budget reflected significant actions to reduce the
burden of State taxation, including adoption of a 3-year, 20 percent reduction
in the State's personal income tax. During 1996-97, New York led the nation in
tax cuts, at 54.1%, bringing the total value of tax reductions in effect for the
1997 year to over $6 billion. When measured as a percentage of personal income,
state-imposed taxes in New York should be below the national median in 1997. The
budget for fiscal year 1997-98 reflects an additional $170 million in tax
reductions.
The State Financial Plan is based on a projection by State's
Division of the Budget ("DOB") of national and State economic activity. The
national economy began the current expansion in 1991 and has added over 7
million jobs since early 1992. However, the recession lasted longer in the State
and the State's economic recovery has lagged behind the nation's. In the last
few years, New York has shown signs of economic resurgence. Since 1994, New York
has jumped from 15th to 6th in terms of total private sector employment growth
compared to other states, gaining 140,000 private sector jobs since December
1994, despite banking layoffs and closure of a major automotive plant. Overall
employment growth was close to 0.7%, almost 60,000 jobs, for 1996. National
employment growth in 1996 was 2.0%. The New York economy in 1997 is expected to
grow at about the same rate as in 1996. Personal income is expected to increase
5.2% in 1996 and 4.5% in 1997.
1996-97 Fiscal Year. The State's current fiscal year commenced on
April 1, 1996, and ends on March 31, 1997 (the "1996-97 fiscal year"). Prior to
adoption of the budget, the Legislature enacted appropriations for disbursements
considered to be necessary for State operations and other purposes, including
all necessary appropriations for debt service. The State Financial Plan for the
1996-97 fiscal year is based on the State's budget as enacted by the legislature
and signed into law by the Governor.
The 1996-97 General Fund Financial Plan continues to be balanced,
with a projected surplus of $1.3 billion. This will be the second consecutive
material budget surplus generated by the Governor's administration. Of this
amount, $250 million is being used to accelerate the last portion of the
Governor's personal income tax cut through changes to the 1997 withholding
tables. This raises taxpayers' current take-home pay rather than issuing larger
refunds in 1998. Of the remainder, $943 million is being used to help close the
projected 1997-98 budget gap, and $65 million is being deposited into the Tax
Stabilization Reserve Fund (the State's "rainy day" fund) as provided by the
Constitution. This is the maximum amount that can be deposited, and increases
the size of that fund to $332 million by the end of 1997-98, the highest balance
ever achieved.
The surplus results primarily from growth in projected receipts. As
compared to the enacted budget, revenues increased by more than $1 billion,
while disbursements fell by $228 million. These changes from original Financial
Plan projections reflect actual results through December 1996 as well as
modified economic and caseload projections for the balance of the fiscal year.
The General Fund is projected to be balanced on a cash basis for
the 1996-97 fiscal year. Total receipts and transfers from other funds are
projected to be $32.966 billion, a decrease of $207 million from total receipts
in the prior fiscal year. Total General Fund disbursements and transfers to
other funds are projected to be $32.895 billion, a decrease of $149 million from
the total amount disbursed in the prior fiscal year.
The General Fund closing balance is expected to be $358 million at
the end of 1996-97. Of this amount, $317 million will be on deposit in the Tax
Stabilization Reserve Fund (TSRF), while another $41 million will remain on
deposit in the Contingency Reserve Fund (CRF). The TSRF has an opening balance
of $287 million, supplemented by a required payment of $15 million and an
extraordinary deposit of $65 million from surplus 1996-97 monies. The $9 million
on deposit in the Revenue Accumulation Fund will be drawn down as planned. The
previously planned deposit of $85 million to the CRF, projected earlier to be
received from contractual efforts to maximize Federal revenue, is not expected
to materialize this year.
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In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural gaps for the State. These gaps resulted from a significant disparity
between recurring revenues and the costs of maintaining or increasing the level
of support for State programs. As noted, the 1996-97 enacted budget combines
significant tax and program reductions which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
The 1995-96 State Financial Plan reflected actions that will
directly affect the State's 1996-97 fiscal year baseline receipts and
disbursements. The three-year plan to reduce State personal income taxes will
decrease State tax receipts by an estimated $1.7 billion in State fiscal year
1996-97, in addition to the amount of reduction in State fiscal year 1995-96.
Further significant reductions in the personal income tax are scheduled for the
1997-98 State fiscal year. Other tax reductions enacted in 1994 and 1995 are
estimated to cause an additional reduction in receipts of over $500 million in
1996-97, as compared to the level of receipts in 1995-96. Similarly, many
actions taken to reduce disbursements in the State's 1995-96 fiscal year are
expected to provide greater reductions in State fiscal year 1996-97.
The 1997-98 budget gap is smaller than the previous two fiscal year
projections. The baseline budget forecast produced an estimated $2.3 billion
budget imbalance, before reflecting any actions taken by the Governor to produce
a balanced 1997-98 Financial Plan. Projections of baseline revenue growth showed
a decline of almost $2 billion, reflecting the loss of non-recurring receipts
used in 1996-97 and implementation of previously enacted tax reduction programs.
The 1996-97 surplus of $943 million reduced the 1997-98 budget gap
to $1.3 billion. Proposals included in the Executive Budget for 1997-98 close
this remaining gap, reducing State spending for the third straight year, and
permitting three new tax reduction proposals: the $1.7 billion, multi-year
property tax reduction portion of STAR (School Tax Relief initiative); a
three-year phased reduction in the estate and gift tax; and a $50 million
reserve for additional targeted job-creating tax reductions. The budget also
makes a significant investment in school aid -- a proposed increase of $302
million on a school year basis as the first step toward implementing the $1.7
billion school aid portion of STAR.
The 1997-98 Financial Plan includes approximately $66 million in
non-recurring resources, or only 0.2% of the General Fund budget -- the lowest
level in more than a decade. As compared to 1996-97, non-recurring resources are
a much smaller component of the budget: down over $1 billion from last year's
adopted budget. The loss of these resources in future years is more than offset
by recommendations which provide higher annualized savings in 1998-99 and
beyond.
Assuming these gap-closing actions, the Financial Plan projects
receipts of $32.9 billion and spending of $32.8 billion in fiscal year 1997-98,
with a required deposit of $15 million to the TSRF and an increase of $24
million in the CRF. The closing fund balance in the General Fund is projected to
be $332 million, the largest amount ever on deposit.
To address a potential imbalance in any given fiscal year, the
State would be required to take actions to increase receipts and/or reduce
disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
To correct recurring budgetary imbalances, the State would need to take
significant actions to align recurring receipts and disbursement in future
fiscal years. There can be no assurance, however that the Legislature will
enact the Governor's proposals or that the State's actions will be sufficient to
preserve budgetary balance in a given fiscal year or to align recurring receipts
and disbursements in future fiscal years.
The economic and financial condition of the State may be affected
by various financial, social, economic and political factors. Those factors can
be very complex, may vary from fiscal year to fiscal year, and are frequently
the result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the Federal government, that
are not under the control of the state. For example, a significant
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risk to the 1997-98 State Financial Plan arises from tax legislation pending in
Congress. Changes to Federal tax treatment of capital gains are likely to flow
through automatically to the State personal income tax. Such changes, depending
upon their precise character and timing, and upon taxpayer response, could
produce either revenue gains or losses during the balance of the State's fiscal
year. Uncertainties with respect to both the economy and potential decisions at
the Federal level add further pressure on future budget balance in New York
State. Specific budget proposals being discussed at the Federal level but not
included in the State's current economic forecast would (if enacted) have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states. Because of the uncertainty and
unpredictability of these potential changes, their impact is not included in the
assumptions underlying the State's projections.
The 1996-97 and 1997-98 State Financial Plans are based upon
forecasts by the DOB of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. Many uncertainties exist in forecasts
of both the national and State economies, including consumer attitudes toward
spending, the extent of corporate and governmental restructuring, Federal fiscal
and monetary policies, the level of interest rates, and the condition of the
world economy, which could have an adverse effect on the State. There can be no
assurances that the State economy will not experience results in the current
fiscal year that are worse than predicted, with corresponding material and
adverse effects on the State's projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are
based on the State tax structure in effect during the fiscal year and on
assumptions relating to basic economic factors and their historical
relationships to State tax receipts. Projections of total State disbursements
are based on assumptions relating to economic and demographic factors, levels of
disbursements for various services provided by local governments (where the cost
is partially reimbursed by the State), and the results of various administrative
and statutory mechanisms in controlling disbursements for State operations.
Factors that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the Federal government, and changes in the demand for and use of State
services. There can be no assurance that the State's projections for tax and
other receipts for the 1996-97 fiscal year and 1997-98 fiscal year are not
overstated and will not be revised downward, or that disbursements will not be
in excess of the amounts projected. Such variances could adversely affect the
State's cash flow during the 1996-97 fiscal year or subsequent fiscal years, as
well as the State's ability to achieve a balanced budget on a cash basis for
such fiscal year or subsequent fiscal years.
The DOB believes that its projections of receipts and disbursements
relating to the current State Financial Plan, and the assumptions on which they
are based, are reasonable. Projections and estimates of receipts from taxes have
been subject to variance in recent fiscal years. The personal income tax, the
sales tax, and the corporation franchise tax have been particularly subject to
overestimation as a result of several factors, most recently the significant
slowdown in the national and regional economies and uncertainties in taxpayer
behavior as a result of actual and proposed changes in Federal tax laws. As a
result of the foregoing uncertainties and other factors, actual results could
differ materially and adversely from the projections discussed herein, and those
projections may be changed materially and adversely from time to time.
In the past, the State has taken management actions and made use of
internal sources to address cash flow needs and State Financial Plan shortfall,
and DOB believes it could take similar action should variances from its
projections occur in the current and/or subsequent fiscal years. Those variances
could, however, affect the State's ability to achieve a balanced budget on a
cash basis for the current and/or subsequent fiscal years.
There can be no assurance that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years. There can be
no assurance, however, that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future years, nor can there be any assurance that budgetary
difficulties will not lead to further adverse consequences for the State and its
obligations.
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As a result of changing economic conditions and information, public
statements or reports may be released by the Governor, members of the State
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the State's
financial condition, as reflected in the 1996-97 State Financial Plan, that may
vary materially and adversely from the information provided herein.
Indebtedness. As of March 31, 1995, the total amount of long-term
State general obligation debt authorized but unissued stood at $1.789 billion.
As of the same date, the State had approximately $5.181 billion in general
obligation debt, including $149.3 million in bond anticipation notes
outstanding.
As of March 31, 1995, $17.980 billion of bonds, issued in
connection with lease-purchase and contractual-obligation financings of State
capital programs, were outstanding. The total amount of outstanding
State-supported debt as of March 31, 1995 was $27.913 billion. As of March 31,
1995, total State-related debt (which includes the State-supported debt, moral
obligation and certain other financings and State-guaranteed debt) was $36.1
billion.
The State anticipates that its capital programs will be financed,
in part, through borrowings by the State and public authorities in the 1995-96
fiscal year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The State's commercial paper
program is expected to have an average of $287 million outstanding during
1997-98. The Legislature has also authorized the issuance of up to $33 million
in certificates of participation during the State's 1995-96 fiscal year for
equipment purchases and $14 million for capital purposes. The projection of the
State regarding its borrowings for the 1995-96 fiscal year may change if
circumstances require.
In June 1990, legislation was enacted creating the New York Local
Government Assistance Corporation ("LGAC"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, and has been authorized to issue its bonds to provide net proceeds of
up to $529 million during the State's 1995-96 fiscal year to redeem notes sold
in June 1995. The LGAC program was completed in 1995-96 with the issuance of the
last installment of authorized bond sales.
Ratings. As of September 1995, Moody's rating of the State's
general obligation bonds stood at A, and S&P's rating stood at A-. Moody's
lowered its rating to A on June 6, 1990, its rating having been A1 since May 27,
1986. S&P lowered its rating from A to A- on January 13, 1992. S&P's previous
ratings were A from March 1990 to January 1992, AA- from August 1987 to March
1990 and A+ from November 1982 to August 1987.
The City and the Municipal Assistance Corporation ("MAC")
The City accounts for approximately 41% of the State's population
and personal income, and the City's financial health affects the State in
numerous ways.
In February 1975, the New York State Urban Development Corporation
("UDC"), which had approximately $1 billion of outstanding debt, defaulted on
certain of its short-term notes. Shortly after the UDC default, the City entered
a period of financial crisis. Both the State Legislature and the United States
Congress enacted legislation in response to this crisis. During 1975, the State
Legislature (i) created MAC to assist with long-term financing for the City's
short-term debt and other cash requirements and (ii) created the State Financial
Control Board (the "Control Board") to review and approve the City's budgets and
four-year financial plans (the financial plans also apply to certain
City-related public agencies).
The national economic downturn which began in July 1990 adversely
affected the City economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and the City's economy
declined in those two years. Beginning in 1992, the improvement in the national
economy helped stabilize conditions in the City. Employment losses moderated and
the City's economy improved,
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boosted by strong wage gains. However, after noticeable improvements in the
City's economy during calendar year 1994, the City's current four-year financial
plan assumes that economic growth will slow in calendar year 1996, with local
employment increasing modestly. During the 1995 fiscal year, the City
experienced substantial shortfalls in payments of non-property tax revenues from
those forecasted.
For each of the 1981 through 1993 fiscal years, the City achieved
balanced operating results as reported in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in its recent fiscal years in order to maintain balanced operating
results. There can be no assurance that the City will continue to maintain a
balanced budget, or that it can maintain a balanced budget without additional
tax or other revenue increases or reductions in City services, which could
adversely affect the City economic base.
Pursuant to State law the City prepares a four-year annual
financial plan, which is reviewed and revised on a quarterly basis and which
includes the City's capital, revenue and expense projections and outlines
proposed gap-closing programs for years with projected budget gaps. The current
financial plan extends through the 1999 fiscal year. The City is required to
submit its financial plans to review bodies, including the Control Board. If the
City were to experience certain adverse financial circumstances, including the
occurrence or the substantial likelihood of the occurrence of an annual
operating deficit of more than $100 million or the loss of access to the public
credit markets to satisfy the City's capital and seasonal financial
requirements, the Control Board would be required by State law to exercise
certain powers, including prior approval of City financial plans, proposed
borrowings and certain contracts.
The City depends on the State for State aid both to enable the City
to balance its budget and to meet its cash requirements. The State's 1996-97
Financial Plan projects a balanced General Fund. If the State experiences
revenue shortfalls or spending increases during its 1996-97 fiscal year or
subsequent years, such developments could result in reductions in projected
State aid to the City. In addition, there can be no assurance that State budgets
in future fiscal years will be adopted by the April 1 statutory deadline and
that there will not be adverse effects on the City's cash flow and additional
City expenditures as a result of such delays.
The Mayor is responsible for preparing the City's four-year
financial plan, including the City's current financial plan for the 1996 through
1999 fiscal years. The City projections set forth in its financial plan are
based on various assumptions and contingencies which are uncertain and which may
not materialize. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. Such assumptions and contingencies
include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, wage increases for City employees
consistent with those assumed in such financial plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives, the ability to complete revenue generating transactions,
provision of State and Federal aid and mandate relief, State legislative
approval of future State budgets, levels of education expenditures as may be
required by State law, adoption of future City budgets by the New York City
Council, approval by the Governor or the State Legislature and the cooperation
of MAC with respect to various other actions proposed in such financial plan,
and the impact on City revenues of proposals for Federal and State welfare
reform.
Implementation of its financial plan is also dependent upon the
City's ability to market its securities successfully in the public credit
markets. The City's financing program for fiscal years 1996 through 1999
contemplates the issuance of $9.7 billion of general obligation bonds primarily
to reconstruct and rehabilitate the City's infrastructure and physical assets
and to make capital investments. In addition, the City issues revenue and tax
anticipation notes to finance its seasonal working capital requirements. The
terms and success of projected public sales of City general obligation bonds and
notes will be subject to prevailing market conditions, and no assurance can be
given that such sales will be completed. If the City were unable to sell its
general obligation bonds and notes, it would be prevented from meeting its
planned capital and operating expenditures. Future developments concerning the
City and public discussion of such developments, the City's future financial
needs and other issues may affect the market for outstanding City general
obligation bonds or notes.
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The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than those
forecast in the financial plan. In addition, the Control Board staff and others
have questioned whether the City has the capacity to generate sufficient
revenues in the future to provide the level of services included in the
financial plan. It is reasonable to expect that such reports and statements will
continue to be issued and to engender public comment.
1995 Fiscal Year. On July 21, 1995, the City submitted to the
Control Board a fourth quarter modification to the financial plan for the 1995
fiscal year. The City projects a balanced budget in accordance with GAAP for the
1995 fiscal year after taking into account a transfer of $75 million.
1996-99 Financial Plan. On July 11, 1995, the City submitted to the
Control Board the 1996-99 Financial Plan, which relates to the City, the Board
of Education and the City University of New York. The 1996-99 Financial Plan is
based on the City's expense and capital budgets for the City's 1996 fiscal year,
which were adopted on June 14, 1995, and sets forth proposed actions by the City
for the 1996 fiscal year to close substantial projected budget gaps resulting
from lower than projected tax receipts and other revenues and greater than
projected expenditures. In addition to substantial proposed agency expenditure
reductions and productivity, efficiency and labor initiatives negotiated with
the City's labor unions, the 1996-99 Financial Plan reflects a strategy to
substantially reduce spending for entitlements for the 1996 and subsequent
fiscal years.
The 1996-99 Financial Plan also sets forth projections for the 1997
through 1999 fiscal years and outlines a proposed gap-closing program to close
projected budget gaps of $888 million, $1.5 billion and $1.4 billion for the
1997, 1998 and 1999 fiscal years, respectively, after successful implementation
of the $3.1 billion gap-closing program for the 1996 fiscal year. The proposed
gap-closing actions, a substantial number of which are not specified in detail,
include various actions which may be subject to State or Federal approval.
On July 24, 1995, the City Comptroller issued a report on the
1996-99 Financial Plan. The report concluded that the 1996-99 Financial Plan
includes total risks of $749 million to $1.034 billion for the 1996 fiscal year.
With respect to the 1997-99 fiscal years, the report noted that the gap-closing
program in the 1996-99 Financial Plan does not include information about how the
City will implement the various gap-closing programs, and that the entitlement
cost containment and revenue initiatives will require approval of the State
legislature. The report estimated that the 1996-99 Financial Plan includes total
risks of $2.0 billion to $2.5 billion in the 1997 fiscal year, $2.8 billion to
$3.3 billion in the 1998 fiscal year, and $2.9 billion to $3.4 billion in the
1999 fiscal year.
In early December 1994, the City Comptroller issued a report which
noted that the City is currently seeking to develop and implement plans which
will satisfy the Federal Environmental Protection Agency that the water supplied
by the City watershed areas does not need to be filtered. The City Comptroller
noted that, if the City is ordered to build filtration plants, they could cost
as much as $4.75 billion to construct, with annual debt service and operating
costs of more than $500 million, leading to a water rate increase of 45%.
On December 16, 1994, the City Comptroller issued a report noting
that the capacity of the City to issue general obligation debt could be greatly
reduced in future years due to the decline in value of taxable real property.
The report concluded that the debt incurring power of the City would likely be
curtailed substantially in the 1997 and 1998 fiscal years.
On July 21, 1995, the staff of the Control Board issued a report on
the 1996-99 Financial Plan which identified risks of $873 million, $2.1 billion,
$2.8 billion and $2.8 billion for the 1996 through 1999 fiscal years,
respectively.
On June 14, 1995, the staff of the Office of the State Deputy
Comptroller for the City of New York ("OSDC") issued a report on the financial
plan with respect to the 1995 fiscal year. The report noted that, during the
1995 fiscal year, the City faced adverse financial developments totaling over $2
billion resulting from the inability to initiate approximately 35% of the City's
gap-closing program, as well as newly-identified spending needs and revenue
shortfalls. The report noted that the City relied heavily on one-time actions to
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offset adverse developments, using $2 billion in one-time resources in the 1995
fiscal year, or nearly double the 1994 amount.
On July 24, 1995, the staff of the OSDC issued a report on the
1996-99 Financial Plan. The report concluded that there remains a budget gap for
the 1996 fiscal year of $392 million, largely because the City and its unions
have yet to reach an agreement on how to achieve $160 million in unspecified
labor savings and the remaining $100 million in recurring health insurance
savings from last year's agreement. The report further noted that growth in City
revenues is being constrained by the weak economy in the City, which is likely
to be compounded by the slowing national economy, and that there is a likelihood
of a national recession during the course of the 1996-99 Financial Plan.
Moreover, the report noted that State and Federal budgets are undergoing
tumultuous changes, and that the potential for far-reaching reductions in
intergovernmental assistance is clearly on the horizon, with greater uncertainty
about the impact on City finances and services.
Litigation. The City is a defendant in a significant number of
lawsuits. Such litigation includes, but is not limited to, actions commenced and
claims asserted against the City arising out of alleged constitutional
violations, torts, breaches of contracts, and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
of the proceedings and claims are not currently predictable, adverse
determinations in certain such proceedings and claims might have a material
adverse effect upon the City's ability to carry out its financial plan. As of
June 30, 1994, the City estimated its potential future liability in
respect of outstanding claims to be approximately $2.6 billion. The 1996-99
Financial Plan includes provisions for judgments and claims of $279 million,
$236 million, $251 million and $264 million for the 1996 through 1999 fiscal
years, respectively.
Ratings. As of March 1996, the State had regained S&P's rating of
A- on the City's general obligation bonds. On July 10, 1995, S&P revised
downward its rating on City general obligation bonds from A- to BBB+ and removed
City bonds from CreditWatch. S&P stated that "structural budgetary balance
remains elusive because of persistent softness in the City's economy,
highlighted by weak job growth and a growing dependence on the historically
volatile financial services sector." Other factors identified by S&P in lowering
its rating on City bonds included a trend of using one-time measures, including
debt refinancings, to close projected budget gaps, dependence on unratified
labor savings to help balance financial plans, optimistic projections of
additional Federal and State aid or mandate relief, a history of cash flow
difficulties caused by State budget delays and continued high debt levels. Fitch
Investors Service, Inc. continues to rate the City general obligations bonds A-.
Moody's rating for City general obligation bonds is Baa1.
On February 11, 1991, Moody's had lowered its rating from A.
Previously, Moody's had raised its rating to A in May 1988, to Baa1 in December
1986, to Baa in November 1983 and to Ba1 in November 1981. S&P had raised its
rating to A- in November 1987, to BBB+ in July 1985 and to BBB in March 1981.
Indebtedness. As of June 30, 1995, the City and MAC had,
respectively, $23.258 billion and $4.033 billion of outstanding net long-term
indebtedness.
The State Agencies: Certain Agencies of the State, including the
State Housing Finance Agency ("HFA") and the UDC, have faced substantial
financial difficulties which could adversely affect the ability of such Agencies
to make payments of interest on, and principal amounts of, their respective
bonds. The difficulties have in certain instances caused the State (under
so-called "moral obligation" provisions, which are non-binding statutory
provisions for State appropriations to maintain various debt service reserve
funds) to appropriate funds on behalf of the Agencies. Moreover, it is expected
that the problems faced by these Agencies will continue and will require
increasing amounts of State assistance in future years. Failure of the State to
appropriate necessary amounts or to take other action to permit those Agencies
having financial difficulties to meet their obligations (including HFA and UDC)
could result in a default by one or more of the Agencies. Such default, if it
were to occur, would be likely to have a significant adverse effect on investor
confidence in, and therefore the market price of, obligations of the defaulting
Agencies. In addition, any default in payment on any general obligation of any
Agency whose bonds contain a moral obligation provision could constitute a
failure of certain conditions that must be satisfied in connection with Federal
guarantees of City and MAC obligations and could thus jeopardize the City's
long-term financing plans.
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State Litigation: The State is a defendant in numerous legal
proceedings pertaining to matters incidental to the performance of routine
governmental operations. Such litigation includes, but is not limited to, claims
asserted against the State arising from alleged torts, alleged breaches of
contracts, condemnation proceedings and other alleged violations of State and
Federal laws. Included in the State's outstanding litigation are a number of
cases challenging the constitutionality or the adequacy and effectiveness of a
variety of significant social welfare programs primarily involving the State's
mental hygiene programs. Adverse judgments in these matters generally could
result in injunctive relief coupled with prospective changes in patient care
which could require substantial increased financing of the litigated programs in
the future.
The State is also engaged in a variety of contract and tort claims
wherein significant monetary damages are sought. Actions commenced by several
Indian nations claim that significant amounts of land were unconstitutionally
taken from the Indians in violation of various treaties and agreements during
the eighteenth and nineteenth centuries. The claimants seek recovery of
approximately six million acres of land as well as compensatory and punitive
damages.
Adverse developments in the foregoing proceedings or new
proceedings could adversely affect the financial condition of the State in the
1996-97 fiscal year or thereafter.
Other Municipalities: Certain localities in addition to New York
City could have financial problems leading to requests for additional State
assistance and the need to reduce their spending or increase their revenues. The
potential impact on the State of such actions by localities is not included in
projections of State revenues and expenditures in the State's 1995-96 fiscal
year
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the Fiscal affairs of Yonkers. Future actions taken by the Governor
or the State Legislature to assist Yonkers could result in allocation of State
resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial
short-term and long-term borrowings. In 1993, the total indebtedness of all
localities in the State other than New York City was approximately $17.7
billion. State law requires the Comptroller to review and make recommendations
concerning the budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during the period that
such deficit financing is outstanding. Fifteen localities had outstanding
indebtedness for deficit financing at the close of their fiscal year ending in
1993.
From time to time, Federal expenditure reductions could reduce, or
in some cases eliminate, Federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, New York City or any of the Agencies were to suffer
serious financial difficulties jeopardizing their respective access to the
public credit markets, the marketability of notes and bonds issued by localities
within the State, including notes or bonds in the Fund, could be adversely
affected. Localities also face anticipated and potential problems resulting from
certain pending litigation, judicial decisions, and long-range economic trends.
Long-range potential problems of declining urban population, increasing
expenditures, and other economic trends could adversely affect localities and
require increasing State assistance in the future.
Factors Affecting North Dakota Fund
General Economic Conditions. North Dakota lies in the central
portion of the Northern Plains with a land area of 70,665 square miles.
Elevation in the northeast corner of the State is 750 feet above sea level and
in the southwest corner of the State is 3,506 feet. The North Dakota economy
continues to grow at a slow and steady pace. The production-based economy, which
provides the basis for this stable, slow growth, while sensitive to change, is
not as susceptible to recessionary impacts as the rest of the nation. Due to
strong economic conditions experienced in North Dakota, taxable sales and
purchases are expected to increase by 3.81% in 1997 and 5.7% annually over the
next biennium, resulting in increased sales tax collections of $43 million
during 1997-99.
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Agriculture is an important segment of the state's economy. As a
major producer of durum wheat, North Dakota is expected to benefit from high
wheat prices while cattle prices are expected to remain low. NAFTA and GATT are
expected to increase agricultural exports. In recent years, the state's farmers
have formed cooperatives that combine production and processing to create
manufacturing jobs and new markets for their goods. An example of North Dakota's
commitment to agriculture-related economic development is its recent success in
attracting the Pro-Gold corn processing plant which is under construction near
Wahpeton, North Dakota. The plant is expected to process 72,000 bushels of corn
per day, expanding to 320,000 bushels per day, raising corn prices in the area
by approximately one dollar per bushel.
The energy industry in North Dakota is projected to be robust
during the next biennium as a result of increased oil activity in the western
part of the state. Oil production in this state is currently averaging
approximately 92,000 barrels per day, up 14.1% from last years production level
of 80,600 barrels per day. Oil production is expected to increase to a level of
over 100,000 barrels of oil per day during the next biennium while prices are
expected to be in the $19 per barrel range.
The labor force and employment situation for the state appears
healthy. Employment in the state has grown by 7,500 wage and salary jobs
reflecting an increase of 2.5% compared to one year earlier. About half of the
increase has been in the service industries with smaller gains in trade and
finance. Construction employment has also been a significant contributor to
overall growth, mainly attributed to the continuing construction of the ProGold
corn processing plant in Wahpeton. Manufacturing employment has shown little
growth in 1995 and 1996 and the current forecast projects manufacturing payroll
growth of 0.5% in 1997. Unemployment is significantly below national levels.
North Dakota's unemployment rate in 1995 and 1996 (preliminary) was 3.3% and
3.1%, respectively. This is significantly lower than the national unemployment
rates of 5.6% and 5.4% for 1995 and 1996, respectively.
The 1995 Legislative Assembly funded the design, development and
implementation of a Welfare Reform Computer System. The demonstration, known as
the Training, Education, Employment, and Management (TEEM) Project, is
progressing with numerous waivers received from the federal government in
September, 1995. The TEEM demonstration provides for a uniform treatment of
income and assets, a uniform budget methodology, standard certification periods
and reporting requirements, and employment and training with adequate child care
as a means of helping participants to become self-sufficient, and incorporates
child support enforcement issues. Ten counties will be included in the TEEM
demonstration.
The 54th Legislative Assembly contained substantial workers
compensation reform. Legislators passed a number of bills which dealt directly
with the North Dakota Workers Compensation Bureau. Among the list of issues
addressed in the legislation were: fraud prevention; designated providers; first
report of injury; retirement; claims closure; rehabilitation; permanent partial
injury; worker adviser/ombudsman program; and, litigation/attorney fees.
Additionally, the North Dakota Workers Compensation Bureau is implementing a
number of other changes to improve customer service. The Fund is also expanding
its employer-based programs to get more employers actively involved in risk
management. These programs focus on intense communication between the injured
worker, medical providers and the employer.
Budgetary Process. The State operates through a biennial
appropriation which represents departmental appropriations recommended by the
Governor and presented to the General Assembly at the beginning of each
legislative session. The General Assembly enacts the budgets of the various
State departments through passage of specific appropriation bills. The Governor
has line item veto powers over all legislation subject to legislative override.
Session laws that were passed by the Legislature in 1993 authorize directors of
various state agencies to transfer appropriation authority among the various
divisions of their specific agency, subject to the Budget Section of the North
Dakota Legislative Council's approval. Unexpended appropriations lapse at the
end of each biennium, except certain capital expenditures covered under the
North Dakota Code and except for all unexpended general funds appropriation
authority which must be deposited in special revenue funds of the institutions
in the University System according to law. During the 1993-1995 biennium there
were supplemental appropriations of $105,573,249. The general fund appropriation
authority was increased by approximately $6.5 million. Of this amount $3.7
million was carryover from the 1991-1993 biennium, $2.0 million was approved by
the 54th Legislative Assembly for Risk Management and $.8 million
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was for deficiencies also approved by the 54th Legislative Assembly.
The beginning balance for the 1995-97 biennium was $31.1 million,
$4.2 million more than had been projected for an ending balance when the 1995
Legislative Assembly adjourned. No one-time transfers were utilized in the
1995-97 budget, although $31.9 million of the transfers from the Bank of North
Dakota were moved from the 1993-95 biennium to the 1995-97 biennium. Although
the 1995 Legislative Forecast estimated transfers from the Bank of North Dakota
of $59.9 million, the November 1996 revenue forecast assumes $50.3 million will
be transferred. The June 30, 1997 ending balance is anticipated to be $63
million.
North Dakota implemented a new accounting standard, GASB Statement
No 22 "Accounting for Taxpayer Assessed Tax Revenues in Governmental Funds."
This created a one time acceleration of revenue recognition for the State's
major tax types. The change resulted in a restatement of the general fund's 1994
balance, increasing it from $64.3 million to $94.4 million. In fiscal year 1995
an additional $75.6 million was recognized for taxes receivable in the general
fund. The increase in taxes receivable resulted in an additional $36 million
being recognized as revenue and $39.6 million as deferred revenue in fiscal year
1995 in the general fund. The general fund also had an $11 million increase in
accrued tax refunds payable which decreased revenues in the general fund for
fiscal year 1995.
Revenues and Expenditures. General governmental activities are
accounted for in four governmental fund types: general (GAAP) basis; special
revenue; capital projects; and, debt service funds. The November 1996 general
fund revenue forecast for the 1995-97 biennium is $1.37 billion, an increase of
approximately $40 million from the original estimate and 10% more than the
previous biennium. Oil tax revenue collections accounted for nearly $9 million
of the excess during the first fiscal year due to the increased oil activity in
the state. Of the total revenues, taxes accounted for over $1 billion. The
largest increase in taxes on a budgetary basis comes from sales and use taxes
with an estimated increase of $50.79 million for the biennium, resulting in
$523.1 million. The second largest source of general fund revenue, the
individual income tax, is estimated to increase $31.6 million to a total of
$311.4 million. On the other hand, corporate income taxes are expected to
slightly decrease approximately $388,000 to $94.37 million.
General fund appropriations are expected to total $1.35 billion for
the 1995-97 biennium, an increase of 7.6% from the previous biennium. The three
leading expenditures are: education, $769.1 million, health and human services,
$327.9 million; and, general government and grants, $99.9 million.
Projected general fund revenues for the 1997-99 biennium, based on
the executive recommendation, are $1.44 billion. This is a $68 million or nearly
5% increase over the revised revenue estimate for the 1995-97 biennium. The
projected ending balance at June 30, 1999 is approximately $10 million.
Claims/Judgments Payable are primarily Workers Compensation Claims
Incurred But Not Yet Reported (IBNR) by the claimants as well as claims related
to various litigation matters. Claims and judgments for governmental funds are
reflected entirely in the general long-term debt account group and not in
individual funds as the liability is not expected to be liquidated with
expendable available financial resources.
Debt Administration. The Constitution of North Dakota provides that
the State may issue or guarantee the payment of bonds provided that all bonds in
excess of $2 million are: secured by first mortgage upon property and no further
indebtedness may be incurred by the State unless evidenced by a bond issue;
authorized by law, for a certain purpose; provisioned to pay the interest
semiannually, and pay the principal within 30 years. The law authorizing the
bond issue must specifically appropriate the provisions to the payment of the
principal and interest of the bond. The State is currently in compliance with
the constitutional debt limitation. At June 30, 1995, the state had a number of
debt issues outstanding. These issued include:
General Obligation Bonds. General obligation bonds have been
authorized and issued to provide funds to the Bank of North Dakota. General
obligation bonds issued according to the constitution and enabling statutes are
backed by the full faith, credit and taxing power of the State of North Dakota.
Debt service requirements are provided by repayment of the real estate loans and
transfers from the Bank of North Dakota. The State's net general obligation debt
per capita is $36. General obligation bonds currently outstanding are the
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1984 and 1986 Real Estate Series. At June 30, 1995, the balance was $39,046,000.
Revenue Bonds. Current State statutes empower certain State
agencies to issue bonds as part of their activities. This debt is not backed by
the full faith and credit of the State of North Dakota. The principal and
interest on such bonds shall be payable only from the applicable agencies'
program income. On June 30, 1995, total Revenue Bonds outstanding totaled
$825,439. The Bonds and balance were as follows: State Fair, $3,421,000; Student
Loan Trust, $199,320,000; Building Authority, $65,613,000; Housing Finance,
$425,149,000; University System, $65,571,000; and Municipal Bond Bank,
$66,365,000.
Long-Term Notes. The Bank of North Dakota has long-term notes in
the amount of $53.5 million. The Fuji Bank, Ltd. Notes ($50 million) were issued
in December, 1986 and are due December, 1996. The rate of interest in 7.875%
with an effective interest rate of 7.94%. The bank has two advances from the
Federal Home Loan Bank in the amounts of $2.5 million and $1 million. The rates
of interest are 7.99% and 8.34%, respectively.
North Dakota continues to receive bond ratings from both Moody's
Investors Service (Aa) and Standard and Poor's Corporation (AA-) on general
obligation bond issues.
Factors Affecting Oregon Fund
General Economic Conditions. Similar to the nation as a whole,
economic growth in Oregon is likely to be restricted to its long-term trend rate
by near capacity labor markets and rising costs. Oregon's jobless rate is
unlikely to fall below its current 5.0% for any sustained period. The labor
force is expected to increase sufficiently to keep Oregon's employment growth
well above the national average but not enough to match the job growth rates of
the 1994 to 1996 period. Overall, manufacturing employment is forecast to
increase 0.3% in 1997 after averaging 3.0% growth for the 1994-1996 period.
Construction employment, which increased 11.4% from 1995 to 1996, is expected to
show less growth in 1997, yet at high levels. The state's service-producing
sectors are expected to continue growing but they too are likely to be
constrained by labor availability. The state's tight labor markets and expanding
high technology industries should continue to push Oregon's wages and per capita
income up toward the national average.
The rest of the state will benefit from a generally healthy
agriculture section (with the exception of the cattle industry), a stabilizing
timber harvest and increasing cost advantages relative to the Willamette Valley
and Portland metropolitan area. The statewide timber harvest is expected to be
4.2 billion board feet in 1997, matching the estimate for 1996. In the
agricultural industry, cash commodities include farm forest products, cattle and
calves, nursery crops, dairy, wheat, potatoes, alfalfa hay, and perennial rye
grass seed.
Non-farm employment is expected to grow 2.9% in 1997, a significant
decrease from the preliminary 4.1% pace recorded in 1996, yet more than double
the 1997 projected national rate of job growth. Job growth is expected to slow
further to 2.3% in 1998 as the high technology manufacturing sector winds down
and a shortage of available labor limits net job creation.
Budgetary Process. The Oregon budget is approved on a biennial
basis by separate appropriation measures. a biennium begins July 1 and ends June
30 of odd-numbered years. Measures are passed for the approaching biennium
during each regular Legislative session, held beginning in January of
odd-numbered years.
Because the Oregon Legislative Assembly meets in regular session
for approximately six months of each biennium, provision is made for interim
funding through the Legislative Emergency Board. The Emergency Board is
authorized to make allocations of General Fund monies to State agencies from the
State Emergency Fund. The Emergency Board may also authorize increases in
expenditure limitations from Other or Federal Funds (dedicated or continuously
appropriated funds), and may take other actions to meet emergency needs when the
Legislative Assembly is not in session. The most significant feature of the
budgeting process in Oregon is the constitutional requirement that the budget be
in balance at the end of each biennium. Because of this provision, Oregon may
not budget a deficit and is required to alleviate any revenue shortfalls within
each biennium.
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Revenue and Expenditures. The Oregon Biennial budget is a two-year
fiscal plan balancing proposed spending against expected revenues. The total
budget consists of three segments distinguished by source of revenues: program
supported by General Fund revenues; programs supported by Other Funds (dedicated
fund) revenues, including lottery funds; and, Federal Funds. In its 1995 Regular
Session, the Oregon Legislative Assembly approved General Fund appropriations
totaling $7,372.6 million for the 1995-1997 biennium. This was a 15.2% increase
compared to estimated 1993-1995 expenditures.
General Fund revenue totaled $6,536.1 million for the 1993-1995
biennium. Revenue exceeded the May estimate by $16.7 million in the 1993 Close
of Session (COS) estimate by $330.6 million or 5.3%. Expenditures were $6,410.1
million for the biennium.
The December forecast for the 1995-97 General Fund revenue is
$7,399.3 million, a 13.2% increase from the 1993-95 biennium. The 1995-97
estimate is also an increase of $106.3 million from the September 1996 estimate
and $437.8 million or 6.3% from the 1995 Close of Legislative Session (COS)
forecast. The beginning balance is estimated to be $496.3 million, leaving total
General Fund resources available for the 1995-97 biennium of $7,895.6 million.
The General Fund resources estimate is $450.9 million higher than the COS
estimate.
General Fund revenue is projected to be $8,145.7 million for the
1997-99 biennium. The beginning balance is estimated to be $536.3 million for a
total General Fund resource estimate of $8,682 million. The December 1997-99
General Fund revenue estimate is $115.1 million higher than the September
forecast despite the anticipation of a larger 2% surplus kicker refund. The
overall General Fund resource projection is $243.8 million more than the
September forecast.
The State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or may impair future revenue sources. Because of the prospective nature of these
legal proceedings, no provision for these potential liabilities has been
recorded in the publicly disclosed financial statements. Additionally, 1,229
notices of tort claims filed against the State. Of those claims, 544 also have
been filed as court actions, and are pending against the State. These cases are
pending in State courts and are subject to the liability limitations stated in
the Tort Claims Act of $500,000 per occurrence, $200,000 per individual for
physical injuries, and $50,000 per occurrence for property damage. The
likelihood of an unfavorable outcome in these cases ranges from probable to
remote, but it is certain that these cases do not involve real exposure of $25
million in the aggregate.
In the November 1994 general election, Oregonians approved a ballot
measure, introduced through the initiative process, that will have, or may have,
a material financial impact on the State. "Measure 11" amends Oregon statutes to
require mandated minimum sentences for certain felonies, effective April 1,
1995. "Measure 11" creates a need for an estimated 6,085 new prison beds by the
year 2001 and calls for State correction facility construction costs of
approximately $462 million in the next five years. The State also estimates
increases in State expenditures for correctional operations, beginning with an
increase of $3.2 million in fiscal year 1996, with accelerating costs that
should peak at an annual increase of up to $101.6 million by fiscal year 2001.
Because these demands will be made by on the State General Fund, they will
reduce amounts that otherwise would be available in the future for the Oregon
Legislative Assembly to appropriate for other purposes.
In November of 1996, voters approved Ballot Measure 47, the
property tax cut and cap. It will reduce revenues to schools, cities and
counties by as much as $1 billion and put pressure on the General Fund to make
up some or all of the difference.
Debt Administration and Limitation. Oregon statutes give the State
Treasurer authority to review and approve the terms and conditions of sale for
State agency bonds. The Governor, by statute, seeks the advice of the State
Treasurer when recommending the total biennial bonding level for State programs.
Agencies may not request that the Treasurer issue bonds or certificates of
requirements for state agencies on proposed and outstanding debt. Statutes
contain management and reporting requirements for state agencies on proposed and
outstanding debt.
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A variety of general obligation and revenue bond programs have been
approved in Oregon to finance public purpose programs and projects. General
obligation bond authority requires voter approval or a constitutional amendment,
while revenue bonds may be issued under statutory authority. However, under the
Oregon Constitution the state may issue up to $50,000 of general obligation debt
without specific voter approval. The State Legislative Assembly has the right to
place limits on general obligation bond programs which are more restrictive than
those approved by the voters. General obligation authorizations are normally
expressed as a percentage of statewide True Cash Value (TCV) of taxable
property. Revenue bonds usually are limited by the Legislative Assembly to a
specific dollar amount.
The State's constitution authorizes the issuance of general
obligation bonds for financing community colleges, highway construction, and
pollution control facilities. Higher education institutions and activities and
community colleges are financed through an appropriation from the General Fund.
Facilities acquired under the pollution control program are required to
conservatively appear to be at least 70% self-supporting and self-liquidating
from revenues, gifts, federal government grants, user charges, assessments, and
other fees.
Additionally, the State's constitution authorizes the issuance of
general obligation bonds to make farm and home loans to veterans, provide loans
for state residents to construct water development projects, provide credit for
multi-family housing for elderly and disabled persons, and for small scale local
energy projects. These bonds are self-supporting and are accounted for as
enterprise funds. Certain provisions of the Water Resources general obligation
bond indenture conflict with State statutes. Upon the advice of the Attorney
General, the method of handling investment interest is in compliance with the
statutes rather than the bond indenture. Currently there is litigation pending
against the State concerning this treatment of the investment interest.
The State's constitution further authorizes the issuance of general
obligation bonds for financing higher education building projects, facilities,
institutions, and activities. For the year ending June 30, 1996, the total
balance of general obligation bonds was $3.7 billion. The debt service
requirements for general obligation bonds, including interest of approximately
$2.75 billion, as of September 1, 1996, was $6.4 billion.
In addition to general obligation and direct revenue bonds, the
State of Oregon issues industrial development revenue bonds ("IDBs"), Oregon
Mass Transportation Financing Authority revenue bonds and Health, Housing,
Educational and Cultural Facilities Authority ("HHECFA") revenue bonds. The IDBs
are issued to finance the expansion, enhancement or relocation of private
industry in the State. Before such bonds are issued, the project application
must be reviewed and approved by both the Oregon State Treasury and the Oregon
Economic Development Commission. Strict guidelines for eligibility have been
developed to ensure that the program meets clearly defined development
objective. IDBs issued by the State are secured solely by payments from the
private company and there is no obligation, either actual or implied, to provide
state funds to secure the bonds. The Oregon Mass Transportation Financing
Authority ("OMTFA") reviews financing request from local mass transit districts
and my authorize issuance of revenue bonds to finance eligible projects. The
State has no financial obligation for these bonds, which are secured solely by
payments from local transit districts.
The State is statutorily authorized to enter into financing
agreements through the issuance of certificates of participation. Certificates
of participation have been used for the acquisition of computer systems by the
Department of Transportation, Department of Administrative Services, and the
Department of Higher Education. Also, certificates of participation have been
used for the acquisition or construction of buildings by the Department of
Administrative Services, Department of Fish and Wildlife, Department of
Corrections, State Police, and Department of Higher Education. Further,
certificates of participation were used in the acquisition of telecommunication
system by the Department of Administrative Services and the Adult & Family
Services Division. For the year ending June 30, 1996, the certificates of
participation debt totaled $443.4 million. The debt service requirements for
certificates of participation for 1995-1997 is estimated at $70.1 million.
HHECFA is a public corporation created in 1989, and modified in
1991, to assist with the assembling and financing of lands for health care,
housing, educational and cultural uses and for the construction and financing of
facilities for such uses. The Authority reviews proposed projects and makes
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recommendations to the State Treasurer as to the issuance of bonds to finance
proposed projects. The State has no financial obligation for these bonds, which
are secured solely by payments from the entities for which the projects were
financed.
The Treasurer on behalf of the State may also issue federally
taxable bonds in those situations where securing a federal tax exemption is
unlikely or undesirable; regulate "current" as well as "advance" refunding
bonds; enter into financing agreements, including lease purchase agreements,
installment sales agreements and loan agreements to finance real or personal
property and approve certificates of participation with respect to the financing
agreements. Amounts payable by the State under a financing agreement are limited
to funds appropriated or otherwise made available by the Legislative Assembly
for such payment. The principal amount of such financing agreements are treated
as bonds subject to maximum annual bonding levels established by the Legislative
Assembly under Oregon statute.
Each of Fitch Investors Service, Moody's Investors Service and
Standard & Poor's Ratings Group has assigned their municipal bond ratings of
"AA," "Aa," and "AA" respectively.
Factors Affecting Puerto Rico
General Economic Conditions. Puerto Rico, the fourth largest of the
Caribbean islands, is located approximately 1,600 miles southeast of New City
and 1,000 miles east-southeast of Miami, Florida. It is approximately 100 miles
long and 35 miles wide. According to estimates of the Planning Board, the
population of Puerto Rico increased to 3,653,000 during fiscal 1994.
Puerto Rico came under United States sovereignty by the Treaty of
Paris, signed on December 10, 1898, terminating the Spanish-American War. Puerto
Ricans have been citizens of the United States since 1917. Puerto Rico's
constitutional status is that of a territory of the United States and the
ultimate source of power over Puerto Rico, pursuant to the Territories Clause of
the Federal Constitution, is the United States Congress. The Commonwealth
exercises virtually the same control over its internal affairs as do the fifty
states; however, it differs from the states in its relationship with the federal
government. The people of Puerto Rico are citizens of the United States but do
not vote in national elections. They are represented in Congress by a Resident
Commissioner who has a voice in the House of Representatives and limited voting
powers. Most federal taxes, except those such as social security taxes, are not
levied in Puerto Rico. No federal income tax is collected from Commonwealth
residents on ordinary income earned from sources in Puerto Rico, except for
certain federal employees who are subject to taxes on their salaries and for
income earned from sources outside Puerto Rico.
The Commonwealth has established policies and programs directed at
the development of manufacturing and the expansion and modernization of the
island's infrastructure. The investment of mainland United States, foreign and
local funds in new factories has been stimulated by selective tax exemption,
development loans, and other financial and tax incentives. Infrastructure
expansion and modernization have bee to a large extent financed by bonds and
notes issued by the Commonwealth, its public corporations and municipalities.
Economic progress has been aided by significant increases in the levels of
education and occupational skills of the island's population.
The economy of Puerto Rico is closely integrated with that of the
mainland United States. During fiscal 1994 approximately 87% of Puerto Rico's
exports went to the United States mainland, which was also the source of
approximately 67% of Puerto Rico's imports. In fiscal 1994, Puerto Rico
experienced a $4.3 billion positive adjusted merchandise trade balance. Gross
product in fiscal 1991 was $22.8 billion and gross product in fiscal 1995 was
$28.4 billion. This represents an increase in gross product of 24.4% from fiscal
1991 to 1995.
Puerto Rico's more than decade-long economic expansion continued
throughout the five-year period from fiscal 1991 through fiscal 1995. Almost
every sector of the economy was affected and record levels of employment were
achieved. Average employment in creased from 977,000 in fiscal 1991 to 1,051,300
in fiscal 1995. Average unemployment decreased from 15.2% in fiscal 1991 to
13.8% in fiscal 1995.
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Puerto Rico has a diversified economy. During the fiscal years
1990-1994, the manufacturing and service sectors generated the largest portion
of gross domestic product. Three sectors of the economy provide the most
employment: Manufacturing, services, and government.
Gross product in fiscal 1991 was $22.8 billion and gross product in
fiscal 1995 was $28.4 billion. This represents an increase in gross product of
24.4% from fiscal 1991 to 1995. Since fiscal 1985, personal income, both
aggregate and per capita, has increased consistently each fiscal year. In fiscal
1994, aggregate personal income was $25.7 billion and personal income per capita
was $7,047. Personal income includes transfer payments to individuals in Puerto
Rico under various social program. Transfer payments to individual in fiscal
1994 were $5.7 billion, of which $3.9 billion, or 68.9% represent entitlements
to individuals who had previously performed services or made contributions under
programs such as Social Security, Veterans' Benefits, and Medicare.
Budgetary Process. The fiscal year of the Commonwealth begins on
July 1. The Governor is constitutionally required to submit to the Legislature
an annual balanced budget of capital improvements and operating expenses of the
Commonwealth for the ensuing fiscal year. Section 7 of Article VI of the
Constitution provides that, "The appropriations made for any fiscal year shall
not exceed the total revenues, including available surplus, estimated for said
fiscal year unless the imposition of taxes sufficient to cover said
appropriations as provided by law."
Revenues and Expenditures. In the fiscal 1995 budget revenues and
other resources of all budgetary funds total $8,381,444,000, excluding balances
from the previous fiscal year and general obligation bonds authorized. Current
expenses and capital improvements, other than those financed by bonds, of all
budgetary funds total $8,673,845,000, an increase of $1,160,550,000 from fiscal
1994. The general obligation bond authorization for the fiscal 1995 budget is
$325,000,000.
In the fiscal 1996 budget proposal revenues and other resources of
all budgetary funds total $8,269,848,000 excluding balances from the previous
fiscal year and general obligation bonds authorized. Current expenses and
capital improvements other than those financed by bonds, of all budgetary funds
total $8,546,543,000, a decrease of $127,303,000 from fiscal 1995. The general
obligation bond authorization for the fiscal 1996 budget is $355,000,000.
Tax Incentives. Much of the development of the manufacturing sector
in Puerto Rico can be attributed to various federal and Commonwealth tax
incentive, particularly Section 936 of the Internal Revenue Code, as amended
(the "Code") and the Commonwealth's Industrial Incentives Program.
Section 936. Under Section 936 of the Code, United States
corporations that meet certain requirements and elect its application ("Section
936 Corporations") are entitled to credit against their United States corporate
income tax the portion of such tax attributable to (i) income derived from the
active conduct of a trade or business within Puerto Rico ("active business
income") or from the sale of exchange of substantially all assets used in the
active conduct of such trade or business; and, (ii) qualified possession source
investment income ("passive income"). To qualify under Section 936 in any given
taxable year a corporation must derive (i) for the three-year period immediately
preceding the end of such taxable year 80% or more of its gross income from
sources within Puerto Rico; and, (ii) for taxable years beginning after December
31, 1986, 75% or more of its gross income from the active conduct of a trade or
business in Puerto Rico. A Section 936 Corporation may elect to compute its
active business income eligible for the Section 936 credit under one of three
formulas.
On November 17, 1995 the United States Congress adopted, as part of
its larger federal income tax legislative package, a ten-year phase out of the
current 936 credit for companies that are existing credit claimants and the
elimination of the credit for companies establishing new operation in Puerto
Rico and for existing companies that add a substantial new lime of business. The
credit based on the economic limitation will continue as under current law
without change until tax years beginning in 2002, during which years the
possession business income will be subject to a cap based on the corporation's
possession income for an average adjusted base period. The credit based on the
percentage limitation will continue as under current law
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until tax years beginning in 1998. In that year and thereafter, the credit based
on the percentage limitation will be 40%, but the possession business income
will be subject to a cap based on the corporation's possession income for an
average adjusted base period. The 936 credit is eliminated for taxable years
beginning in 2006. However, the credit granted to passive income (QPSII) is
eliminated for taxable years beginning after December 31, 1995.
The President vetoed the legislation submitted by the United States
Congress on December 7, 1995. The Administration has proposed a modification to
the 936 credit that would phase out the credit based upon the percentage
limitation over a five year period beginning in 1997, retain the credit based
upon the economic limitation under current law, allow a five year carry forward
of excess credit based upon the economic limitation and retain the credit
granted to passive income (QPSII) under current law.
It is not possible at this time to determine the final legislative
changes that may be made to Section 936, or the effect on the long-term outlook
on the economy of Puerto Rico. The government of Puerto Rico does not believe
there will be short-term or medium-term material adverse effects on Puerto
Rico's economy as a result of the changes to Section 936 currently proposed by
Congress or the Administration. The Government of Puerto Rico further believes
that even if the Congressional proposal became law, sufficient time exists to
put additional incentive programs in place to safeguard Puerto Rico's
competitive position.
Industrial Incentives Program. Since 1948 Puerto Rico has had
various industrial incentives laws designed to stimulate industrial investment
in the island. On January 24, 1987, the Governor of Puerto Rico signed into law
the most recent industrial incentives law, known as the Puerto Rico Tax
Incentive Act (the "1987 Act"). The tax exemption benefits provided by the 1987
Act are generally more favorable than those provided by its predecessor, the
Industrial Incentives Act of 1978 (the "1978 Act"). The activities eligible for
exemption under the 1987 Act include manufacturing, certain designated services
for markets outside Puerto Rico, the production of energy from local renewable
sources for consumption in Puerto Rico, and laboratories for scientific and
industrial research.
The 1987 Act provides a fixed 90% exemption from income and
property taxes and a 60% exemption from municipal license taxes during a 10, 15,
20 or 25 year period, depending on the zone where the operations are located.
The 1987 Act also provides a special deduction equal to 15% of the production
payroll for companies whose net income from operations is less than $20,000 per
production job. This special benefit is designed to attract and maintain labor
intensive operations in Puerto Rico. The passive income from certain qualified
investment in Puerto Rico and the instruments evidencing such investments are
fully exempt from income tax. In addition, companies making such investments for
fixed periods of not less than five years are eligible to reduce the tollgate
tax imposed on dividend and liquidating distributions from a maximum rate of 10%
to 5%, depending on the amount and term of the investment.
The bottom limit of 5% was approved in a recent amendment (December
1993) of the 1987 Act (the "1993 amendments"). The 1993 amendments also impose a
new 5% estimated tax on annual industrial development income, subject to
reduction in the event certain long-term qualified investments with such income
are made. The Department of Treasury is collecting an additional amount annually
as a result of the implementation of the bottom limit. As a result of the 1993
amendments, the Department of the Treasury has increased its ability to predict
tax revenues from corporations with greater accuracy. The 1993 amendments also
contain an option to pay a flat 14% tax on annual industrial development income,
which would allow eligible companies to repatriate profits free of tollgate
taxes. Under this option, if a company invests 25% or 50% of its profits in
qualified industrial development investments, the 14% rate drops to 11% or 9%,
respectively. The 1987 Act applies to newly established operations as well as to
existing operations that elect to convert their tax exemption grants to the
provision of the 1987 Act.
Since 1983 hotel operations have been covered by a special
incentives law, the Tourism Incentives Act of 1983, which provides exemptions
from income, property and municipal license taxes for a period of 10 years. In
1993, legislation was enacted providing for an additional set of tax incentives
for new hotel development projects. In addition to providing for exemptions from
income, property and municipal license taxes for a period of up to 10 years, it
provides certain tax credits for qualifying investments in such projects.
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Caribbean Basin Initiative. In August, 1983, the President of the
United States signed into law the Caribbean Basin Economic Recovery Act. The Tax
Reform Act of 1986 amended Section 936 to allow Puerto Rico financial
institutions to invest funds representing earnings accumulated under Section
936, in active business assets or development projects in a qualified Caribbean
Basin country. As of December 1994, 167 projects under the Puerto Rico Caribbean
Development Program have been promoted in fourteen Caribbean Basin countries,
representing 36,115 jobs and over $1,989 million in loan commitments, of which
$1,217 million of Section 936 funds have been disbursed.
Debt Administration and Limitation. Public sector debt comprises
bonds and notes of the Commonwealth and its municipalities and public
corporations. Direct debt of the Commonwealth is supported by Commonwealth
taxes. Debt of municipalities, other than bond anticipation notes, is supported
by real and personal property taxes and municipal license taxes. Debt of public
corporations, other than bond anticipation notes is generally supported by the
revenues of such corporations from charges for services or products. However,
certain debt of public corporations is supported, in whole or in part, directly
or indirectly, by Commonwealth appropriations or taxes.
Commonwealth Guaranteed Debt. Annual debt service on outstanding
Commonwealth guaranteed bonds issued by Urban Renewal and Housing Corporation
and assumed in fiscal year 1992 by Housing Bank and Finance Agency is
$13,254,048 in the fiscal year ending September 30, 1996, which constitutes the
maximum annual debt service on such bonds. The final maturity of such bonds is
October 1, 2001. As of September 30, 1995, $74,755,000 of Commonwealth
guaranteed bonds of Housing Bank and Finance Agency were outstanding. Annual
debt service on Commonwealth guaranteed bonds of Public Buildings Authority is
$114,777,000 in fiscal year ending June 30, 1996 with the final maturity on July
1, 2025. As of September 30, 1995, $1,335,611,000 of Commonwealth guaranteed
bonds of Public Buildings Authority were outstanding. No payments under the
Commonwealth guaranty have been required to date for bonds of Housing Bank and
Finance Agency or Public Buildings Authority.
As of September 30, 1995, $267,000,000 of Commonwealth guaranteed
obligations of Government Development Bank were outstanding. No payments under
the Commonwealth guaranty have been required for any obligations of Government
Development Bank to date.
Public Sector Debt. In Puerto Rico, many governmental or
quasi-governmental functions are performed by public corporations. These are
governmental entities of the Commonwealth created by the Legislature but with
varying degrees of independence from the central government. Most public
corporations obtain revenues from charges for services or products, but many are
subsidized to some extent by the central governments. Capital improvements of
most of the larger public corporations are financed by revenue bonds under trust
notes of certain of the public corporations as of September 30, 1995. Debt of
certain other public corporations is payable primarily from the Federal
Government or is payable from sources other than Commonwealth appropriations or
taxes or revenues of public corporations derived from services or products.
Historically, the Commonwealth has maintained a fiscal policy which
provides for a prudent relationship between the growth of public sector debt and
the growth of the economic base required to service that the debt. The
Commonwealth has also sought opportunities to realize debt service savings by
refunding outstanding debt with obligations bearing lower interest rates. Over
fiscal years 1991 to 1995, public sector debt increased by 24.7% while gross
product rose 24.4%. This slightly greater increase in the rate of public sector
debt relative to the rate of increase in gross product over the subject period
was principally the result of refinancing to achieve debt service savings. Short
term debt outstanding relative to total debt was 7.7% as of September 30, 1995.
Government Development Bank. The principal functions of Government
Development Bank are to act as financial advisor to, and fiscal agent for, the
Commonwealth, its municipalities and public corporations in connection with the
issuance of bonds and notes, to make loans and advances to public corporations
and municipalities, and to make loans to private enterprises to aid in the
economic development of Puerto Rico.
As of September 30, 1995, $1,540,948,000 of bonds and notes of
Government Development Bank
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were outstanding. Government Development Bank has loaned $1,901,578,894 to
Commonwealth public corporations and municipalities. Act No. 12, approved May 9,
1975, as amended, provides that the payment of principal of and interest on
specified notes and other obligations of Government Development Bank, not
exceeding $550,000,000, may be guaranteed by the Commonwealth, of which
$267,000,000 were outstanding as of September 30, 1995. Government Development
Bank has the following principal subsidiaries: Higher Education Assistance
Corporation, Housing Finance Corporation, Tourism Development Fund, Development
Fund, Capital Fund, and Public Finance Corporation.
Factors Affecting Utah Fund
General Economic Conditions. On January 4, 1896, the State became
the forty-fifth state of the United States of America. Ranking eleventh among
the states in total area, the State contains approximately 82,168 square miles.
It ranges in elevation from a low of 2,500 feet above sea level in the south, to
a high of 13,500 feet above sea level in the north. The State is located in an
arid region (precipitation ranks as the forty-ninth lowest in the nation, ahead
of Nevada) and in the center of the Rocky Mountain region with excellent access
to major national and international markets. Home to deserts, plateaus, the
Great Basin and the Rocky Mountains, the State is known for its scenic beauty
and the diversity of its outdoor recreation areas. Approximately 20% of the
State is national park and forest land, 42% is Bureau of Land Management land
and 7% is State park land. Transportation infrastructure in the form of
interstate highways, railroad lines, and an international airport is in place to
provide efficient transportation for business and tourism.
The population forecast for 1996 is 2,002,359 indicating continued
growth. The 1995 estimate for Utah's population was approximately 1,959,025, a
2.2% increase. The U.S. Census Bureau estimates Utah was the third fastest
growing state in the country. Net in-migrations were approximately 13,882 people
in 1996. This is the sixth consecutive year Utah experienced strong net
in-migrations. The State's population continues to be concentrated in the
metropolitan area along the Wasatch mountains, with Salt Lake City as the hub.
Growth in the rural areas has picked up in the last few years and between 1995
and 1996, almost every county in Utah experienced population increases. The
State continues to face the challenge of bringing more economic development to
the rural areas of the State.
Utah's economy continues to experience sustained growth rates
greater than that of the national economy. Employment growth, an important
economic indicator, continues to look strong. Utah consistently ranked near the
top of the nation in job growth. In 1996, Utah's job growth rate was 5.3%, or an
additional 48,000 net new jobs, ranking second among all states. Utah's job
growth rate has now equaled or exceeded 3.0% for nine consecutive years and
exceeded 5% in four straight years. Projected job growth for 1997 is about 4.2%.
The strength of the State's economy over the past several years has
occurred at the same time that it has become more diversified. That is, the
distribution of the State's employment has become less specialized across
industries while the level of total employment has increased. The result of this
restructuring in the midst of economic growth is that sectors in which the
State's employment has been disproportionately concentrated in the past (such as
the federal government and extractive industries) have lost in employment share,
while sectors other than these (notably those affected by the expansion of
tourism, computer software, financial services, and biomedical technologies)
have increased in shares. The service industries continue to generate the
largest number of jobs in the State. During 1996, services created 17,100 new
jobs for a growth rate of over 7%. The major contributors to rapid expansion
were the high-tech computer services, business services, engineering/management
services, and personal/amusement services.
In light of Utah's economic growth and positive financial position,
the State continues to face many significant issues. The State must deal with
the increased demand for services associated with this growth. Education,
economic development, transportation, corrections, health, and human service
needs continue to be the major demands on state resources.
Budgetary Process. The Governor is required to submit a balanced
budget to the Legislature for each fiscal year. The budget is required to
describe, among other things, (i) a complete plan of proposed expenditures and
estimated revenues for the ensuing year, (ii) the revenues and expenditures for
the next
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preceding fiscal year, and (iii) current assets, liabilities and reserves, any
surplus or deficit and the debts and funds of the State. The budget is required
to include an itemized estimate of appropriations for payment and discharge of
the principal and interest of the indebtedness of the State, among other things.
Deficits or anticipated deficits must be included in the budget.
The State Constitution requires that budgeted expenditures should
not exceed estimated revenues and other sources of funding, including beginning
fund balances. The Legislature authorizes expenditures in annual state
"Appropriations Acts." The Acts also identify the sources of funding for
budgeted expenditures. In the event actual revenues are insufficient to cover
budgeted expenditures, the Governor must order budget reductions. Adjustments to
the budget may be made throughout the year for changes in department revenues or
fund revenues so that departments and funds will not end the fiscal year in a
deficit positions.
The State also has an appropriation limitation statute which limits
the growth in state appropriations. The law provides three basic limitations.
First, as population, personal income, and inflation increase, appropriations
are allowed to increase only at the same relative rate. Second, it limits
outstanding state general obligation debt to 20% of the appropriations limit.
Third, it freezes the state-mandated property tax rate, which funds a portion of
public education at the local level. These statutory limitations can be exceeded
only if a fiscal emergency is declared and approved by more than two-thirds of
both houses of the Legislature, or if approved by a vote of the people. However,
the spending limit statute may be amended by a majority in both houses of the
Legislature.
The State was $7.4 million below the appropriation limitation for
the fiscal year ended June 30, 1996. The State is currently below the fiscal
year 1997 appropriation limitation by $15 million. Also, the State is currently
$326 million below the debt limit established in the Constitution.
Revenues and Expenditures. The General Fund is the principal fund
from which appropriations are made for State operations. It is specifically
maintained to account for all financial resources and transactions not accounted
for in another fund. The General Fund receives all State sales taxes, which
comprise the largest source of this Fund's revenues. Other principal sources of
revenues include Federal contracts, grants and mineral lease payments, State
department collections and miscellaneous licenses, fees and taxes.
Each fund of the State maintains an equity position which is either
restricted by state law, restricted by contract, or is unreserved and available
for future appropriation. The equity position of the State's General Fund
Uniform School Fund, and Transportation Fund are:
The state ended fiscal year 1996 with a surplus in both the General
and Uniform School Funds totaling $9.1 million. In addition, fiscal year 1997
revenue is expected to exceed original estimates by $13.8 million with the total
General and Uniform School Fund at $2.8 billion. Other changes to available
dollars amount to $1.9 million. Altogether, there are $24.8 million available.
This allows the governor to recommend supplemental funding in fiscal year 1997
for needs that arose after the legislature met in 1996. The Governor is
recommending $6.7 million in General and Uniform School Fund supplementals.
The General Fund ending balance for fiscal year 1996 was $351,000,
which is 97.7% less than the previous fiscal year. Approximately $126.2 million
in the Uniform School Fund was reserved from fiscal year 1996 for fiscal year
1997, leaving a $0 ending balance in this fund at June 30, 1996. The balance in
the Rainy Day Fund was $71.5 million.
Actual revenue collections for the General Fund in fiscal year 1996
were $1.34 billion. Of this amount, 86.8% or $1.162 billion came from the sales
and use tax. Sales and use tax revenue increased 10.2% from the previous fiscal
year. Retail sales were estimated to have increased 11.8% in 1996, but are
projected to slow to 6.3% in 1997.
Actual revenue collections in the Uniform School Fund was $1.33
billion. Of this amount, approximately $1.14 billion or 85.8% was generated from
the individual income tax, an increase of 11% from fiscal year 1995. Revenue in
the Transportation Fund for fiscal year 1996 totaled $261 million, with 64% or
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$163 million represented by the motor fuel tax which showed a 4.8% increase.
Expenditures in the General and Uniform School Funds for fiscal
year 1996 totaled $2.595 billion. Prior to the lapsing of $14.1 million into
these Funds, the total appropriations were $2.609 billion. The majority of the
spending is toward public education, which consisted of 48% or $1.25 billion of
total expenditures. Higher education received $425 million or 16.2%. Corrections
appropriations amounted to 5.9% or $155 million, and human services were 5.5% or
$142 million of total appropriations.
Debt service appropriations from General and Uniform School Funds
totaled $77 million in fiscal year 1996 and are expected to increase to $81.5
million for fiscal year 1997. Appropriations for the Capital Budget in these
Funds were $72.4 million in fiscal year 1996 but are estimated to increase to
$209.1 million in fiscal year 1997. Total capital budget for all funds for
fiscal year 1996 was $388.3 million and total debt service was $94.4 million.
Debt Administration and Limitation. Utah's Constitution limits the
State to a total general obligation debt not to exceed, in the aggregate any one
time, an amount equal to 1.5% of the value of the taxable property of the State,
as shown by the last assessment for state purposes. The estimated fiscal year
1998 appropriation limit of $3.25 billion equates to an outstanding general
obligation debt limit of $650 million. Revenue bonds and certificates of
participation issued by the State are legally excluded from the debt
limitations.
During fiscal year 1995, the State issued $95 million in general
obligation bonds and $31 million in lease revenue bonds for construction and
renovation of various capital facilities. Shortly after fiscal year end, the
State issued general obligation bonds totaling $45 million for buildings
construction and purchases. The State also issued $93 million in lease revenue
bonds on August 15, 1995, to be used to purchase and construct state buildings.
The State is authorized to issue an additional $15 million in general obligation
bonds for construction and renovation of various capital facilities. The bonds
are not likely to be issued before July 1996.
The State issued $8.4 million in water revenue refunding notes on
October 4, 1995. The note proceeds and original bond reserve funds were used to
defease the 1989 Revolving Loan Recapitalization Program Revenue Bond of $7.7
million. The notes also provided an additional $2 million in capital for
revolving water loan programs.
As of June 30, 1995, the State's total general obligation debt
outstanding was $431 million, leaving available to the Sate $725 million of
additional general obligation borrowing capacity. As of October 31, 1995, the
outstanding debt was $413 million, with a remaining constitutional limit of $743
million. A statutory debt limit is established in the Utah Code Annotated. It
sets the maximum general obligation bonding authority at 20% of the
appropriation limitation. The estimated fiscal year 1998 appropriation limit of
$3.25 billion equates to an outstanding general obligation debt limit of $650
million. This amount, less approximately $297 million in outstanding debt and
$27 million in authorized but unissued debt, leaves a general obligation
borrowing capacity of $326 million in fiscal year 1998.
In fiscal year 1996, $44.33 million general obligation bonds were
authorized and another $31 million are authorized for fiscal year 1997.
Lease-purchase/revenue bond projects authorized for fiscal year 1997 are at
$50.6 million.
Funding for debt service on the State's general obligation bonds is
usually appropriated from the General Fund and transferred to the various bond
sinking funds within the Debt Service Fund. All State general obligation bond
and certain revenue bond principal and interest payments are made from
individual sinking funds within the Debt Service Fund. Investment earnings on
moneys held in the sinking funds (except as may be required by the proceedings
authorizing the issuance of particular series of bonds), transfers from the
General Fund or Special Revenue Funds and certain pledged revenues are the only
sources of funding for this fund.
The outstanding general obligation bonds of the State were rated
"Aaa by Moody's, "AAA" by Standard & Poor's, and "AAA" by Fitch as of July 1,
1995.
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Factors Affecting Washington Fund
General Economic Conditions. The state of Washington was created by
an enabling act of Congress in 1889. The state is located on the Pacific Coast
in the northwestern corner of the continental United States. Washington
comprises 68,139 square miles. On the west side of the state, high mountains
rise above coastal waters. The mild moist climate in western Washington makes
this region excellent for dairy farming and the production of flower bulbs. The
forests of the Olympic Peninsula are among the rainiest places in the world.
Washington's location makes it a gateway for land, sea, and air travel to Alaska
and the Pacific Rim countries. Its coastline has hundreds of bays and inlets
that make excellent harbors. East of the Cascade Mountain Range, farmers raise
livestock and wheat on large ranches. Washington leads the nation in apple
production and the state produces large amounts of lumber, pulp, paper, and
other wood products.
The State's population reached an estimated 5,516,800 in 1996, with
an annual growth rate of approximately 2% despite slower economic growth since
1990. In fiscal year 1995, Washington's population growth remained relatively
strong, with an estimated net migration of 57,400 people between April 1, 1994
and April 1, 1995. This was only slightly higher than the 55,700 increase
recorded in the previous fiscal year, but still substantially above the 30-year
historical average of approximately 40,000 net migrants per year. Net migration
between 1996 and 1997 is forecast at 55,800.
The City of Seattle, located in northwestern Washington, is the
largest city in the Pacific Northwest and serves as the King County seat. King
County and the adjacent counties to the north, Snohomish and Island Counties,
comprise the Seattle Primary Metropolitan Statistical Area ("PMSA"), which is
the fourth largest metropolitan center on the Pacific Coast and biggest single
component of the State's economy. The population in Seattle declined gradually
to 488,200 in 1986 and since that time has increased to 531,400 in 1994. The
percent of State residents living east of the Cascades, which had remained
stable at 25% throughout the 1970's, declined to nearly 20% by 1990. Since 1990
the pace of growth picked up in several eastern cities, including Spokane, as
growth began to slow in the Puget Sound area.
The economic base of the State includes manufacturing and service
industries as well as agricultural and timber production. As the State's largest
employer, the Boeing Company, is preeminent in aircraft manufacture and is
headquartered in Seattle. Boeing exerts a significant impact on overall State
production, employment and labor earnings. After six years of downsizing, Boeing
increased its work force by 3,800 employees in the last two quarters of fiscal
year 1996, with plans to hire 10,000 more by the end of calendar year 1996. This
marked a dramatic turn-around for the state's aerospace industry, which lost a
total of 25,000 jobs between the first quarter of 1993 and the second quarter of
1996. While the primary activity of Boeing is the manufacture of commercial
aircraft, Boeing has played leading roles in aerospace and military missile
programs for the United States and has undertaken a broad program of
diversification activities including Boeing Information and Support Services. In
1995, Boeing had $19.515 billion in sales and net earnings of $329 million, and
a backlog of orders totaling $72.3 billion. While Boeing has dominated
manufacturing employment, other manufacturers have experienced growth, thus
reducing Boeing's percentage of total manufacturing jobs in the State. The most
significant growth in manufacturing jobs, exclusive of aerospace, has occurred
in high technology-based companies.
The highest employment growth in the State between 1981 and the
present occurred in the services sector, although rate of growth has shown small
but consistent decline since 1990 from 7% to 3.5% forecast for 1994. As the
business, legal, and financial center of the State, Seattle ranks ninth in the
country in the number of downtown hotel rooms. The Washington State Convention
and Trade Center, occupying 370,000 square feet at an investment of $152 million
opened in June 1988. The convention facility has the capacity for events
involving as many as 11,000 people. The State's natural attractions include the
Olympic and Cascade Mountain Ranges, Mt. Rainier, Mt. St. Helens National
Volcanic Monument, Puget Sound and the ocean beaches. Tourists also enjoy the
State's wineries. Seven of the ten largest wine producers in the Pacific
Northwest are located in the State.
Natural forests cover more than 40% of the State's land area.
Forest products rank second behind aerospace in value of total production.
Approximately 2.6% of non-farm employment is in the forest products industry,
with The Weyerhaeuser Company being the largest employer. Productivity in the
State's forest
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products industry increased steadily from 1980 to 1990; however, since 1991
recessionary influences have resulted in a production decline. Yet, in 1994, the
industry employed more than 58,000 people and produced approximately $11.0
billion worth of products. A continued decline in overall production during the
next few years is expected due to federally imposed limitations on the harvest
of old-growth timber and the inability to maintain the recent record levels of
production increases. Although continued decline in unemployment may be
anticipated in certain regions, the impact is not expected to significantly
affect the State's overall economic performance.
Agriculture, combined with food processing, is the State's most
important industry. The State's major products, wheat, milk, apples and cattle,
comprise 55% of total production. Washington's food processing industries
employed approximately 40,000 workers at more than 750 plants in 1994,
generating products worth nearly $8 billion annually. Growth in agricultural
production, including potatoes and hay, was an integral factor in the State's
economic growth in the late 1980's and early 1990's.
On a combined basis, employment in the government sector represents
approximately 19% of all wage and salary employment in the State. Seattle is the
regional headquarters of a number of federal government agencies, and the State
receives an above-average share of defense expenditures. Major federal
installations include Navy bases at Bremerton, Whidbey Island and Bangor;
Everett is the site of a new Naval home port; an Air Force base (McChord) and an
Army base (Fort Lewis) are located in the Tacoma area. As part of the
President's plan to reduce the federal deficit, the Secretary of Defense has
proposed spending cuts that would include the Puget Sound Naval Shipyard and the
Bangor Trident Submarine Base in Kitsap County. None of the military
installations in the State are included among those bases proposed for closure
in 1995. Recent declines of naval and civilian personnel in Kitsap County have
been offset by increases in army personnel in Pierce County. During 1994, Army
unit reassignments to Fort Lewis from Europe and parts of the United States
increased troop strength by more than 5,000. At present no major additions or
reductions to troop strength at Fort Lewis have been made. The long term outlook
is for relative stability.
Budgetary Process. The Governor is required to submit a budget to
the state Legislature no later than December 20 of the year preceding
odd-numbered year sessions of the Legislature. The budget is a proposal for
expenditures in the ensuing biennial period based upon anticipated revenues from
the sources and rates existing by law at the time of submission of the budget.
The appropriated budget and any necessary supplemental budgets are legally
required to be adopted through the passage of biennial appropriation bills by
the Legislature and approved by the Governor. Biennial operating appropriations
are generally made at the fund/account and agency level, however, in a few
cases, biennial appropriations are made at the fund/account and agency/program
level. Biennial capital appropriations are generally made at the fund/account,
agency, and project level.
Biennial legislative appropriations are strict legal limits on
expenditures/expenses, and over expenditures are prohibited. All appropriated
and non-appropriated/allotted funds are further controlled by the executive
branch through the allotment process. This process allocates the
expenditure/expense plan into monthly allotments by program, source of funds,
and object of expenditures. According to statutes, except under limited
circumstances, the original biennial allotments are approved by the Governor and
may be revised only at the beginning of the second year of the biennium and must
be initiated by the Governor.
Proprietary funds earn revenues and incur expenses not covered by
the allotment process. Budget estimates are generally made outside the allotment
process according to prepared business plans. These proprietary fund business
plan estimates are adjusted only at the beginning of each fiscal year.
Additional fiscal control is exercised through various means. OFM
is authorized to make expenditure/expenses allotments based on availability of
unanticipated receipts, mainly federal government grant increases made during a
fiscal year. State law does not preclude the over expenditure of allotments
although, the statute requires that the Legislature be provided an explanation
of major variances.
Revenues and Expenditures. The General Fund accounts for all
general government financial resources and expenditures not required to be
accounted for in other funds. For the 1993-1995 biennium,
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revenues in the General Fund increased 11.5%. Based on the November 1996
forecast by the ERFC, General Fund-State revenues for the 1995-1997 Biennium are
forecast to be about $18.3 billion, an increase of 6.2% over the previous
biennium in nominal terms. In real terms and on a constant rate and base, the
revenue growth will be about 5.1%. Tax changes enacted during the 1995
legislative session reduced revenues for the 1995-1997 Biennium by $228
million; additional changes during the 1996 legislative session and the special
session further reduced revenues for the 1995-1997 Biennium by $175 million.
Without these legislative reductions, the revenue growth for the 1995-1997
Biennium would have been 10%.
Governmental activities are accounted for in four governmental fund
types: the general, special revenue, debt service, and capital projects funds.
Revenues for all governmental funds are estimated to total $37.97 billion for
the 1995-97 biennium. This represents an increase of 5.9% over revenue for the
previous biennium. Taxes, the largest source of governmental revenue, are
expected to produce 55% of revenues. This percentage is a slight increase from
the previous biennium and is attributable to growth in the state's population
and personal income during the current biennium which increased retail sales and
use tax collections by $434 million or 5.3%. Also, during the current biennium,
the federal government grants-in-aid is expected to increase by $397 million or
5%. However, Washington is expected to lose $618.9 million in federal funding in
the 1997-99 biennium due to federal cost cutting measures signed into law in
August 1996. Of this amount, $474 million are in programs outside of the current
state budget. Yet, many of these reductions are expected to have a significant
impact on the state budget.
Claims and judgments payable is materially comprised of three
activities: workers' compensation, risk management, and state employees'
insurance. The Workers' Compensation Fund, an enterprise fund, establishes a
liability for both reported and incurred but not reported insured events, which
includes estimates of both future payments of losses and related claim
adjustment expenses. At June 30, 1995, $23.4 billion of unpaid claims and claim
adjustment expenses are presented at their net present value of $10.4 billions.
The $10.4 billion claims and claim adjustment liabilities as of June 30, 1995,
includes $4.7 billion for supplemental pension cost of living adjustments (COLA)
that by statute are not to be fully funded. The remaining $5.7 billion in claims
liabilities is fully funded by $6.7 billion in assets, including $6.2 billion of
long-term investments, held for payment of the claims.
The Risk Management Fund, an internal service fund, reports claims
and judgment liabilities when it becomes probable that a loss has occurred and
the amount of that loss can be reasonably estimated. The state and its component
public authorities are defendants in a significant number of lawsuits pertaining
to property and casualty matters. As of June 30, 1995, outstanding and
actuarially determined claims against the state and its public authorities were
$113.8 million for which the state has recorded a liability. At June 30, 1995,
the Risk Management Fund held $69.3 million in cash equivalents designated for
payment of these claims. Of this amount, $52.6 million has been accumulated
under the state's Self Insurance Liability Program initiated in 1990. This Self
Insurance Liability Program is intended to provide funds for the payment of all
claims resulting from accidents after June 30, 1990. The state is restricted by
law from accumulating funds in the Self Insurance Liability Program in excess of
50% of total outstanding and actuarially determined claims. Current projections
indicate that the state will reach this limit by June 30, 1996.
The State Employees' Insurance Fund, an internal service fund,
establishes a liability when it becomes probable that a loss has occurred and
the amount of that loss can be reasonably estimated. Liabilities include an
actuarially determined amount for claims that have been incurred but not
reported. Because actual claims liabilities depend on various complex factors,
the process used in computing claims liabilities does not necessarily result in
an exact amount. At June 30, 1995, the state held $31.1 million in investments
designated for payment of state employees' insurance claims.
Debt Administration. The State Constitution and enabling statutes
authorize the incurrence of state general obligation debt, to which the state's
full faith, credit, and taxing power are pledged, either by the Legislature or
by a body designated by statute (presently the State Finance Committee). Bonds
payable at June 30, 1995 consisted of bonds issued by the state of Washington
and accounted for in the General Long-Term Obligations Account Group, and
certain state agency bonds accounted for in proprietary funds. During Fiscal
Year 1995, the state of Washington maintained its "AA" rating from Fitch
Investors Service and Standard &
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Poor's Corporation, and its "Aa" rating from Moody's Investors Service.
General Obligation Bonds. General obligation bonds have been
authorized and issued primarily to provide funds for acquisition and
construction of capital facilities for public and common schools, higher
education, public and mental health, corrections, conservation, and maintenance
and construction of highways, roads, and bridges. The state also issued bonds
for assistance to municipalities for construction of water and sewage treatment
facilities and corrections facilities. Additionally, bonds are authorized and
issued to provide for the advance refunding of general obligation bonds
outstanding.
Zero Interest Rate General Obligation Bonds. Zero interest rate
general obligation bonds have been authorized and issued primarily to provide
funds for acquisition and construction of public administrative buildings and
facilities, and capital facilities for public and common schools and higher
education. Total debt service (principal and interest) requirements for zero
interest rate general obligation bonds to maturity as of June 30, 1995 was
approximately $492 million. As of June 30, 1995, zero interest rate general
obligation bonds outstanding totaled $208 million while bonds authorized but
unissued equaled zero.
Limited Obligation Bond. Limited obligation bonds have been
authorized and issued to provide funds for public school plant facilities;
state, county, and city arterials; and state capital buildings and facilities.
These bonds are payable primarily from dedicated revenue of the state's motor
vehicle fuel excise tax and other miscellaneous dedicated revenue generated from
assets such as harbors and tidelands, park, and land grants. Total debt service
(principal and interest) requirements for limited obligation bonds to maturity
at June 30, 1995 was approximately $8.1 million. As of November 30, 1996,
limited obligation bonds outstanding totaled $4.2 million while bonds authorized
but unissued equaled zero.
Revenue Bonds. Current state statutes empower certain state
agencies to issue bonds that are not supported, or are not intended to be
supported, by the full faith and credit of the state. These bonds pledge income
derived from acquired or constructed assets for retirement of the debt and
payment of the related interest. Revenue bonds issued by individual agencies are
supported by fees, rentals, and tolls assessed to users. Primary issuing
agencies are the State's Public Universities and various Community Colleges.
Total debt service (principal and interest) for revenue bonds to maturity at
June 30, 1995 was approximately $310 million. As of June 30, 1995, revenue bonds
outstanding totaled $162 million while bonds authorized but unissued equaled
zero.
Certificates of Participation. The office of the State Treasurer
continued its administration of the state certificates of participation program
("COPs")which has been in existence since Fiscal Year 1990. This program enables
state agencies to finance the acquisition of real and personal property at tax
exempt interest rates realizing substantial savings over vendor financing. The
state's publicly-offered equipment certificates of participation have been rated
"A" by both rating agencies which rely on the centralized oversight of the State
Treasurer and the Office of Financial Management as a strong credit element in
the rating. In the real estate component of the financing program, certain
projects have been rated "A1" by Moody's Investors Service as a reflection of
their essentialness to state government operations. As of June 30, 1995, there
were outstanding $193 million in certificates of participation. Underlying this
amount were agency certificates originating from 73 agencies amounting to $178.5
million with the balance on deposit with the trustee either for use in the
program (unissued proceeds) or to satisfy reserve requirements. These programs
are currently funded using a combination of publicly offered securities and bank
financial services master installment agreements.
Factors Affecting Wisconsin Fund
General Economic Conditions. Wisconsin provides a full range of
services which include education, health and social services, transportation,
law, justice, public safety, recreation and resource development, public
improvements and general administrative services. The State's economy remains
strong. Unemployment fell to 3.5% for all of 1996, the lowest rate since 1969.
This is well below the national rate of 5.4% and is estimated to be the fifth
lowest unemployment rate in the country. Manufacturing jobs in 1996 reached
599,900, eclipsing the old mark of 591,000 set in 1979. The strongest growth
occurred in the service sector, increasing by 14,900 jobs to a total 645,600.
Total non-farm employment increased to 2,586,200, setting a new record. However,
in 1996, Wisconsin's jobs increased 1.2% which is much lower than the 2.6%
growth
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in 1995 and the 2.0% growth nationally. Looking ahead, strong gains in
employment will be more difficult. Employment growth is expected to remain at
1.2% in 1997 and rise slightly to 1.6% in 1998. Manufacturing employment growth
is expected to dip into negative territory briefly in 1997, but then resume
growth near 1% for 1998 and 1999. That will again place manufacturing employment
growth in Wisconsin nearly 1% above the national average. The strongest gains in
employment will be trade and services.
Wisconsin's personal income growth will be affected by the slowdown
in employment growth. Personal income increased 6.1% in 1995. However, the
slowdown in job growth will restrain income gains to increases below the rest of
the country for 1996, 4.9%. In 1997 and 1998, income gains should match the pace
of national income growth, about 4.8%.
In 1995, the State continued its efforts to expand existing State
business and attract new businesses to Wisconsin. In 1995, $11.4 million was
awarded in grants and loans from the Wisconsin Development Fund for major
economic development projects, customized labor training and technology
development. In addition, the State operates a variety of programs that target
minority business development, development zones and community-based economic
development. For the 1997-99 biennium, the Governor recommended $4 million be
provided to the Wisconsin Development Reserve Fund to support guarantees for
private bank loans of up to $500,000 for land redevelopment. The State expended
$8.2 million in 1995 to market Wisconsin as a tourism destination. In Calendar
Year 1994, the tourism industry created directly and indirectly 147,149 jobs and
$5.6 billion in expenditures. For the 1997-99 biennium, the Governor recommended
maintaining tourism promotion funding at $7.7 million annually.
Wisconsin's Clean Water Fund program provides financial assistance
to municipalities for the planning, design and construction of pollution
abatement facilities - primarily for wastewater treatment. Funding is provided
from the federal state revolving fund grant authorized through the Water Quality
Act, and through four State programs backed by State revenue and general
obligation bonds. In fiscal year 1995, the Clean Water Fund reached agreements
with municipalities amounting to $116.7 million, bringing the total amount of
loans and grants awarded by the program to $761.7 million since its inception in
1991. For fiscal years 1997-99, the Governor recommended $20 million be
authorized in the Clean Water Fund for subsidized loans to municipalities along
with $43,800 to support loan-processing activities.
Welfare reform initiatives moved forward in Wisconsin in fiscal
year 1995 with the implementation of the Parental and Family Responsibility
program and the Two-Tier Demonstration project, each in four counties on July 1,
1994. In addition, the Work Not Welfare initiative, one of the first programs in
the nation to test time-limited benefits, began in January 1995 in two counties.
On April 25, 1996, "Wisconsin Works" was enacted into law as an effort to make
people more self-sufficient by making beneficial changes for child care, AFDC
families, and increasing grant amounts for subsidized employment. As a result of
ongoing welfare reform efforts and a strong economy the AFDC caseload dropped
from approximately 68,000 in October 1995 to approximately 48,000 in October
1996, a reduction of almost 30% and the lowest level since the early 1980's.
In fiscal year 1995, the legislature and Governor acted to fulfill
their commitment to increase the State's share of school costs to 66.7% in
fiscal year 1997. To facilitate reaching this goal, $171 million was added to
the $103 million fiscal year 1995 school aid increase originally approved in the
1993-95 biennial budget, bringing the total fiscal year 1995 State school aid
increase to $274 million. This $274 million increase is the largest dollar
increase in school aid in the State's history and resulted in a statewide 1994
school property tax increase of only 0.3%, the smallest levy increase since
1973. Full implementation of the two-thirds State funding commitment in Fiscal
Year 1997 will result in the largest reduction in the school property tax levy
in the State's history. The Governor recommended increases in direct school aids
of $204.3 million in fiscal year 1998 and $94.2 million in fiscal year 1999.
Budgetary Process. The State Constitution requires the Legislature
to enact a balanced budget. The State's fiscal year runs from July 1 through
June 30 of the following year. State law establishes procedures for the budget's
enactment. The Secretary of Administration, under the direction of the Governor,
compiles all budget information and prepares an executive budget consisting of
the planned operating expenditures and revenues of all State agencies. The
Department of Revenue furnishes forecasts of tax revenues to the
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Department of Administration. The budget is submitted to the Legislature on or
about February 15 of each odd-numbered year. Upon concurrence by both houses of
the Legislature in the appropriations and revenue measures embodied in the
budget bill, the entire bill is submitted to the Governor. The Governor is
empowered to sign the bill into law or to veto all or part of the bill. If the
Governor vetoes any portions, those items may be reconsidered in accordance with
the rules of each house and, if approved by two-thirds of the members of each
house, will become law notwithstanding the Governor's veto. In the event that a
budget is not in effect at the start of a fiscal year, the prior year's budget
serves as the budget until such time a new one is enacted.
State law prohibits the enactment of legislation which would cause
the estimated General Fund balance to be less than 1% of the general purpose
revenue appropriations for that fiscal year. For the 1995-1996 fiscal year and
1996-1997 fiscal year, the statutorily required reserves are $83 million and $92
million respectively. The effect of the State law provision is to divide the
year-ending General Fund balance into two components: the statutorily required
reserve and the amount above such reserve.
The Statutes provide that if, following the enactment of the
budget, the Secretary of Administration determines that budgeted expenditures
will exceed revenues by more than one-half of one percent of general purpose
revenues, no action can be taken regarding approval of expenditure estimates.
Further, the Secretary of Administration must notify the Governor, the
Legislature and its Joint Committee on Finance, and the Governor must submit a
bill correcting the imbalance. If the Legislature is not in session, the
Governor must call a special session to take up the matter.
The Secretary of Administration also has statutory power to order
reductions in the appropriations of state agencies (which represent less than
one-third of the General Fund budget). The Secretary of Administration may also
temporarily reallocate free balances of certain funds to other funds which have
insufficient balances and, further, may prorate or defer certain payments in the
event current or projected balances are insufficient to meet current
obligations. In such an event, the Department of Administration may also request
the issuance of operating notes by the Building Commission.
The 1995-1997 State budget provides for a reorganization of State
government that occurs between July 29, 1995 and July 1, 1996. This
reorganization is intended to improve accountability, consolidate similar
functions, provide a better framework to administer policy changes and improve
government efficiency and effectiveness. The reorganization creates two
departments. The Department of Tourism initiates operations on January 1, 1996,
and will perform various duties previously conducted within parts of the
Department of Development and Department of Natural Resources. The Department of
Financial Institutions commences operations on July 1, 1996 and will perform
duties currently conducted within the Offices of the Commissioners of Banking,
Savings and Loan, Securities, and Credit Unions.
This reorganization renames the Department of Public Instruction
the Department of Education and transfers revised duties of the State
Superintendent of Public Instruction to the new Office of the State
Superintendent of Public Instruction. These actions were to go into effect on
January 1, 1996; however, the State Supreme Court issued a temporary injunction
on December 27, 1995 that delays the renaming of the Department of Public
Instruction and transfer of revised duties of the State Superintendent of Public
Instruction. Effective July 1, 1996, this reorganization also renames other
State Departments and includes other components for reorganization in eight
other functions groupings as well.
Revenues and Expenditures. The State has an extremely diverse
revenue-raising structure. Approximately forty-four percent of the total revenue
is derived from the various taxes levied by the State. The remainder comes from
the federal government and from various kinds of fees, licenses, permits and
service charges paid by users of specific services, privileges or facilities.
State expenditures are categorized under eight functional
categories and three distinct types of expenditures within each. The eight
functional categories are: Commerce, Education, Environmental Resources, Human
Relations and Resources, General Executive, Judicial, Legislative, and General
Appropriations.
As of June 30, 1995, the State ended the fiscal year on a statutory
and unaudited basis with an
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unreserved, undesignated balance of $401 million. On an all-funds basis, the
total amount available was $23.319 billion consisting of (i) a beginning balance
of $235 million, (ii) tax revenues of $8.577 billion and (iii) nontax revenues
of $14.507 billion. Total disbursements and reserves were $22.918 billion,
resulting in the balance stated previously. On a general-fund basis the total
amount available was $13.495 billion consisting of (i) the same beginning
balance, (ii) tax revenues of $7.816 billion and (iii) nontax revenues of $5.444
billion. Total disbursements and reserves were approximately $13.94 billion,
resulting in the same balance as described on an all-fund basis.
For fiscal year ending June 30, 1996, the budget on an all-funds
basis projects a balance of $442 million. Total available revenues are estimated
to be $20.686 billion consisting of (i) a beginning balance of $337 million,
(ii) tax revenues of $8.218 billion and (iii) nontax revenues of $12.131
billion. Total disbursements and reserves are estimated to be $20.327 billion,
consisting of net disbursements of $20.187 billion and reserves of $140 million.
This results in an estimated balance of $359 million which, when combined with
statutorily required balance of $83 million, results in a balance at June 30,
1996 of $442 million.
For fiscal year 1997, total tax revenue is estimated at $8,688.5
million and total revenue in the general fund is estimated at $9,407.5 million.
After expenditures of $9,264.8 million, the general fund is expected to have an
ending balance of $142.7 million.
Since 1984 the State has issued operating notes each year in
anticipation of cash-flow imbalances, primarily experienced in November and
December. These operating notes eliminated the need to prorate or defer large
local assistance payments or to reallocate balances in other State funds. The
1997-99 budget assumes issuing operating notes of approximately $500 million in
fiscal year 1998 and $750 million in fiscal year 1999. As a percent of total
appropriations, the size of the operating notes will be within the range of
notes issued in past years. Operating notes are not general obligations of the
State and are not on a parity with State general obligations.
The Dane County Circuit Court has specified the remedies resulting
form its 1991 decision regarding the source of payment for certain additional
pension amounts. One part of the remedy required a lump-sum payment from the
General Fund to the Employee Trust Fund to be made by August 1994. The payment
is estimated to be $95.3 million. In addition, the State is expected to incur
other costs of about $0.5 million to implement the remedy and an amount yet to
be determined to pay plaintiffs' attorneys fees. The monetary remedy has been
stayed by the Dane Count Circuit Court pending entry of a final, nonappealable
judgment. All parties have filed appeals or cross-appeals. It is possible that
the amount of the remedy may be increased or decreased, perhaps substantially,
or eliminated. The 1995-1996 and 1996-1997 budgets do not specifically provide
for this payment.
Debt Administration and Limitation. At the inception of statehood,
constitutional limitations severely restricted the issuance of direct State
debt. Prior to 1969, independent nonstock, nonprofit corporations were
established to issue debt on behalf of the State. In April 1969, the voters of
the State, by referendum, adopted an amendment to the Constitution that
authorized the State to borrow money directly and simultaneously terminated the
use of the corporations for financing State construction. Legislation that
established specific implementation powers was subsequently passed in December
1969, whereupon the State first issued general obligation bonds. To date, the
Legislature has authorized the issuance of general obligations for 59 distinct
purposes and has limited the amount of general obligations which may be issued
for each purpose. The purposes for which State general obligations may be issued
are set forth in the Wisconsin Constitution, which provides the basis for the
State's general obligation borrowing program. It permits three types of
borrowing: (1) to acquire, construct, develop, extend, enlarge or improve land,
waters, property, highways, railways, buildings, equipment or facilities for
public purposes; (2) make funds available for veterans housing loans; and, (3)
fund or refund any outstanding State general obligations. There is no
constitutional requirement that the issuance of general obligations receive the
direct approval of the electorate.
The Wisconsin Constitution and State Statutes limits the amount of
debt the State can contract in total and in any calendar year. In total, debt
cannot exceed five percent of the value of all taxable property in the State.
The amount of debt contracted in any calendar year is limited to the lesser of
three-quarters of one
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percent of aggregate value of taxable property or 5 percent of aggregate value
of taxable property less net indebtedness at January 1. Currently, the annual
limit is $1,511,535,818 and the cumulative debt limits is $10,076,905,450 (of
which the amount available is 46,832,826,001). The lesser amount is
$1,511,535,818. A refunding bond issue is not taken into account for purposes of
the annual debt limit, and a refunded bond issue is not taken into account for
purposes of the cumulative debt limits. Interest scheduled to accrue on any
obligation that is not payable during the current fiscal year is treated as debt
and taken into account for purposes of the debt limitations.
The $158,080,000 State of Wisconsin General Obligation Bonds of
1996, Series A, are the State's first publicly offered general obligation bond
issue in 1996. Currently authorized but unissued general obligation bonding
authority for general purpose revenue supported programs amounts to $980.4
million. This authorized/unissued bond authority breaks down to $514.0 million
for building programs and $466.4 million for environmental programs. The State
anticipates several competitive sales of general obligations for governmental
purposes. The State anticipates the competitive sale of at least one general
obligation issue for the veterans housing loan program and several private sales
of general obligations for the Clean Water Fund program. The amounts will be
based on cash needs and market conditions. The state's most recent long-term
20-year general obligation bond issue sold at a true interest cost rate of
5.56%. The State is currently considering a general obligation refunding issue
which the State would undertake to achieve debt service savings. The size of
this transaction is estimated to be $75-$125 million.
Although all general obligation bonds and notes issued by the State
are supported by its full faith, credit and taxing power, a substantial amount
of the indebtedness of the State is issued with the expectation that debt
service payments will not impose a direct burden on the State's taxpayers and
its general revenue sources. Similarly, a portion of the indebtedness issued by
nonstock, nonprofit corporations on behalf of the State prior to 1970 and backed
by lease-rental obligations of various State agencies was issued with the
expectation that the rental obligations of the State would not be discharged
from General Fund revenues. At June 30, 1995, State of Wisconsin bonds had a
rating of Aa from Moody's Investors Services and a rating of AA from Standard
and Poor's Corporation.
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FINANCIAL STATEMENTS
KPMG Peat Marwick LLP served as the independent auditors for each
Fund through December 31, 1996 and, in its capacity as such, audited the annual
financial statements of the Fund. Beginning May 1, 1997, Ernst & Young LLP began
serving in such capacity. The Fund's Statements of Net Assets, Statements of
Operations, Statements of Changes in Net Assets, and Notes to Financial
Statements, as well as the report of KPMG Peat Marwick LLP, independent
auditors, for the fiscal year ended December 31, 1996 are included in their
Annual Reports to shareholders. The financial statements, the notes relating
thereto and the report of KPMG Peat Marwick LLP, listed above are incorporated
by reference from the Annual Report into this Part B.
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- --------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
AUGUST 28, 1997
- --------------------------------------------------------------------------------
VOYAGEUR MUTUAL FUNDS, INC.
- --------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
For Prospectus and Performance of Class A Shares, Class B Shares and Class C
Shares:
Nationwide 800-523-4640
Information on Existing Accounts of Class A Shares, Class B Shares and Class C
Shares:
(SHAREHOLDERS ONLY) Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Cover Page
- --------------------------------------------------------------------------------
Investment Restrictions and Policies
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Accounting and Tax Issues
- --------------------------------------------------------------------------------
Performance Information
- --------------------------------------------------------------------------------
Trading Practices and Brokerage
- --------------------------------------------------------------------------------
Purchasing Shares
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Investment Plans
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Determining Offering Price
and Net Asset Value
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Redemption and Repurchase
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Distributions and Taxes
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Investment Management Agreement
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Officers and Directors
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
Appendix A -- Ratings
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Appendix B -- General Characteristics and Risks of Options and Futures
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
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Voyageur Mutual Funds, Inc. ("Mutual Funds, Inc.") is a
professionally-managed mutual fund of the series type. This Statement of
Additional Information ("Part B" of the registration statement) describes
Delaware-Voyageur Minnesota High Yield Municipal Bond Fund series (the "Fund")
of Mutual Funds, Inc. The Fund offers Class A Shares, Class B Shares and Class C
Shares (individually, a "Class" and collectively the "Classes").
Class B Shares and Class C Shares of the Fund may be purchased at a
price equal to the next determined net asset value per share. Class A Shares may
be purchased at the public offering price, which is equal to the next determined
net asset value per share, plus a front-end sales charge. Class A Shares are
subject to a maximum front-end sales charge of 3.75% and annual 12b-1 Plan
expenses of up to 0.25%. Class B Shares are subject to a contingent deferred
sales charge ("CDSC") which may be imposed on redemptions made within six years
of purchase and annual 12b-1 Plan expenses of up to 1% which are assessed
against Class B Shares for approximately eight years after purchase. See
Automatic Conversion of Class B Shares under Classes of Shares in the Fund's
Prospectus. Class C Shares are subject to a CDSC which may be imposed on
redemptions made within 12 months of purchase and annual 12b-1 Plan expenses of
up to 1% which are assessed against Class C Shares for the life of the
investment. All references to "shares" in this Part B refer to all Classes of
shares of the Fund, except where noted.
This Part B supplements the information contained in the current
Prospectus for the Fund dated August 28, 1997 as it may be amended from time to
time. It should be read in conjunction with the Prospectus. Part B is not itself
a prospectus but is, in its entirety, incorporated by reference into the
Prospectus. A prospectus may be obtained by writing or calling your investment
dealer or by contacting the Fund's national distributor, Delaware Distributors,
L.P. (the "Distributor"), 1818 Market Street, Philadelphia, PA 19103.
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INVESTMENT RESTRICTIONS AND POLICIES
Investment Restrictions
The Fund has adopted certain investment restrictions set forth below
which, together with the investment objectives of the Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the 1940 Act, this means the lesser of
the vote of (1) 67% of the shares of the Fund at a meeting where more than 50%
of the outstanding shares of the Fund are present in person or by proxy or (2)
more than 50% of the outstanding shares of the Fund. The following investment
restrictions apply to the Fund. The Fund will not:
(1) Borrow money (provided that the Fund may enter into reverse
repurchase agreements with respect to not more than 10% of its total assets),
except from banks for temporary or emergency purposes in an amount not exceeding
20% of the value of the Fund's total assets, including the amount borrowed. The
Fund may not borrow for leverage purposes, provided that the Fund may enter into
reverse repurchase agreements for such purposes, and securities will not be
purchased while outstanding borrowings exceed 5% of the value of the Fund's
total assets.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of portfolio investments, the Fund may
be deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities
which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more if its total assets in the securities of any
industry, although, for purposes of this limitation, tax-exempt securities and
U.S. Government obligations are not considered to be part of any industry.
(6) Issue any senior securities (as defined in the 1940 Act), except as
set forth in investment restriction number (1) above, and except to the extent
that using options, futures contracts and options on futures contracts,
purchasing or selling on a when-issued or forward commitment basis or using
similar investment strategies may be deemed to constitute issuing a senior
security.
(7) Purchase or sell commodities or futures or options contracts with
respect to physical commodities. This restriction shall not restrict the Fund
from purchasing or selling, on a basis consistent with any restrictions
contained in its then-current Prospectus, any financial contracts or instruments
which may be deemed commodities (including, by way of example and not by way of
limitation, options, futures, and options on futures with respect, in each case,
to interest rates, currencies, stock indices, bond indices or interest rate
indices).
The following non-fundamental investment restrictions may be changed by
the Board of the Fund at any time. The Fund will not:
(1) Invest more than 5% of its total assets in securities of any single
investment company, nor more than 10% of its total assets in securities of two
or more investment companies, except as part of a merger, consolidation or
acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
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(3) The Fund will not write puts if, as a result, more than 50% of the
Fund's assets would be required to be segregated to cover such puts.
(4) The Fund will not make short sales of securities or maintain a
short position for the account of the Fund, unless at all times when a short
position is open it owns an equal amount of such securities or owns securities
which, without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
Diversification
Although the Fund is characterized as a non-diversified fund under the
1940 Act, the Fund intends to conduct its operations so that it will qualify
under the Internal Revenue Code of 1986 as a "regulated investment company." In
order to qualify as a regulated investment company, the Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Code requires that not more than 25% in value of the Fund's total assets may be
invested in the securities of a single issuer at the close of each quarter of
the taxable year.
For purposes of such diversification, the identification of the issuer
of Municipal Obligations depends on the terms and conditions of the security. If
a State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond
is backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by the Fund
exceeds 10% of the value of the Fund's total assets, the guarantee is considered
a separate security and is treated as an issue of the guarantor. Investments in
municipal obligations refunded with escrowed U. S. Government securities will be
treated as investments in U. S. Government securities for purposes of
determining the Fund's compliance with the 1940 Act diversification
requirements.
Municipal Obligations
Municipal Obligations are generally issued to obtain funds for various
public purposes, including the construction or improvement 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 Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses and
lending such funds to other public institutions and facilities. In addition,
Municipal Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
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housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Fund may invest, including Municipal
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Municipal Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Municipal Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Municipal Obligations for investment by the
Fund and the value of the Fund's portfolio. In such event, management of the
Fund may discontinue the issuance of shares to new investors and may reevaluate
the Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service ("Fitch"), or Standard & Poor's Ratings
Services ("S&P") for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for their investments in accordance with the
investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's, Fitch and S&P represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings provide an
initial criterion for selection of portfolio investments, Voyageur Fund
Managers, Inc. ("Voyageur"), the Fund's investment manager, will subject these
securities to other evaluative criteria prior to investing in such securities.
Floating and Variable Rate Demand Notes
Variable rate master demand notes, in which the Fund may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between the Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, the Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the period of time remaining
until the principal amount can be recovered from the issuer through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes purchased by the Fund will be determined by the
Fund's Manager under guidelines established by the Fund's Board of Directors to
be of comparable quality at the time of purchase to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, the Manager will consider the earning power, cash flow and other
liquidity ratios of the issuers of such notes (such issuers include financial,
merchandising, bank holding and other companies)
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and will continuously monitor their financial condition. Although there may be
no active secondary market with respect to a particular variable or floating
rate note purchased by the Fund, the Fund may re-sell the note at any time to a
third party. The absence of such an active secondary market, however, could make
it difficult for the Fund to dispose of the variable or floating rate note
involved in the event the issuer of the note defaulted on its payment
obligations, and the Fund could, for this or other reasons, suffer a loss to the
extent of the default. Variable or floating rate notes may be secured by bank
letters of credit.
Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with securities with legal
or contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Fund's total assets only if such notes are
subject to a demand feature that will permit the Fund to demand payment of the
Principal within seven days after demand by the Fund. If not rated, such
instruments must be found by the Fund's Manager and/or sub-adviser under
guidelines established by the Fund's Board of Directors, to be of comparable
quality to instruments that are rated high quality. A rating may be relied upon
only if it is provided by a nationally recognized statistical rating
organization that is not affiliated with the issuer or guarantor of the
instruments.
Escrow Secured Bonds or Defeased Bonds
Escrow secured bonds or defeased bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) some of its outstanding bonds
and it becomes necessary or desirable to set aside funds for redemption or
payment of the bonds at a future date or dates. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade interest
bearing debt securities which are then deposited in an irrevocable escrow
account held by an escrow agent to secure all future payments of principal and
interest of the advance refunded bond. Escrow secured bonds will often receive a
triple A rating from S&P, Moody's and Fitch.
State or Municipal Lease Obligations
Municipal leases may take the form of a lease with an option to
purchase, an installment purchase contract, a conditional sales contract or a
participation certificate in any of the foregoing. In determining leases in
which the Fund will invest, the Manager will evaluate the credit rating of the
lessee and the terms of the lease. Additionally, the Manager may require that
certain municipal leases be secured by a letter of credit or put arrangement
with an independent financial institution. State or municipal lease obligations
frequently have the special risks described below which are not associated with
general obligation or revenue bonds issued by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "nonappropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "nonappropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for nonappropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the leased property without any recourse to the general credit of the public
body. The disposition of the leased property by the lessor in the event of
termination of the lease might, in many cases, prove difficult or result in
loss.
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Concentration Policy
As a fundamental policy, the Fund may not invest 25% or more of its
total assets in the securities of any industry, although, for purposes of this
limitation, tax-exempt securities and U.S. Government obligations are not
considered to be part of any industry. The Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Fund from time to time will invest 25% or more of its total
assets in a particular segment of the municipal bond market, such as housing,
health care, utility, transportation, education or industrial obligations. In
such circumstances, economic, business, political or other changes affecting one
bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or a declining market or need
for the project) might also affect other bonds in the same segment, thereby
potentially increasing market or credit risk.
Housing Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
Health Care Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
Utility Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
Transportation Obligations. The Fund may, from time to time, invest 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance airports and highway, bridge and
toll road facilities. The major portion of an airport's gross operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs, deregulation, traffic constraints and other factors,
and several airlines are experiencing severe financial difficulties. The
revenues of issuers which derive their payments from bridge, road or tunnel toll
revenues could be adversely affected by competition from toll-free vehicular
bridges and roads and alternative modes of transportation. Such
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revenues could also be adversely affected by a reduction in the availability of
fuel to motorists or significant increases in the costs thereof.
Education Obligations. The Fund may, from time to time, invest 25% or
more of its total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
Industrial Revenue Obligations. The Fund may, from time to time, invest
25% or more of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal
income taxes and the personal income taxes of Minnesota for certain housing,
health care, utility, transportation, education and industrial revenue bonds
depends on compliance with relevant provisions of the Code. The failure to
comply with these provisions could cause the interest on the bonds to become
includable in gross income, possibly retroactively to the date of issuance,
thereby reducing the value of the bonds, subjecting shareholders to
unanticipated tax liabilities and possibly requiring the Fund to sell the bonds
at the reduced value. Furthermore, such a failure to meet these ongoing
requirements may not enable the holder to accelerate payment of the bond or
require the issuer to redeem the bond.
Taxable Obligations
As set forth in the Fund's Prospectus, the Fund may invest to a limited
extent in obligations and instruments, the interest on which is includable in
gross income for purposes of federal and Minnesota state income taxation.
Government Obligations
The Fund may invest in securities issued or guaranteed by the U. S.
Government or its agencies or instrumentalities. These securities include a
variety of Treasury securities, which differ in their interest rates, maturities
and times of issuance. Treasury Bills generally have maturities of one year or
less; Treasury Notes generally have maturities of one to ten years; and Treasury
Bonds generally have maturities of greater than ten years. Some obligations
issued or guaranteed by U. S. Government agencies and instrumentalities, such as
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U. S. Treasury; other obligations,
such as those of the Federal Home Loan Banks, are secured by the right of the
issuer to borrow from the Treasury; other obligations, such as those issued by
the Federal National Mortgage Association, are supported by the discretionary
authority of the U. S. Government to purchase certain obligations of the agency
or
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instrumentality; and other obligations, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the instrumentality
itself. Although the U. S. Government provides financial support to such U. S.
Government-sponsored agencies or instrumentalities, no assurance can be given
that it will always do so, since it is not so obligated by law. The Fund will
invest in such securities only when the Manager is satisfied that the credit
risk with respect to the issuer is minimal.
Repurchase Agreements
A repurchase agreement is a short-term investment by which the
purchaser acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the purchaser's holding period. Should an issuer of a
repurchase agreement fail to repurchase the underlying security, the loss to the
Fund, if any, would be the difference between the repurchase price and the
market value of the security. The Fund will limit its investments in repurchase
agreements to those which the Manager, under the guidelines of the Board of
Directors, determines to present minimal credit risks and which are of high
quality. In addition, the Fund must have collateral of at least 100% of the
repurchase price, including the portion representing the Fund's yield under such
agreements which is monitored on a daily basis.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
Delaware Group funds jointly to invest cash balances. The Fund may invest cash
balances in a joint repurchase agreement in accordance with the terms of the
Order and subject generally to the conditions described below.
Other Taxable Investments
The Fund also may invest in certificates of deposit, bankers'
acceptances and other time deposits. Certificates of deposit are certificates
representing the obligation of a bank to repay the funds deposited (plus
interest thereon) at a time certain after the deposit. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a stated interest rate.
Options
The Fund may purchase call options, write call options on a covered
basis, write secured put options and purchase put options on a covered basis
only, and will not engage in option writing strategies for speculative purposes.
The Fund may invest in options that are either Exchange listed or
traded over-the-counter. Certain over-the-counter options may be illiquid. Thus,
it may not be possible to close option positions and this may have an adverse
impact on the Fund's ability to effectively hedge its securities. The Fund will
not, however, invest more than 15% of its assets in illiquid securities.
A. Covered Call Writing--The Fund may write covered call options from
time to time on such portion of its portfolio, without limit, as Delaware
Management Company, Inc. (the "Manager") determines is appropriate in seeking to
obtain the Fund's investment objective. A call option gives the purchaser of
such option the right to buy, and the writer, in this case the Fund, has the
obligation to sell the underlying security at the exercise price during the
option period. The advantage to the Fund of writing covered calls is that the
Fund receives a premium which is additional income. However, if the security
rises in value, the Fund may not fully participate in the market appreciation.
During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which
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<PAGE>
the writer effects a closing purchase transaction. A closing purchase
transaction cannot be effected with respect to an option once the option writer
has received an exercise notice for such option.
With respect to options on actual portfolio securities owned by the
Fund, the Fund may enter into closing purchase transactions. A closing purchase
transaction is one in which the Fund, when obligated as a writer of an option,
terminates its obligation by purchasing an option of the same series as the
option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Fund may realize a net
gain or loss from a closing purchase transaction depending upon whether the net
amount of the original premium received on the call option is more or less than
the cost of effecting the closing purchase transaction. Any loss incurred in a
closing purchase transaction may be partially or entirety offset by the premium
received from a sale of a different call option on the same underlying security.
Such a loss may also be wholly or partially offset by unrealized appreciation in
the market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, the Fund will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means
that the Fund will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Fund would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Fund will normally have expiration dates between one and
nine months from the date written. The exercise price of a call option may be
below, equal to or above the current market value of the underlying security at
the time the option is written.
B. Purchasing Call Options--The Fund may purchase call options to the
extent that premiums paid by the Fund do not aggregate more than 2% of the
Fund's total assets. The advantage of purchasing call options is that the Fund
may alter portfolio characteristics, and modify portfolio maturities without
incurring the cost associated with portfolio transactions.
The Fund may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same Fund as the option previously purchased. The Fund
will realize a profit from a closing sale transaction if the price received on
the transaction is more than the premium paid to purchase the original call
option; the Fund will realize a loss from a closing sale transaction if the
price received on the transaction is less than the premium paid to purchase the
original call option.
Although the Fund will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular
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option, or at any particular time, and for some options no secondary market on a
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the results that the Fund would have to
exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Fund may expire without any value
to the Fund.
C. Purchasing Put Options--The Fund may invest up to 2% of its total
assets in the purchase of put options. The Fund will, at all times during which
it holds a put option, own the security covered by such option.
The Fund intends to purchase put options in order to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option ("protective puts"). The ability to
purchase put options will allow the Fund to protect an unrealized gain in an
appreciated security in its portfolio without actually selling the security. If
the security does not drop in value, the Fund will lose the value of the premium
paid. The Fund may sell a put option which it has previously purchased prior to
the sale of the securities underlying such option. Such sales will result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the put option which
is sold.
The Fund may sell a put option purchased on individual portfolio
securities. Additionally, the Fund may enter into closing sale transactions. A
closing sale transaction is one in which the Fund, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
D. Writing Put Options--The Fund may also write put options on a
secured basis which means that the Fund will maintain in a segregated account
with its custodian, cash or U.S. government securities in an amount not less
than the exercise price of the option at all times during the option period. The
amount of cash or U.S. government securities held in the segregated account will
be adjusted on a daily basis to reflect changes in the market value of the
securities covered by the put option written by the Fund. Secured put options
will generally be written in circumstances where the Manager wishes to purchase
the underlying security for the Fund's portfolio at a price lower than the
current market price of the security. In such event, the Fund would write a
secured put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay.
Following the writing of a put option, the Fund may wish to terminate
the obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
Futures
Futures contracts are agreements 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 Fund enters into a futures
transaction, it must deliver to the futures commission merchant selected by the
Fund an amount referred to as "initial margin." This amount is maintained by the
futures commission merchant in an account at the Fund's custodian bank.
Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the
Fund from, such account in accordance with controls set for such account,
depending upon changes in the price of the underlying securities subject to the
futures contract.
In addition, when the Fund engages in futures transactions, to the
extent required by the Securities and Exchange Commission, it will 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
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portfolio in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the margin payments
made by the Fund with respect to such futures contracts.
The Fund may enter into such futures contracts to protect against the
adverse effects of fluctuations in interest rates without actually buying or
selling such securities. Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to hedge in anticipation of
subsequent purchases of government securities at higher prices.
With respect to options on futures contracts, when the Fund is not
fully invested, it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. The writing of a call
option on a futures contract constitutes a partial hedge against declining
prices of the securities which are deliverable upon exercise of the futures
contract. If the futures price at the expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities which
are deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge against any
increase in the price of government securities which the Fund intends to
purchase.
If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between the value of its
portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates.
To the extent that interest rates move in an unexpected direction, the
Fund may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize a loss. For example, if the Fund is hedged
against the possibility of an increase in interest rates which would adversely
affect the price of government securities held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its government securities which it has because it will have
offsetting losses in its futures position. In addition, in such situations, if
the Fund had insufficient cash, it may be required to sell government securities
from its portfolio to meet daily variation margin requirements. Such sales of
government securities may, but will not necessarily, be at increased prices
which reflect the rising market. The Fund may be required to sell securities at
a time when it may be disadvantageous to do so.
Further, with respect to options on futures contracts, the Fund may
seek to close out an option position by writing or buying an offsetting position
covering the same securities or contracts and have the same exercise price and
expiration date. The ability to establish and close out positions on options
will be subject to the maintenance of a liquid secondary market, which cannot be
assured.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market
-12-
<PAGE>
may attract more speculators than does the securities market. Increased
participation by speculators in the futures market may also cause temporary
price distortions. Because of possible price distortion in the futures market
and because of imperfect correlation between movements in indexes of securities
and movements in the prices of futures contracts, even a correct forecast of
general market trends may not result in a successful hedging transaction over a
very short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by the Fund is subject to the
ability of Voyageur to predict correctly movements in the direction of interest
rates or the relevant underlying securities market. If the Fund has hedged
against the possibility of an increase in interest rates adversely affecting the
value of fixed-income securities held in its portfolio and interest rates
decrease instead, the Fund will lose part or all of the benefit of the increased
value of its security which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not necessarily, be at
increased prices which reflect the rising market or decline in interest rates.
The Fund may have to sell securities at a time when it may be disadvantageous to
do so.
Liquidity of Futures Contracts. The Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. The Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Fund intends to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risk of Options. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium, which may
partially offset a
-13-
<PAGE>
decline in the value of the Fund's portfolio assets. By writing a call option,
the Fund becomes obligated to sell an underlying instrument or a futures
contract, which may have a value higher than the exercise price. Conversely, the
writing of a put option generates a premium, but the Fund becomes obligated to
purchase the underlying instrument or futures contract, which may have a value
lower than the exercise price. Thus, the loss incurred by the Fund in writing
options may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when
Voyageur deems it desirable to do so. Although the Fund will enter into an
option position only if Voyageur believes that a liquid secondary market exists
for such option, there is no assurance that the Fund will be able to effect
closing transactions at any particular time or at an acceptable price. The
Fund's transactions involving options on futures contracts will be conducted
only on recognized exchanges.
The Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by Voyageur, which
could prove to be inaccurate. Even if the expectations of Voyageur are correct,
there may be an imperfect correlation between the change in the value of the
options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
-14-
<PAGE>
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Fund will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in
price of securities that the Fund anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Fund to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when Voyageur believes it would be advantageous to do so. Accordingly, OTC
options are subject to the Fund's limitation that a maximum of 15% of its net
assets be invested in illiquid securities. In the event of the bankruptcy of the
writer of an OTC option, the Fund could experience a loss of all or part of the
value of the option. Voyageur anticipates that options on Municipal Obligations
will consist primarily of OTC options.
Illiquid Investments
The Fund may invest no more than 15% of the value of its net assets in
illiquid securities.
The Fund may invest in restricted securities, including securities
eligible for resale without registration pursuant to Rule 144A ("Rule 144A
Securities") under the Securities Act of 1933. Rule 144A permits many privately
placed and legally restricted securities to be freely traded among certain
institutional buyers such as the Fund.
While maintaining oversight, the Board of Directors has delegated to
the Manager the day-to-day function of determining whether or not individual
Rule 144A Securities are liquid for purposes of a Fund's 15% limitation on
investments in illiquid assets. The Board has instructed the Manager to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
-15-
<PAGE>
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security that was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Manager will determine what action to take to ensure that
the Fund continues to adhere to such limitation.
Special Factors Affecting the Fund
The following information is a brief summary of Minnesota factors
affecting the Fund and does not purport to be a complete description of such
factors. The financial condition of Minnesota, its public authorities and local
governments could affect the market values and marketability of, and therefore
the net asset value per share and the interest income of the Fund, or result in
the default of existing obligations, including obligations which may be held by
the Fund. Further, Minnesota faces numerous forms of litigation seeking
significant damages which, if awarded, could adversely affect the financial
situation of Minnesota or issuers located in therein. It should be noted that
the creditworthiness of obligations issued by local issuers may be unrelated to
the creditworthiness of Minnesota, and that there is no obligation on the part
of Minnesota to make payment on such local obligations in the event of default
in the absence of a specific guarantee or pledge provided by Minnesota. The
following information is based primarily upon information derived from public
documents relating to securities offerings of issuers of such states and other
historically reliable sources, but has not been independently verified by the
Fund. The Fund makes no representation or warranty regarding the completeness or
accuracy of such information. The market value of the shares of the Fund may
fluctuate due to factors such as changes in interest rates, matters affecting
Minnesota or for other reasons.
General Economic Conditions. Diversity and a significant natural
resource base are two important characteristics of the Minnesota economy.
Generally, the structure of the State's economy parallels the structure of the
United States economy as a whole. There are, however, employment concentrations
in durable goods and non-durable goods manufacturing, particularly industrial
machinery, instruments and miscellaneous, food, paper and related industries,
and printing and publishing. During the period from 1980 to 1990, overall
employment growth in Minnesota lagged behind national employment growth, in
large part due to declining agricultural employment. The rate of non-farm
employment growth in Minnesota exceeded the rate of national growth, however, in
the period of 1990 to 1994. Since 1980, Minnesota per capita income generally
has remained above the national average, but tightness in local labor markets
may reduce the rate of personal income growth below that of the national average
in the future. During 1993, 1994 and 1995, the State's monthly unemployment rate
generally was less than the national unemployment rate.
Revenue and Expenditures. The State relies heavily on a progressive
individual income tax and a retail sales tax for revenue, which results in a
fiscal system that is sensitive to economic conditions. Frequently in recent
years, legislation has been required to eliminate projected budget deficits by
raising additional revenue, reducing expenditures, including aids to political
subdivisions and higher education, reducing the State's budget reserve, imposing
a sales tax on purchases by local governmental units, and making other budgetary
adjustment. The Minnesota Department of Finance February 1996 Forecast has
projected that, under current laws, the State will complete its current biennium
June 30, 1997 with a $15 million surplus, plus a $350 million cash flow account
balance, plus a $220 million budget reserve. Total General Fund expenditures and
transfers for the biennium are projected to be $18.8 billion. State expenditures
for education finance (K-12), post-secondary education, and human services in
the biennium ending June 30, 1997 are not anticipated to be sufficient to
maintain program levels of the previous biennium. The State is party to a
variety of civil actions that could adversely affect the State's General Fund.
In addition, substantial portions of State and local revenues are derived from
federal expenditures, and reductions in federal aid to the State and its
political subdivisions and other federal spending cuts may have substantial
adverse
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<PAGE>
effects on the economic and fiscal condition of the State and its local
governmental units. The February 1996 Forecast states that pending federal
legislation could reduce federal aid to Minnesota's state and local governments
by a total of $3.2 billion over seven years. Risks are inherent in making
revenue and expenditure forecasts. Economic or fiscal conditions less favorable
than those reflected in State budget forecasts and planning estimates may create
additional budgetary pressures.
State grants and aids represent a large percentage of the total
revenues of cities, towns, counties and school districts in Minnesota, but
generally the State has no obligation to make payments on local obligations in
the event of a default. Even with respect to revenue obligations, no assurance
can be given that economic or other fiscal difficulties and the resultant impact
on State and local government finances will not adversely affect the ability of
the respective obligors to make timely payment of the principal and interest on
Minnesota Municipal Obligations that are held by the Fund or the value or
marketability of such obligations.
Recent Minnesota tax legislation and possible future changes in federal
and State income tax laws, including rate reductions, could adversely affect the
value and marketability of Minnesota Municipal Obligations that are held by the
Fund. See Dividends and Distributions and Taxes--Minnesota State Taxation in the
Prospectus.
As of May 1996, ratings applicable to General Obligation bonds issued
by the State of Minnesota are as follows: "Aaa" by Moody's; "AA+" by S&P and
"AAA" by Fitch Investors Service.
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<PAGE>
ACCOUNTING AND TAX ISSUES
When the Fund writes a call option, an amount equal to the premium
received by it is included in the section of the Fund's 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. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an option
which the Fund has written expires on its stipulated expiration date, the Fund
reports a realized gain. If the Fund enters into a closing purchase transaction
with respect to an option which the Fund has written, the Fund 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 Fund has written is exercised, the Fund
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.
Other Tax Requirements -- The Fund has qualified and intend to continue
to qualify as regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). 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
consists 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. This 30% rule
is rescinded for tax years beginning August 5, 1997.
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 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 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 straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the following year, subject to the same limitation.
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<PAGE>
PERFORMANCE INFORMATION
From time to time, the Fund may state each of its Classes' total return
in advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life-of-fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC applicable to only certain redemptions of those shares will not be deducted
from any computation of total return. See the Prospectus for a description of
the Limited CDSC and the limited instances in which it applies. All references
to a CDSC in this Performance Information section will apply to Class B Shares
or Class C Shares of the Fund.
Total return performance for each Class will be computed by adding all
reinvested income and realized securities profits distributions plus the change
in net asset value during a specific period and dividing by the offering price
at the beginning of the period. It will not reflect any income taxes payable by
shareholders on the reinvested distributions included in the calculation.
Because securities prices fluctuate, past performance should not be considered
as a representation of the results which may be realized from an investment in
the Fund in the future.
The average annual total rate of return for each Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of $1,000
from which, in the case of only Class A Shares, the
maximum front-end sales charge is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical $1,000 purchase
at the end of the period after the deduction of the
applicable CDSC, if any, with respect to Class B
Shares and Class C Shares.
As stated in the Prospectus, the Fund may also quote the current yield
for each Class in advertisements and investor communications. The yield
computation is determined by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period and annualizing the resulting figure, according to the following formula:
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a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the
period;
b = expenses accrued for the period (net of
reimbursements);
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends;
d = the maximum offering price per share on
the last day of the period.
The above formula will be used in calculating quotations of yield of
each Class, based on specified 30-day periods identified in advertising by the
Fund. The yields as of December 31, 1996 using this formula were 5.17%, 4.59%
and 4.64% for Class A Shares, Class B Shares and Class C Shares, respectively.
Yield assumes the maximum front-end sales charge, if any, and does not reflect
the deduction of any CDSC or Limited CDSC and also reflects voluntary waivers in
effect during the period. Actual yield may be affected by variations in
front-end sales charges on investments. Past performance, such as is reflected
in quoted yields, should not be considered as a representation of the results
which may be realized from an investment in any class of the Fund in the future.
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.
The taxable equivalent yield is based on current Federal marginal income tax
rates combined with Minnesota marginal income tax rates. Each combined marginal
rate assumes a single taxpayer and that state income taxes paid are fully
deductible for purposes of computing federal taxable income. The combined
marginal rates do not reflect federal rules concerning the phase-out of personal
exemptions and limitations on the allowance of itemized deductions for certain
high-income taxpayers.
The taxable equivalent yields for each Class of the Fund for the 30-day
period ended December 31, 1996 were:
34.12% 36.87% 41.44% 44.73%
------ ------ ------ ------
Class A 9.12% 9.52% 10.26% 10.87%
Class B 8.33% 8.70% 9.38% 9.93%
Class C 8.36% 8.73% 9.41% 9.97%
These yields were computed by dividing that portion of a Class' yield
which is tax-exempt by one minus the stated income tax rate and adding the
product to that portion, if any, of the yield that is not tax-exempt. These
yields also reflect the expense limitations in effect during the period.
Investors should note that the income earned and dividends paid by the
Fund 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 Fund invests in longer-term securities that fluctuate in value and do
so in a manner inversely correlated with changing interest rates. The Fund's net
asset value will tend to rise when interest rates fall. Conversely, the Fund's
net asset value will tend to fall as interest rates rise. Normally, fluctuations
in interest rates have a greater effect on the prices of longer-term bonds. The
value of the securities held in the Fund will vary from day to day and investors
should consider the volatility of the Fund's net asset value as well as its
yield before making a decision to invest.
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<PAGE>
From time to time, the Fund may also quote actual total return
performance of its Classes in advertising and other types of literature compared
to indices or averages of alternative financial products available to
prospective investors. For example, the performance comparisons may include the
average return of various bank instruments, some of which may carry certain
return guarantees offered by leading banks and thrifts as monitored by Bank Rate
Monitor, and those of generally-accepted corporate bond and government security
price indices of various durations prepared by Lehman Brothers and Salomon
Brothers, Inc. These indices are not managed for any investment goal.
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 activity and performance of the Fund 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 Fund. 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.
Russell Indexes is an investment analysis service that provides both
current and historical stock performance information, focusing on the
business fundamentals of those firms issuing the security.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as
well as unmanaged indices compiled and maintained by these firms, will
be used in preparing comparative illustrations. In addition, the
performance of multiple indices compiled and maintained by these firms
may be combined to create a blended performance result for comparative
purposes. Generally, the indices selected will be representative of the
types of securities in which the Fund may invest and the assumptions
that were used in calculating the blended performance will be described.
Comparative information on the Consumer Price Index may also be
included. 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.
The following table is an example, for purposes of illustration only, of
cumulative total return performance for Class A Shares, Class B Shares and Class
C Shares through December 31, 1996. For these purposes, the calculations
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<PAGE>
assume the reinvestment of any realized securities profits distributions and
income dividends paid during the indicated periods. In addition, these
calculations, as shown below, reflect maximum sales charges, if any, paid on the
purchase or redemption of shares, as applicable, but not any income taxes
payable by shareholders on the reinvested distributions included in the
calculations. The performance of Class A Shares may also be shown without
reflecting the impact of any front-end sales charge. The performance of Class B
Shares and Class C Shares is calculated both with the applicable CDSC included
and excluded.
The net asset value of a Class fluctuates so shares, when redeemed, may
be worth more or less than the original investment, and a Class' results should
not be considered as representative of future performance.
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<PAGE>
Cumulative Total Return
Minnesota High Yield Municipal Bond Fund(1)
<TABLE>
<CAPTION>
Class B Class B Class C Class C
Class A Shares Shares Shares Shares
Shares (including (excluding (including (excluding
(at offer) CDSC)(2) CDSC) CDSC) CDSC)
<S> <C> <C> <C> <C> <C> <C> <C>
3 months 3 months 3 months
ended ended ended
12/31/96 (1.20%) 12/31/96 (1.55%) 2.45% 12/31/96 1.35% 2.35%
6 months 6 months 6 months
ended ended ended
12/31/96 (0.10%)(3) 12/31/96 (0.61%) 3.39% 12/31/96 2.29% 3.39%
Period Period Period
6/4/96(4) 6/12/96(1) 6/7/96(1)
through through through
12/31/96 1.44% 12/31/96 3.29% 7.29% 12/31/96 4.02% 5.02%
</TABLE>
(1) Reflects voluntary waivers in effect during the period(s).
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) For the six months ended December 31, 1996, cumulative total return for
Class A Shares at net asset value was 3.76%.
(4) Date of initial public offering.
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
personal financial planning. One typical way of addressing these issues is to
compare an individual's goals and the length of time the individual has to
attain these goals to his or her risk threshold. In addition, the Distributor
will provide information that discusses the Manager's overriding investment
philosophy and how that philosophy impacts the 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.
-23-
<PAGE>
THE POWER OF COMPOUNDING
When you opt to reinvest your current income for additional Fund
shares, your investment is given yet another opportunity to grow. It's called
the Power of Compounding and the following chart illustrates just how powerful
it can be.
COMPOUNDED RETURNS
Results of various assumed fixed rates of return on a $10,000
investment compounded monthly for 10 years:
7% Rate 9% Rate 11% Rate
of Return of Return of Return
--------- --------- ---------
1 year $10,723 $10,938 $11,157
2 years $11,498 $11,964 $12,448
3 years $12,330 $13,086 $13,889
4 years $13,221 $14,314 $15,496
5 years $14,177 $15,657 $17,289
6 years $15,201 $17,126 $19,289
7 years $16,300 $18,732 $21,522
8 years $17,479 $20,489 $24,012
9 years $18,743 $22,411 $26,791
10 years $20,098 $24,514 $29,891
These figures are calculated assuming a fixed constant investment
return and assume no fluctuation in the value of principal. These figures, which
do not reflect payment of applicable taxes or 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.
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<PAGE>
TRADING PRACTICES AND BROKERAGE
Portfolio transactions are executed by the Manager on behalf of the
Fund in accordance with the standards described below.
Brokers, dealers and banks are selected to execute transactions for
the purchase or sale of portfolio securities on the basis of the Manager's
judgment of their professional capability to provide the service. The primary
consideration is to have brokers, dealers or banks execute transactions at best
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. Trades are generally made on a net basis where
securities are either bought or sold directly from or to a broker, dealer or
bank. In these instances, there is no direct commission charged, but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission. When a commission is paid, 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, the Fund pays a minimal share
transaction cost when the transaction presents no difficulty.
The Manager may allocate out of all commission business generated by
all of the funds and accounts under its management, brokerage business to
brokers or dealers who provide brokerage and research services. These services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software and hardware used in
security analyses; and providing portfolio performance evaluation and technical
market analyses. Such services are used by the Manager in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used, or used exclusively, with respect
to the fund or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 and the Fund's
Investment Management Agreement, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, Mutual Funds, Inc. 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.
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<PAGE>
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 Mutual Funds,
Inc.'s 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 expenses of the funds in the Delaware Group of
funds, such as custodian fees, and may, at the request of the Distributor, give
consideration to sales of such funds shares as a factor in the selection of
brokers and dealers to execute portfolio transactions.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish the
Fund's objective in relation to anticipated movements in the general level of
interest rates. The Fund is free to dispose of portfolio securities at any time,
subject to complying with the Code and the 1940 Act, when changes in
circumstances or conditions make such a move desirable in light of the
investment objective. The Fund will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. However, it is generally anticipated that the Fund's
portfolio turnover rate will be less than 100%.
The degree of portfolio activity may affect brokerage costs of the
Fund and taxes payable by the Fund's shareholders to the extent of any net
realized capital gains. The Fund's portfolio turnover rate is not expected to
exceed 100%; however, under certain market conditions the Fund may experience a
rate of portfolio turnover which could exceed 100%. The Fund's portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the particular fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the particular
fiscal year, exclusive of securities whose maturities at the time of acquisition
are one year or less. A turnover rate of 100% would occur, for example, if all
the investments in the Fund's portfolio at the beginning of the year were
replaced by the end of the year.
During the period June 7, 1996 (date of initial sale) through
December 31, 1996, the Fund's portfolio turnover rate was 15%, annualized.
The Fund may hold securities for any period of time. The Fund's
portfolio turnover will be increased if the Fund writes a large number of call
options which are subsequently exercised. The portfolio turnover rate also may
be affected by cash requirements from redemptions and repurchases of Fund
shares. Total brokerage costs generally increase with higher portfolio turnover
rates.
-26-
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for the Fund's
classes of shares - Class A Shares, Class B Shares and Class C Shares, and has
agreed to use its best efforts to sell shares of the Fund. See the Prospectus
for additional information on how to invest. Shares of the Fund are offered on a
continuous basis, and may be purchased through authorized investment dealers or
directly by contacting Mutual Funds, Inc. or the Distributor.
The minimum initial investment generally is $1,000 for Class A
Shares, Class B Shares and Class C Shares. Subsequent purchases of such classes
generally must be at least $100. The initial and subsequent minimum investments
for Class A Shares will be waived for purchases by officers, directors and
employees of any Delaware Group fund, the Manager or any of the its affiliates
if the purchases are made pursuant to a payroll deduction program. Shares
purchased pursuant to the Uniform Gifts to Minors Act or Uniform Transfers to
Minors Act and shares purchased in connection with an Automatic Investing Plan
are subject to a minimum initial purchase of $250 and a minimum subsequent
purchase of $25. Accounts opened under the Delaware Group Asset Planner service
are subject to a minimum initial investment of $2,000 per Asset Planner Strategy
selected.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. Mutual Funds, Inc. will reject any purchase order
for more than $250,000 of Class B Shares and $1,000,000 or more of Class C
Shares. An investor may exceed these limitations by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers are responsible for transmitting orders promptly.
Mutual Funds, Inc. reserves the right to reject any order for the purchase of
shares of the Fund if in the opinion of management such rejection is in the
Fund's best interests.
The NASD has adopted Rules of Fair Practice, as amended, relating to
investment company sales charges. Mutual Funds, Inc. and the Distributor intend
to operate in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 3.75%; however, lower front-end sales charges
apply for larger purchases. See the table below. Class A Shares are also subject
to annual 12b-1 Plan expenses.
Class B Shares are purchased at net asset value and are subject to a
CDSC of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; and (iv) 1% if
shares are redeemed during the sixth year following purchase. Class B Shares are
also subject to annual 12b-1 Plan expenses which are higher than those to which
Class A Shares are subject and are assessed against Class B Shares for
approximately eight years after purchase. See Automatic Conversion of Class B
Shares under Classes of Shares in the Prospectus.
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
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<PAGE>
Class A Shares, Class B Shares and Class C Shares shares represent a
proportionate interest in a Fund's assets and will receive a proportionate
interest in that Fund's income, before application, as to Class A, Class B and
Class C Shares, of any expenses under that Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
in the Class A Shares, unless a shareholder submits a specific request. However,
purchases not involving the issuance of certificates are confirmed to the
investor and credited to the shareholder's account on the books maintained by
Delaware Service Company, Inc. (the "Transfer Agent"). The investor will have
the same rights of ownership with respect to such shares as if certificates had
been issued. An investor that is permitted to obtain a certificate may receive a
certificate representing full share denominations purchased by sending a letter
signed by each owner of the account to the Transfer Agent requesting the
certificate. No charge is assessed by Mutual Funds, Inc. for any certificate
issued. A shareholder may be subject to fees for replacement of a lost or stolen
certificate under certain conditions, including the cost of obtaining a bond
covering the lost or stolen certificate. Please contact the Fund for further
information. Investors who hold certificates representing any of their shares
may only redeem those shares by written request. The investor's certificate(s)
must accompany such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class
C Shares of the Fund permit investors to choose the method of purchasing shares
that is most suitable for their needs given the amount of their purchase, the
length of time they expect to hold their shares and other relevant
circumstances. Investors should determine whether, given their particular
circumstances, it is more advantageous to purchase Class A Shares of a Fund and
incur a front-end sales charge and annual 12b-1 Plan expenses of up to a maximum
of 0.25% of the average daily net assets of Class A Shares or to purchase either
Class B or Class C Shares of a Fund and have the entire initial purchase amount
invested in the Fund with the investment thereafter subject to a CDSC and annual
12b-1 Plan expenses. Class B Shares are subject to a CDSC if the shares are
redeemed within six years of purchase, and Class C Shares are subject to a CDSC
if the shares are redeemed within 12 months of purchase. Class B and Class C
Shares are each subject to annual 12b-1 Plan expenses of up to a maximum of 1%
(0.25% of which are service fees to be paid to the Distributor, dealers or
others for providing personal service and/or maintaining shareholder accounts)
of average daily net assets of the respective Class. Class B Shares will
automatically convert to Class A Shares at the end of approximately eight years
after purchase and, thereafter, be subject to annual 12b-1 Plan expenses of up
to a maximum of 0.25% 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.
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<PAGE>
<TABLE>
<CAPTION>
Class A Shares
- -------------------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as a % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.75% 3.93% 3.25%
$100,000 but under $250,000 3.00 3.05 2.50
$250,000 but under $500,000 2.50 2.55 2.00
$500,000 but under $1,000,000* 2.00 2.06 1.75
</TABLE>
* There is no front-end sales charge on purchases of $1 million or more
of Class A Shares but, under certain limited circumstances, a 1%
contingent deferred sales charge may apply upon redemption of such
shares.
** Based on an initial net asset value of the Class A Shares of the end of
Mutual Funds, Inc.'s most recent fiscal year.
*** Financial institutions or their affiliated brokers may receive an
agency transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify
for the reduced front-end sales charge on the basis of previous or
current purchases. The reduced front-end sales charge will be granted
upon confirmation of the shareholder's holdings by the Fund. Such
reduced front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
the front-end sales charges 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 commission of up to 0.15% of
the offering price in connection with sales of Class A Shares. Such dealers must
meet certain requirements in terms of organization and distribution capabilities
and their ability to increase sales. The Distributor should be contacted for
further information on these requirements as well as the basis and circumstances
upon which the additional commission will be paid. Participating dealers may be
deemed to have additional responsibilities under the securities laws.
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<PAGE>
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are effected in accordance with the following schedule:
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Prospectus) may be aggregated with those of Class A Shares of
the Fund. Financial advisers also may be eligible for a dealer's commission in
connection with certain purchases made under a Letter of Intention or pursuant
to an investor's Right of Accumulation. Financial advisers should contact the
Distributor concerning the applicability and calculation of the dealer's
commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below, and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time of
purchase of the shares being redeemed or the net asset value of those shares at
the time of redemption. No CDSC will be imposed on increases in net asset value
above the initial purchase price, nor will a CDSC be assessed on redemptions of
shares acquired through reinvestment of dividends or capital gains
distributions. See Waiver of Contingent Deferred Sales Charge - Class B and
Class C Shares under Redemption and Exchange in the Prospectus for a list of the
instances in which the CDSC is waived.
-30-
<PAGE>
The following table sets forth the rates of the CDSC for Class B Shares
of each Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ -------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. At the end of approximately eight years after purchase, the investor's
Class B Shares will be automatically converted into Class A Shares of the Fund.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus. Such conversion will constitute a tax-free exchange for federal
income tax purposes. See Taxes in the Prospectus.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Mutual Funds, Inc. has
adopted a separate plan for each of the Class A Shares, Class B Shares and Class
C Shares of the Fund (the "Plans"). Each Plan permits the Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the class of shares to which the Plan applies. Such shares are not
included in calculating the Plans' fees.
The Plans permit the Fund, pursuant to its Distribution Agreement, to
pay out of the assets of the Class A Shares, Class B Shares and Class C Shares
monthly fees to the Distributor for its services and expenses in distributing
and promoting sales of shares of such classes. These expenses include, among
other things, preparing and distributing advertisements, sales literature and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, and paying distribution and maintenance fees to securities
brokers and dealers who enter into agreements with the Distributor. The Plan
expenses relating to Class B and Class C Shares are also used to pay the
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, the Fund may make payments out of the assets of Class A,
Class B and Class C Shares directly to other unaffiliated parties, such as
banks, who either aid in the distribution of shares of, or provide services to,
such classes.
The maximum aggregate fee payable by the Fund under its Plans, and the
Fund's Distribution Agreement, is on an annual basis, up to 0.25% of the Class A
Shares' average daily net assets for the year, and up to 1% (0.25% of which are
service fees to be paid to the Distributor, dealers and others for providing
personal service and/or maintaining shareholder accounts) of each of the Class B
Shares' and the Class C Shares' average daily net assets for the year. Mutual
Funds, Inc.'s Board of Directors may reduce these amounts at any time.
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
-31-
<PAGE>
reimbursement from the 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 Agreement, as amended, have all been
approved by the Board of Directors of Mutual Funds, Inc., including a majority
of the directors who are not "interested persons" (as defined in the 1940 Act)
of Mutual Funds, Inc. and who have no direct or indirect financial interest in
the Plans, by vote cast in person at a meeting duly called for the purpose of
voting on the Plans and such Agreements. Continuation of the Plans and the
Distribution Agreements, as amended, must be approved annually by the Board of
Directors in the same manner as specified above.
Each year, the directors must determine whether continuation of the
Plans is in the best interest of shareholders of, respectively, Class A Shares,
Class B Shares and Class C Shares of the Fund 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 Agreement, as amended, may be terminated with
respect to a Class at any time without penalty by a majority of those directors
who are not "interested persons" or by a majority vote of the outstanding voting
securities of the Class. Any amendment materially increasing the percentage
payable under the Plans must likewise be approved by a majority vote of the
outstanding voting securities of the Class, as well as by a majority vote of
those directors who are not "interested persons." With respect to the Class A
Shares' Plan, any material increase in the maximum percentage payable thereunder
must also be approved by a majority of the outstanding voting securities Class B
Shares of the Fund. Also, any other material amendment to the Plans must be
approved by a majority vote of the directors including a majority of the
noninterested directors of Mutual Funds, Inc. having no interest in the Plans.
In addition, in order for the Plans to remain effective, the selection and
nomination of directors who are not "interested persons" of Mutual Funds, Inc.
must be effected by the directors who themselves are not "interested persons"
and who have no direct or indirect financial interest in the Plans. Persons
authorized to make payments under the Plans must provide written reports at
least quarterly to the Board of Directors for their review.
For the period June 4, 1996 (commencement of operations) through
December 31, 1996, the Fund paid $14,659 in Rule 12b-1 fees.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all
registered broker/dealers whose aggregate sales of Fund Classes exceed certain
limits as set by the Distributor, may receive from the Distributor an additional
payment of up to 0.25% of the dollar amount of such sales. The Distributor may
also provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares. The Distributor may also pay a portion of the
expense of preapproved dealer advertisements promoting the sale of Delaware
Group fund shares.
Special Purchase Features--Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased without a front-end sales charge under
the Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege.
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<PAGE>
Current and former officers, directors and employees of Mutual Funds,
Inc., any other fund in the Delaware Group, the Manager, the Manager's
affiliates, or any of the Manager's affiliates that may in the future be
created, legal counsel to the funds, and registered representatives and
employees of broker/dealers who have entered into Dealer's Agreements with the
Distributor may purchase Class A Shares of the Fund and any such class of shares
of any of the other funds in the Delaware Group, including any fund that may be
created, at the net asset value per share. Family members of such persons at
their direction, and any employee benefit plan established by any of the
foregoing funds, corporations, counsel or broker/dealers may also purchase Class
A Shares at net asset value. Class A Shares may also be purchased at net asset
value by current and former officers, directors and employees (and members of
their families) of the Dougherty Financial Group LLC.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers concerning sales of shares of Delaware Group
funds. Officers, directors and key employees of institutional clients of the
Manager or any of its affiliates may purchase Class A Shares at net asset value.
Moreover, purchases may be effected at net asset value for the benefit of the
clients of brokers, dealers and registered investment advisers affiliated with a
broker or dealer, if such broker, dealer or investment adviser has entered into
an agreement with the Distributor providing specifically for the purchase of
Class A Shares in connection with special investment products, such as wrap
accounts or similar fee based programs.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group at net asset value.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made
within a 13-month period pursuant to a written Letter of Intention provided by
the Distributor and signed by the purchaser, and not legally binding on the
signer or Mutual Funds, Inc., which provides for the holding in escrow by the
Transfer Agent of 5% of the total amount of Class A Shares intended to be
purchased until such purchase is completed within the 13-month period. A Letter
of Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as noted
below, the purchaser will be asked to pay an amount equal to the difference
between the front-end sales charge on Class A Shares purchased at the reduced
rate and the front-end sales charge otherwise applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the Transfer Agent will surrender an appropriate number
of the escrowed shares for redemption in order to realize the difference. Such
purchasers may include the value (at offering price at the level designated in
their Letter of Intention) of all their shares of the Fund 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.
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Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of Class A Shares, Class B Shares and/or Class C
Shares of the Fund, as well as shares of any other class of any of the other
Delaware Group funds (except shares of any Delaware Group fund which do not
carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge, CDSC
or Limited CDSC). In addition, assets held in any stable value product available
through the Delaware Group may be combined with other Delaware Group fund
holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). If, for example, any such purchaser has previously purchased and still
holds Class A Shares and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $60,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $60,000 purchase would currently be 3.00%. For the purpose of this
calculation, the shares presently held shall be valued at the public offering
price that would have been in effect were the shares purchased simultaneously
with the current purchase. Investors should refer to the table of sales charges
for Class A Shares to determine the applicability of the Right of Accumulation
to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of the Fund 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 the Fund or in Class A Shares of any of the other
funds in the Delaware Group, subject to applicable eligibility and minimum
purchase requirements, in states where shares of such other funds may be sold,
at net asset value without the payment of a front-end sales charge. This
privilege does not extend to Class A Shares where the redemption of the shares
triggered the payment of a Limited CDSC. Persons investing redemption proceeds
from direct investments in mutual funds in the Delaware Group offered without a
front-end sales charge will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
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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 CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus) in connection with the features
described above.
INVESTMENT PLANS
Reinvestment of Dividends in Other Delaware Group Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions in
any of the mutual funds in the Delaware Group, including the Fund, in states
where their shares may be sold. Such investments will be at net asset value at
the close of business on the reinvestment date without any front-end sales
charge or service fee. The shareholder must notify the Transfer Agent in writing
and must have established an account in the fund into which the dividends and/or
distributions are to be invested. Any reinvestment directed to a fund in which
the investor does not then have an account will be treated like all other
initial purchases of a fund's shares. Consequently, an investor should obtain
and read carefully the prospectus for the fund in which the investment is
intended to be made before investing or sending money. The prospectus contains
more complete information about the fund, including charges and expenses. See
also Additional Methods of Adding to Your Investment - Dividend Reinvestment
Plan under How to Buy Shares in the Prospectus.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the Fund,
provided an account has been established. Dividends from Class A Shares may not
be directed to Class B Shares or Class C Shares. Dividends from Class B Shares
may only be directed to other Class B Shares and dividends from Class C Shares
may only be directed to other Class C Shares. See Appendix B -- Classes Offered
in the Prospectus for the funds in the Delaware Group that are eligible for
investment by holders of Fund shares.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for the Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and Class
C Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date although no check is required to initiate the transaction. (2) If
the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
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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 the Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
the Fund may liquidate sufficient shares from a shareholder's account to
reimburse the government or the private source. In the event there are
insufficient shares in the shareholder's account, the shareholder is expected to
reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. The Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll allotments, by
mail directly from the third party. Investors should contact their employers or
financial institutions who in turn should contact Mutual Funds, Inc. for proper
instructions.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the
Classes through regular liquidations of shares in their accounts in other mutual
funds in the Delaware Group. Shareholders of the Classes may elect to invest in
one or more of the other mutual funds in the Delaware Group through the Wealth
Builder Option. See Wealth Builder Option and Redemption and Exchange in the
Prospectus.
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 Prospectus.
The investment will be made on the 20th day of each month (or, if the fund
selected is not open that day, the next business day) at the public offering
price or net asset value, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges. Shareholders can terminate their participation at any time by giving
written notice to their Fund.
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DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund, its agent or designee. Orders for purchases of
Class B Shares and Class C Shares are effected at the net asset value per share
next calculated by the Fund in which shares are being purchased after receipt of
the order by the Fund, its agent or designee. Selling dealers are responsible
for transmitting orders promptly.
The offering price for Class A Shares consists of the net asset value
per share plus any applicable front-end sales charges. Offering price and net
asset value are computed as of the close of regular trading on the New York
Stock Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is
open. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year except for New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas. When the New York Stock Exchange is closed, the
Fund will generally be closed, pricing calculations will not be made and
purchase and redemption orders will not be processed.
Net asset value data of the Fund as of December 31, 1996 was
calculated as follows:
Class A Net Assets ($6,067,647) = Net Asset Value Per Share ($10.18)
----------------------- Shares Outstanding (596,194)
Class B Net Assets ($2,737,647) = Net Asset Value Per Share ($10.19)
----------------------- Shares Outstanding (268,787)
Class C Net Assets ($900,257) = Net Asset Value Per Share ($10.18)
----------------------- Shares Outstanding (88,448)
The Fund's net asset value per share is computed by adding the value of
all the Fund's securities and other assets, deducting any liabilities of the
Fund, and dividing by the number of Fund shares outstanding. Expenses and fees
are accrued daily. Portfolio securities, except for bonds, which are primarily
traded on a national or foreign securities exchange are valued at the last sale
price on that exchange. Options are valued at the last reported sales price or,
if no sales are reported, at the mean between bid and asked prices. Securities
not traded on a particular day, over-the-counter securities and government and
agency securities are valued at the mean value between bid and asked prices.
Money market instruments having a maturity of less than 60 days are valued at
amortized cost. Debt securities (other than short-term obligations) are valued
on the basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Use of a pricing service
has been approved by the Board of Directors. Subject to the foregoing,
securities for which market quotations are not readily available and other
assets are valued at fair value as determined in good faith and in a method
approved by the Board of Directors.
Each Class of the Fund will bear, pro-rata, all of the common expenses
of the Fund. The net asset values of all outstanding shares of each Class of the
Fund will be computed on a pro-rata basis for each outstanding share based on
the proportionate participation in the Fund represented by the value of shares
of that Class. All income earned and expenses incurred by the Fund will be borne
on a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in the Fund represented by the value of shares of such Classes. Due
to the specific distribution expenses and other costs that may be allocable to
each Class, the dividends paid to each Class may vary. The net asset value per
share of each Class is expected to be equivalent.
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REDEMPTION AND REPURCHASE
Any shareholder may require the Fund to redeem shares by sending a
written request, signed by the record owner or owners exactly as the shares are
registered, to the Fund at 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. Certificates are issued for Class
A Shares only if a shareholder specifically requests them. Certificates are not
issued for Class B Shares or Class C Shares. If stock certificates have been
issued for shares being redeemed, they must accompany the written request. For
redemptions of $50,000 or less paid to the shareholder at the address of record,
the request must be signed by all owners of the shares or the investment dealer
of record, but a signature guarantee is not required. When the redemption is for
more than $50,000, or if payment is made to someone else or to another address,
signatures of all record owners are required and a signature guarantee may be
required. Each signature guarantee must be supplied by an eligible guarantor
institution. 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 Fund shares, the Distributor, acting as
agent of the Fund, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the Fund or its agent,
subject to any applicable CDSC or Limited CDSC. This is computed and effective
at the time the offering price and net asset value are determined. See
Determining Offering Price and Net Asset Value. The Fund and the Distributor end
their business days at 5 p.m., Eastern time. This offer is discretionary and may
be completely withdrawn without further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to the applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then settled
as an ordinary transaction with the broker/dealer (who may make a charge to the
shareholder for this service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus. Class B Shares are subject to a CDSC
of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; and (iv) 1% if
shares are redeemed during the sixth year following purchase. Class C Shares are
subject to a CDSC of 1% if shares are redeemed within 12 months following
purchase. See Contingent Deferred Sales Charge - Class B Shares and Class C
Shares under Classes of Shares in the Prospectus. Except for the applicable CDSC
or Limited CDSC and, with respect to the expedited payment by wire described
below for which, in the case of the Classes, there is currently a $7.50 bank
wiring cost, neither the Fund nor the Fund's Distributor charges a fee for
redemptions or repurchases, but such fees could be charged at any time in the
future.
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order; provided, however, that each commitment to mail or wire
redemption proceeds by a certain time, as described below, is modified by the
qualifications described in the next paragraph.
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The Fund will process written or telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor redemption requests as to shares for which a check
was tendered as payment, but the Fund will not mail or wire the proceeds until
it is reasonably satisfied that the check has cleared. 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 shares
purchased by the check plus any dividends earned thereon. Shareholders may be
responsible for any losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practical, or it is not reasonably practical for the Fund fairly to value its
assets, or in the event that the SEC has provided for such suspension for the
protection of shareholders, the Fund may postpone payment or suspend the right
of redemption or repurchase. In such case, the shareholder may withdraw the
request for redemption or leave it standing as a request for redemption at the
net asset value next determined after the suspension has been terminated.
Payment for shares redeemed or repurchased may be made either in cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid or
distributed in kind would be valued as described in Determining Offering Price
and Net Asset Value. Subsequent sale by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, Mutual
Funds, Inc. has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
The value of the Fund's investments is subject to changing market
prices. Thus, a shareholder reselling shares to the Fund 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 noted in the Prospectus, has remained below the minimum
amounts required by the Prospectus 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 How to Buy Shares in the Prospectus.
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 made 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 of the Fund Classes or their investment dealers of record
wishing to redeem any amount of shares of $50,000 or less for which certificates
have not been issued may call the Shareholder Service Center at 800-523-1918
prior to the time the offering price and net asset value are determined, as
noted above, and have the proceeds mailed to them at the address of record.
Checks payable to the shareholder(s) of record will normally be
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mailed the next business day, but no later than seven days, after the receipt of
the redemption request. This option is only available to individual, joint and
individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the 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, from the date of the
telephone request. This procedure will take longer than the Payment by Wire
option (1 above) because of the extra time necessary for the mailing and
clearing of the check after the bank receives it.
Redemption Requirements: In order to change the name of the bank and
the account number it will be necessary to send a written request to the Fund
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.
If expedited payment under these procedures could adversely affect the
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Fund nor the Fund's Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, the Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders of the Fund Classes are generally tape recorded. A written
confirmation will be provided for all purchase, exchange and redemption
transactions initiated by telephone.
Systematic Withdrawal Plans
Shareholders 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.
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Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the Class at net asset value. This plan is not recommended
for all investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital and the share balance
may, in time, be depleted, particularly in a declining market.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is investing in Delaware Group
funds which do not carry a sales charge. Redemptions of Class A Shares pursuant
to a Systematic Withdrawal Plan may be subject to a Limited CDSC if the purchase
was made at net asset value and a dealer's commission has been paid on that
purchase. Redemptions of Class B Shares or Class C Shares pursuant to a
Systematic Withdrawal Plan may be subject to a CDSC, unless the annual amount
selected to be withdrawn is less than 12% of the account balance on the date
that the Systematic Withdrawal Plan was established. See Waiver of Contingent
Deferred Sales Charge - Class B and Class C Shares and Waiver of Limited
Contingent Deferred Sales Charge - Class A Shares under Redemption and Exchange
in the Prospectus. Shareholders should consult their financial advisers to
determine whether a Systematic Withdrawal Plan would be suitable for them.
An investor wishing to start a Systematic Withdrawal Plan must
complete an authorization form. If the recipient of Systematic Withdrawal Plan
payments is other than the registered shareholder, the shareholder's signature
on this authorization must be guaranteed. Each signature guarantee must be
supplied by an eligible guarantor institution. The 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.
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DISTRIBUTIONS AND TAXES
The Fund declares a dividend to shareholders of each Class from net
investment income on a daily basis. Dividends are declared each day the Fund is
open and paid monthly. 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
shares of the Fund by wire begin earning dividends when converted into Federal
Funds and are available for investment, normally the next business day after
receipt. However, if the respective Fund is given prior notice of Federal Funds
wire and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Investors desiring to guarantee wire payments
must have an acceptable financial condition and credit history in the sole
discretion of the Fund. Mutual Funds, Inc. reserves the right to terminate this
option at any time. Purchases by check earn dividends upon conversion to Federal
Funds, normally one business day after receipt.
Each Class of shares of the Fund will share proportionately in the
investment income and expenses of the Fund, except that Class A Shares, Class B
Shares and Class C Shares alone will incur distribution fees under their
respective 12b-1 Plans.
Dividends are automatically reinvested in additional shares of the
same Class of the respective Fund at net asset value, unless an election to
receive dividends in cash has been made. Payment by check of cash dividends will
ordinarily be mailed within three business days after the payable date. Dividend
payments of $1.00 or less will be automatically reinvested, notwithstanding a
shareholder's election to receive dividends in cash. If such a shareholder's
dividends increase to greater than $1.00, the shareholder would have to file a
new election in order to begin receiving dividends in cash again. If a
shareholder redeems an entire account, all dividends accrued to the time of the
withdrawal will be paid by separate check at the end of that particular monthly
dividend period, consistent with the payment and mailing schedule described
above. Any check in payment of dividends or other distributions which cannot be
delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. The Fund may deduct from a shareholder's account the costs of
the Fund's effort to locate a shareholder if a shareholder's mail is returned by
the United States Post Office or the Fund is otherwise unable to locate the
shareholder or verify the shareholder's mailing address. These costs may include
a percentage of the account when a search company charges a percentage fee in
exchange for their location services.
Any distributions from net realized securities profits will be made
twice a year. Payment would be made during the first quarter of the next fiscal
year. Such distributions will be reinvested in shares, unless the shareholders
elect to receive them in cash. The Fund will mail a quarterly statement showing
the dividends paid and all the transactions made during the period.
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INVESTMENT MANAGEMENT AGREEMENT
Delaware Management Company, Inc.("Manager"), located at One Commerce
Square, Philadelphia, PA 19103, furnishes investment management services to the
Fund, subject to the supervision and direction of Mutual Funds, Inc.'s Board of
Directors.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had
been retained under an investment advisory contract to act as the Fund's
investment adviser, subject to the authority of the Board of Directors. Voyageur
was an indirect, wholly-owned subsidiary of Dougherty Financial Group, Inc.
("DFG"). After the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") as a result of Lincoln National's acquisition of DFG.
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, Minnesota High Yield Municipal Bond Fund's previous
investment advisory agreement with Voyageur was "assigned", as that term is
defined by the Investment Company Act of 1940, and the previous agreements
therefore terminated upon the completion of the acquisition. The Board of
Directors of Mutual Funds, Inc. unanimously approved new advisory agreements at
a meeting held in person on February 14, 1997, and called for a shareholders
meeting to approve the new agreements. At a meeting held on April 11, 1997, the
shareholders of Minnesota High Yield Municipal Bond Fund approved its Investment
Management Agreement with Voyageur, an indirect wholly-owned subsidiary of LNC,
to become effective after the close of business on April 30, 1997, the date the
acquisition was completed. On May 30, 1997, Voyageur was merged into the Manager
and the Manager became the investment manager for the Fund.
The Investment Management Agreement into which the Fund's Manager has
entered has an initial term of two years and may be renewed each year only so
long as such renewal and continuance are specifically approved at least annually
by the Board of Directors or by vote of a majority of the outstanding voting
securities of the Fund, and only if the terms and the renewal thereof have been
approved by the vote of a majority of the directors of Mutual Funds, Inc. who
are not parties thereto or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The Agreement is
terminable without penalty on 60 days' notice by the directors of Mutual Funds,
Inc. or by the Manager. The Agreement will terminate automatically in the event
of its assignment.
Under its Investment Management Agreement, the Fund pays the Manager
an annual fee equal to 0.65% of its average daily net assets.
Beginning June 9, 1997, the Manager has elected voluntarily to waive
that portion, if any, of the annual management fees payable by the Fund and to
pay certain expenses of the Fund to the extent necessary to ensure that the
Total Operating Expenses of Class A Shares, Class B Shares and Class C Shares of
the Fund (exclusive of taxes, interest, brokerage commissions, extraordinary
expenses but including 12b-1 fees) do not exceed, on an annual basis, 0.30%,
1.05% and 1.05%, respectively, through December 31, 1997.
The Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement. In connection with the
merger transaction described above, the Manager has agreed for a period of two
years ending on April 30, 1999, to pay the operating expenses (excluding
interest expense, taxes, brokerage fees, commissions and Rule 12b-1 fees) of the
Fund which exceed 1% of the Fund's average daily net assets on an annual basis
up to certain
-43-
<PAGE>
limits as set forth in this Part B. This agreement replaces a similar provision
in the Fund's investment advisory contracts with the Fund's predecessor
investment adviser.
For the period June 4, 1996 (commencement of operations) through
December 31, 1996, the Fund paid $17,203 in advisory fees.
Under the general supervision of the Board of Directors, the Manager
makes and executes all investment decisions for the Fund. The Manager pays the
salaries of all directors, officers and employees of Mutual Funds, Inc.
who are affiliated with the Manager. The Fund pays all of its other expenses.
The ratios of expenses to average daily net assets for the Class A
Shares, Class B Shares and Class C Shares of the Fund for the period ended
December 31, 1996 were as follows:
Period ended
12/31/96
Class A Shares (1) 0.24%*
Class B Shares (2) 0.95%*
Class C Shares (3) 0.99%*
*Annualized
(1) Period from June 4, 1996 (commencement of operations) to December 31, 1996.
(2) Period from June 12, 1996 (commencement of operations) to December 31, 1996.
(3) Period from June 7, 1996 (commencement of operations) to December 31, 1996.
The expense ratios reflect the expense limitations in effect during the
period.
Distribution and Service
The Distributor, Delaware Distributors, L.P., located at 1818 Market
Street, Philadelphia, PA 19103, serves as the national distributor of the Fund's
shares under a Distribution Agreement dated March 1, 1997. The Distributor is
an affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by the Fund on behalf of Class A, Class B and
Class C Shares under their respective 12b-1 Plans. The Distributor is an
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 Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to an Amended and Restated Shareholders Services Agreement dated as of
April 30, 1997. The Transfer Agent also provides accounting services to the Fund
pursuant to the terms of a separate Fund Accounting Agreement. The Transfer
Agent is also an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc.
-44-
<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of Mutual Funds, Inc. are managed under the
direction of its Board of Directors.
Certain officers and directors of Mutual Funds, Inc. hold identical
positions in each of the other funds in the Delaware Group. On July 31, 1997,
Mutual Funds, Inc.'s officers and directors owned less than 1% of the
outstanding shares of each Class of the Fund.
As of July 31, 1997, management believes the following shareholders
held 5% or more of the outstanding shares of a Class:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
Minnesota High Yield Kaye L. Marvin & Charles C. Marvin 87,512 6.34%
Municipal Bond Fund TTEE Charles C. Marvin Trust
Class A Shares: P.O. Box 625
Warroad MN 56763-0625
Minnesota High Yield MLPF&S for the sole benefit of 73,862 12.14%
Municipal Bond Fund its customers
Class B Shares: Attn: Fund Administration
4800 Deer Lake Drive East, 3rd floor
Jacksonville FL 32246-6484
Minnesota High Yield Bonnie D. Kersting & Steven M Kersting 32,181 13.95%
Municipal Bond Fund TTEE Bonnie D. Kersting Trust
Class C Shares: 17751 Layton Path
Lakeville MN 55044-5217
MLPF&S for the sole benefit of 27,839 12.06%
its customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd floor
Jacksonville FL 32246-6484
</TABLE>
-45-
<PAGE>
DMH Corp., Delaware Voyageur Holdings, Inc., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Management Trust Company, Delaware
International Holdings Ltd., Founders Holdings, Inc., Delaware International
Advisers Ltd., Delaware Capital Management, Inc. and Delaware Investment &
Retirement Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") was completed. DMH and the Manager are indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National. Lincoln
National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services industry,
including insurance and investment management.
As noted under Investment Management Agreement, after the close of
business on April 30, 1997, Voyageur became an indirect wholly-owned subsidiary
of Lincoln National as a result of Lincoln National's acquisition of DGF.
Directors and principal officers of Mutual Funds, Inc. are noted below
along with their ages and their business experience for the past five years.
Unless otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
-46-
<PAGE>
*Wayne A. Stork (60)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of Mutual Funds, Inc., 32 other investment companies in the
Delaware Group, Delaware Management Holdings, Inc., DMH Corp.,
Delaware International Holdings Ltd. and Founders Holdings,
Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware organization.
Richard G. Unruh, Jr. (57)
Executive Vice President of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group, Delaware Management
Holdings, Inc. and Delaware Capital Management, Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware organization.
Paul E. Suckow (50)
Executive Vice President/Chief Investment Officer, Fixed Income of
Mutual Funds, Inc., each of the other 32 investment companies
in the Delaware Group, Delaware Management Company, Inc. and
Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
-47-
<PAGE>
Walter P. Babich (69)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (58)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance
and Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group, Inc.,
New York, from 1988 to 1990. Mr. Knerr founded The Publishing
Group, Inc. in 1988.
Ann R. Leven (56)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business School.
W. Thacher Longstreth (76)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Thomas F. Madison (61)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994, Mr.
Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
-48-
<PAGE>
* Jeffrey J. Nick (44)
Director and/or Trustee of Mutual Funds, Inc. and 32 other investment
companies in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was
Managing Director of Lincoln National UK plc and from 1989 to
1992, he was Senior Vice President responsible for corporate
planning and development for Lincoln National Corporation.
Charles E. Peck (71)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of
The Ryland Group, Inc., Columbia, MD.
David K. Downes (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of Mutual Funds, Inc., each of the other 32 investment
companies in the Delaware Group, Delaware Management Holdings,
Inc. Founders CBO Corporation, Delaware Capital Management,
Inc., and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH
Corp., Delaware Distributors, Inc. and Founders Holdings, Inc.,
Delaware International Holdings Ltd.
Chairman, Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc.
President/Chief Executive Officer/Chief Financial Officer and Director
of Delaware Service Company, 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.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
-49-
<PAGE>
George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of Mutual Funds,
Inc. and each of the other 32 investment companies in the
Delaware Group, Delaware Management Holdings, Inc. and Delaware
Distributors, L.P.
Executive Vice President, Secretary General Counsel and Director of
Delaware Management Trust Company.
Senior Vice President, Secretary General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services, Inc
and Delaware Capital Management, Inc.
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.
Joseph H. Hastings (47)
Senior Vice President/Corporate Controller of Mutual Funds, Inc. and
each of the other 32 investment companies in the Delaware
Group and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc. and Delaware International Holdings
Ltd.
Chief Financial Officer/Treasurer of Delaware Investment & Retirement
Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/ Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
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 (35)
Senior Vice President/Treasurer of Mutual Funds, Inc. and each of the
other 32 investment companies in the Delaware Group, Delaware
Distributors, Inc. and Founders Holdings, Inc.
Senior Vice President/Investment Accounting, Delaware Management
Company, Inc., and Delaware Service Company, Inc.
Senior Vice President/Manager of Investment Accounting of Delaware
International Holdings Ltd.
Senior Vice President and Treasurer/Manager of Investment Accounting
of Delaware Distributors, L.P.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995, a
Vice President for CS First Boston Investment Management, New
York, NY from 1993 to 1994 and an Assistant Vice President for
Equitable Capital Management Corporation, New York, NY from
1987 to 1993.
Elizabeth Howell (35)
Vice President/Senior Portfolio Manager of Mutual Funds, Inc. and
four other investment companies in the Delaware Group and
Delaware Management Company, Inc.
Before joining the Delaware Group in 1997, Ms. Howell was a senior
portfolio manager with Voyageur Fund Managers, Inc.
-50-
<PAGE>
The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation expected to be
received from Mutual Funds, Inc. during the actual fiscal year, the total
compensation received from all Delaware Group investment companies for the
fiscal year ended December 31, 1996, and an estimate of annual benefits to be
received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of December 31, 1996.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued Annual from all 18
Compensation as Part of Benefits Delaware
from Mutual Mutual Funds, Upon Group Investment
Name Funds, Inc.(1) Inc. Expenses Retirement* Companies
<S> <C> <C> <C> <C>
W. Thacher Longstreth $826 None $30,000 $46,187
Ann R. Leven $872 None $30,000 $54,323
Walter P. Babich $863 None $30,000 $53,323
Anthony D. Knerr $863 None $30,000 $53,323
Charles E. Peck $826 None $30,000 $49,323
Thomas F. Madison(2) $826 None $30,000 N/A
</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 December 31, 1996, he or she would be
entitled to annual payments totaling $30,000, in the aggregate, from all of
the funds in the Delaware Group, based on the number of funds in the
Delaware Group as of that date.
(1) The current Board of Directors was elected by shareholders of Mutual Funds,
Inc. on April 11, 1997 and began serving on May 1, 1997. With the exception
of Thomas F. Madison, none of the current directors had served on the prior
Board. Compensation figures are estimates of payments for Mutual Funds,
Inc.'s current fiscal year.
(2) Thomas F. Madison also received $1,462 for his service on the previous
Board of Directors during the last fiscal year.
-51-
<PAGE>
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 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
Shareholder Service Center at 800-523-1918 to effect an exchange. The
shareholder's current Fund account number must be identified, as well as the
registration of the account, the share or dollar amount to be exchanged and the
fund into which the exchange is to be made. Requests received on any day after
the time the offering price and net asset value are determined will be processed
the following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent or, as relevant, your Client Services
Representative.) Certain funds are not available for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Group. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and the Fund reserve the right to
record exchange instructions received by telephone and to reject exchange
requests at any time in the future.
-52-
<PAGE>
As described in the Fund's Prospectus, 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 Fund shares
which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), 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 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 stocks issued
by emerging growth companies exhibiting strong capital appreciation potential.
-53-
<PAGE>
Small Cap Value Fund seeks capital appreciation by investing primarily
in common stocks whose market values appear low relative to their underlying
value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return Fund
seeks long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to principal.
Blue Chip Fund seeks to achieve long-term capital appreciation. Current income
is a secondary objective. It seeks to achieve these objectives by investing
primarily in equity securities and any securities that are convertible into
equity securities. Quantum Fund seeks to achieve long-term capital appreciation.
It seeks to achieve this objective by investing primarily in equity securities
of medium- to large- sized companies expected to grow over time that meet the
Fund's "Social Criteria" strategy.
Delchester Fund seeks as high a current income as possible by investing
principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Strategic Income Fund seeks to
provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities.
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 USA Fund seeks high current income exempt from federal income
tax by investing in municipal bonds of geographically-diverse issuers. Tax-Free
Insured Fund invests in these same types of securities but with an emphasis on
municipal bonds protected by insurance guaranteeing principal and interest are
paid when due. Tax-Free USA Intermediate Fund seeks a high level of current
interest income exempt from federal income tax, consistent with the preservation
of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while maintaining
a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital.
-54-
<PAGE>
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation. Global Assets Fund seeks to achieve
long-term total return by investing in global securities which will provide
higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers located or operating in emerging countries.
Enterprise Fund seeks to provide maximum appreciation of capital by
investing in medium-sized companies which have a dominant position within their
industry, are undervalued, or have potential for growth in earnings. U.S. Growth
Fund seeks to maximize capital appreciation by investing in companies of all
sizes which have low dividend yields, strong balance sheets and high expected
earnings growth rates relative to their industry. World Growth Fund seeks to
maximize total return (capital appreciation and income), principally through
investments in an internationally diversified portfolio of equity securities.
New Pacific Fund seeks long-term capital appreciation by investing primarily in
companies which are domiciled in or have their principal business activities in
the Pacific Basin. Federal Bond Fund seeks to maximize current income consistent
with preservation of capital. The fund attempts to achieve this objective by
investing primarily in securities issued by the U.S. government, its agencies
and instrumentalities. Corporate Income Fund seeks to provide high current
income consistent with preservation of capital. The fund attempts to achieve
this objective primarily by investing in a diversified portfolio of investment
grade fixed-income securities issued by U.S. corporations.
Delaware Group Premium Fund, Inc. offers 15 funds available exclusively
as funding vehicles for certain insurance company separate accounts. Decatur
Total Return Series seeks the highest possible total rate of return by selecting
issues that exhibit the potential for capital appreciation while providing
higher than average dividend income. Delchester Series seeks as high a current
income as possible by investing in rated and unrated corporate bonds, U.S.
government securities and commercial paper. Capital Reserves Series seeks a high
stable level of current income while minimizing fluctuations in principal by
investing in a diversified portfolio of short- and intermediate-term securities.
Cash Reserve Series seeks the highest level of income consistent with
preservation of capital and liquidity through investments in short-term money
market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware Series seeks a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. International
Equity Series seeks long-term growth without undue risk to principal by
investing primarily in equity securities of foreign issuers that provide the
potential for capital appreciation and income. Value Series seeks capital
appreciation by investing in small- to mid-cap common stocks whose market values
appear low relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that may be
temporarily out of favor or whose value is not yet recognized by the market.
Trend Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over
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time. Emerging Markets Series seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. Convertible Securities Series seeks a high level of total
return on its assets through a combination of capital appreciation and current
income by investing primarily in convertible securities. Quantum Series seeks to
achieve long-term capital appreciation by investing primarily in equity
securities of medium to large-sized companies expected to grow over time that
meet the Series' "Social Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a high
level of current income consistent with the prudent investment risk by investing
in U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Tax-Free Arizona Insured Fund seeks to provide a high
level of current income exempt from federal income tax and the Arizona personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Minnesota Insured Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax, consistent with
the preservation of capital.
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund seeks to provide
a high level of current income exempt from federal income tax and the Minnesota
personal income tax, consistent with preservation of capital. The Fund seeks to
reduce market risk by maintaining an average weighted maturity from five to ten
years.
Delaware-Voyageur Tax-Free California Insured Fund seeks to provide a
high level of current income exempt from federal income tax and the California
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Florida Insured Fund seeks to provide a high level of
current income exempt from federal income tax, consistent with the preservation
of capital. The Fund will seek to select investments that will enable its shares
to be exempt from the Florida intangible personal property tax.
Delaware-Voyageur Tax-Free Florida Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. The Fund will seek to select investments that will enable its shares to
be exempt from the Florida intangible personal property tax. Delaware-Voyageur
Tax-Free Kansas Fund seeks to provide a high level of current income exempt from
federal income tax, the Kansas personal income tax and the Kansas Intangible
personal property tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Missouri Insured Fund seeks to provide a high level
of current income exempt from federal income tax and the Missouri personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free New Mexico Fund seeks to provide a high level of current income exempt
from federal income tax and the New Mexico personal income tax, consistent with
the preservation of capital. Delaware-Voyageur Tax-Free Oregon Insured Fund
seeks to provide a high level of current income exempt from federal income tax
and the Oregon personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Utah Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Washington Insured Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital.
Delaware-Voyageur Tax-Free Florida Intermediate Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital. The Fund will seek to select investments that will
enable its shares to be exempt from the Florida intangible personal property
tax. The Fund seeks to reduce market risk by maintaining an average weighted
maturity from five to ten years.
Delaware-Voyageur Tax-Free Arizona Fund seeks to provide a high level
of current income exempt from federal income tax and the Arizona personal income
tax, consistent with the preservation of capital.
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Delaware-Voyageur Tax-Free California Fund seeks to provide a high level of
current income exempt from federal income tax and the California personal income
tax, consistent with the preservation of capital. Delaware-Voyageur Tax-Free
Iowa Fund seeks to provide a high level of current income exempt from federal
income tax and the Iowa personal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Idaho Fund seeks to provide a high level of
current income exempt from federal income tax and the Idaho personal income tax,
consistent with the preservation of capital. National High Yield Municipal Fund
seeks to provide a high level of income exempt from federal income tax,
primarily through investment in medium and lower grade municipal obligations.
Delaware- Voyageur Tax-Free New York Fund seeks to provide a high level of
current income exempt from federal income tax and the personal income tax of the
state of New York and the city of New York, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Wisconsin Fund seeks to provide a high level
of current income exempt from federal income tax and the Wisconsin personal
income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Colorado Fund seeks to provide a high level
of current income exempt from federal income tax and the Colorado personal
income tax, consistent with the preservation of capital.
Aggressive Growth Fund seeks long-term capital appreciation, which the
Fund attempts to achieve by investing primarily in equity securities believed to
have the potential for high earnings growth. Although the Fund, in seeking its
objective, may receive current income from dividends and interest, income is
only an incidental consideration in the selection of the Fund's investments.
Growth Stock Fund has an objective of long-term capital appreciation. The Fund
seeks to achieve its objective from equity securities diversified among
individual companies and industries. Tax-Efficient Equity Fund seeks to obtain
for taxable investors a high total return on an after-tax basis. The Fund will
attempt to achieve this objective by seeking to provide a high long-term
after-tax total return through managing its portfolio in a manner that will
defer the realization of accrued capital gains and minimize dividend income.
Delaware-Voyageur Tax-Free Minnesota Fund seeks to provide a high level
of current income exempt from federal income tax and the Minnesota personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free North Dakota Fund seeks to provide a high level of current income
exempt from federal income tax and the North Dakota personal income tax,
consistent with the preservation of capital.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
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GENERAL INFORMATION
The Manager is the investment manager of the Fund. The Manager also
provides investment management services to certain of the other funds in the
Delaware Group. The Manager, through a separate division, also manages private
investment accounts. While investment decisions of the Fund are made
independently from those of the other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for the Fund.
The Manager, or its affiliate Delaware International Advisers Ltd.,
also manages the investment options for Delaware Medallion (sm) III Variable
Annuity. Medallion is issued by Allmerica Financial Life Insurance and Annuity
Company (First Allmerica Financial Life Insurance Company in New York and
Hawaii). Delaware Medallion offers fifteen different investment series ranging
from domestic equity funds, international equity and bond funds and domestic
fixed income funds. Each investment series available through Medallion utilizes
an investment strategy and discipline the same as or similar to one of the
Delaware Group mutual funds as available outside the annuity. See Discipline
Group Premium Fund, Inc., above.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, 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. Prior to May 31, 1997, Voyageur Fund
Distributors, Inc. served as the national distributor for the Fund.
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The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for each Fund and for the
other mutual funds in the Delaware Group. The Transfer Agent is paid a fee by
the Fund 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 unaffiliated directors. The Transfer
Agent also provides accounting services to the Fund. Those services include
performing all functions related to calculating the Fund's net asset value and
providing all financial reporting services, regulatory compliance testing and
other related accounting services. For its services, the Transfer Agent is paid
a fee based on total assets of all funds in the Delaware Group for which it
provides such accounting services. Such fee is equal to 0.25% multiplied by the
total amount of assets in the complex for which the Transfer Agent furnishes
accounting services, where such aggregate complex assets are $10 billion or
less, and 0.20% of assets if such aggregate complex assets exceed $10 billion.
The fees are charged to each fund, including the Fund, on an aggregate pro-rata
basis. The asset-based fee payable to the Transfer Agent is subject to a minimum
fee calculated by determining the total number of investment portfolios and
associated classes.
Norwest Bank Minnesota, N.A. ("Norwest"), Sixth Street & Marquette
Avenue, Minneapolis, Minnesota 55402 is custodian of the Fund's securities and
cash. As custodian for the Fund, Norwest maintains a separate account or
accounts for the Fund; receives, holds and releases portfolio securities on
account of the Fund; receives and disburses money on behalf of the Fund; and
collects and receives income and other payments and distributions on account of
the Fund's portfolio securities.
Capitalization
Mutual Funds, Inc. has a present authorized capitalization of 10
trillion shares of capital stock with a $.01 par value per share.
The Board of Directors has allocated the following number of shares to
the Fund and its respective classes:
Minnesota High Yield Municipal Bond Fund 100 billion
Class A Shares 10 billion
Class B Shares 10 billion
Class C Shares 10 billion
All shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable and, except as described above, have
equal voting rights.
Shares of each Class of the Fund represent a proportionate interest in
the assets of the Fund, and have the same voting and other rights and
preferences as the other classes of the Fund. Shareholders of Class A Shares,
Class B Shares and Class C Shares of a Fund may vote only on matters affecting
the 12b-1 Plan that relates to the Class of shares that they hold. However,
Class B Shares may vote on any proposal to increase materially the fees to be
paid by the Fund under the 12b-1 Plan relating to its Class A Shares. General
expenses of the Fund will be allocated on a pro-rata basis to the classes
according to asset size, except that expenses of the 12b-1 Plans of the Fund's
Class A, Class B and Class C Shares will be allocated solely to those classes.
Beginning June 9, 1997, the name of Voyageur Minnesota High Yield
Municipal Bond Fund changed to Delaware-Voyageur Minnesota High Yield Municipal
Bond Fund.
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Noncumulative Voting
Mutual Funds, Inc.'s shares have noncumulative voting rights which
means that the holders of more than 50% of the shares of Mutual Funds, Inc.
voting for the election of directors can elect all the directors if they choose
to do so, and, in such event, the holders of the remaining shares will not be
able to elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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APPENDIX A -- RATINGS
Earnings and Dividend Rankings for Common Stocks
Standard & Poor's Corporation. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, Standard & Poor's
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. The rankings,
however, do not pretend to reflect all of the factors, tangible or intangible,
that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of
protection for principal and interest, called creditworthiness, cannot be
applied to common stocks, and therefore rankings are not to be confused with
bond quality ratings which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
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A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
Commercial Paper Ratings
Standard & Poor's Corporation. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
Moody's Investors Service, Inc. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term
promissory obligations.
Prime-2 Strong capacity for repayment of short-term
promissory obligations.
Prime-3 Acceptable capacity for repayment of short-term
promissory obligations.
Corporate Bond Ratings
Standard & Poor's Corporation. Its ratings for corporate bonds have
the following definitions:
Investment grade:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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Speculative Grade:
Debt rated "BB," "B," "CCC" and "CC" and "C" is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. Its ratings for corporate bonds
include the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Bonds which are rated "Ba" are 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.
Bonds which are rated "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.
Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
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Bonds which are rated "C" are 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.
Preferred Stock Rating
Standard& Poor's Corporation. Its ratings for preferred stock have the
following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rate "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Moody's Investors Service, Inc. Its ratings for preferred stock
include the following:
An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
An issue which is rate "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
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An issue which is rated "baa" is considered to be medium-grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "c" is the lowest rated class of preferred or
preference stock. Issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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APPENDIX B
General Characteristics and Risks of Options and Futures
General. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," the Fund may purchase and sell options on
the securities in which it may invest and the Fund may purchase and sell options
on futures contracts (as defined below) and may purchase and sell futures
contracts. The Fund intend to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Fund's investment
objectives, to seek to hedge against the effects of market conditions and to
seek to stabilize the value of its assets. The Fund will engage in hedging and
risk management transactions from time to time in Voyageur's discretion, and may
not necessarily be engaging in such transactions when movements in interest
rates that could affect the value of the assets of the Fund occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Fund will employ any of the
techniques or strategies described below. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the 'CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Fund does not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and
attendant risks, are discussed below.
Futures Contracts and Related Options. The Fund may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which the Fund may invest. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities, or
the cash value of an index, called for by the contract at a specified price
during a specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. The Fund
may also purchase and sell (write) call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during, or at the termination of, the
period specified in the terms of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. The
Fund would be required to deposit with its custodian initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. The Fund's
ability to establish and close out positions in futures contracts and options on
futures contracts will be subject to the liquidity of the market. Although the
Fund generally will purchase or sell only those futures contracts and options
thereon for which there appears to be a liquid market, there is no assurance
that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. Where it is not possible to
effect a closing transaction in a contract or to do so at a satisfactory price,
the Fund would have to make or take delivery under the futures contract, or, in
the case of a purchased option, exercise the option. The Fund would be required
to maintain initial margin deposits with respect to the futures contract and to
make variation margin payments until the contract is closed. The Fund will incur
brokerage fees when they purchase or sell futures contracts.
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At the time a futures contract is purchased or sold, the Fund must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts the Fund may purchase or sell may range from approximately
1 1/2% to approximately 5% of the value of the securities (or the securities
index) underlying the contract. In certain circumstances, however, such as
during periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Initial margin requirements
may be increased generally in the future by regulatory action. An outstanding
futures contract is valued daily in a process known as "marking to market." If
the market value of the futures contract has changed, the Fund will be required
to make or will be entitled to receive a payment in cash or specified high
quality debt securities in an amount equal to any decline or increase in the
value of the futures contract. These additional deposits or credits are
calculated and required on a daily basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of
the futures contract the Fund purchases or sells and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts purchased or sold by the Fund in a hedging
transaction, even if Voyageur correctly forecasts market trends the Fund's
hedging strategy may not be successful. If this should occur, the Fund could
lose money on the futures contracts and also on the value of its portfolio
securities.
Although the Fund believes that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Fund's
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Fund seeks
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Fund may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
Options on Securities. The Fund may purchase and sell (write) options
on securities, which options may be either exchange-listed or over-the-counter
options. The Fund may write call options only if the call option is "covered." A
call option written by the Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Fund may write put
options only if the put option is "secured." A put option written by the Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
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<PAGE>
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
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<PAGE>
The Fund may purchase and sell options that are exchange-traded or
that are traded over-the counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when the Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although the Fund will enter into OTC options only with dealers that
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Fund's ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Fund may be unable to liquidate an OTC
option. In the case of options written by the Fund, the inability to enter into
a closing purchase transaction may result in material losses to the Fund.
Regulatory Restrictions. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the Fund
will maintain, in a segregated account, cash or liquid high-grade securities
equal to the value of such contracts. Compliance with such segregation
requirements may restrict the Fund's ability to invest in intermediate- and
long-term Tax Exempt Obligations.
The Fund intend to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that futures and options
positions be used (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Fund currently does not
intend to engage in transactions in futures contracts or options thereon for
speculation.
Accounting Considerations. When the Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When the Fund purchases an option, the premium paid by the Fund is recorded as
an asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the
Fund, an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset subsequently is adjusted to reflected changes in the amount
of the deposit as well as changes in the value of the contract.
-69-
<PAGE>
FINANCIAL STATEMENTS
KPMG Peat Marwick LLP served as the independent auditors for Voyageur
Mutual Funds, Inc. through December 31, 1996 and, in its capacity as such,
audited the annual financial statements of the Fund. Beginning May 1, 1997,
Ernst & Young LLP began serving in such capacity. The Fund's Statements of Net
Assets, Statements of Operations, Statements of Changes in Net Assets, and Notes
to Financial Statements, as well as the report of KPMG Peat Marwick LLP,
independent auditors, for the fiscal year ended December 31, 1996 are included
in Voyageur Mutual Funds, Inc.'s Annual Report to shareholders. The financial
statements, the notes relating thereto and the report of KPMG Peat Marwick LLP,
listed above are incorporated by reference from the Annual Report into this
Part B.
-70-
<PAGE>
The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific 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, shareholders of the
Fund Classes should contact their financial adviser or call Delaware Group at
800-523- 4640.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIAN
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55402
- --------------------------------------------------------------------------------
DELAWARE-VOYAGEUR MINNESOTA HIGH
YIELD MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
A CLASS
- --------------------------------------------------------------------------------
B CLASS
- --------------------------------------------------------------------------------
C CLASS
- --------------------------------------------------------------------------------
CLASSES OF VOYAGEUR MUTUAL
FUNDS, INC.
- --------------------------------------------------------------------------------
PART B
STATEMENT OF
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
AUGUST 28, 1997
DELAWARE
GROUP
--------
<PAGE>
- --------------------------------------------------------------------------------
PART B--STATEMENT OF ADDITIONAL INFORMATION
AUGUST 28, 1997
- --------------------------------------------------------------------------------
VOYAGEUR MUTUAL FUNDS, INC.
- --------------------------------------------------------------------------------
1818 Market Street
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
For Prospectus and Performance of Class A Shares, Class B Shares and Class C
Shares: Nationwide 800-523-4640
Information on Existing Accounts of Class A Shares, Class B Shares and Class C
Shares: (SHAREHOLDERS ONLY) Nationwide 800-523-1918
Dealer Services: (BROKER/DEALERS ONLY) Nationwide 800-362-7500
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Cover Page
- --------------------------------------------------------------------------------
Investment Restrictions and Policies
- --------------------------------------------------------------------------------
Accounting and Tax Issues
- --------------------------------------------------------------------------------
Performance Information
- --------------------------------------------------------------------------------
Trading Practices and Brokerage
- --------------------------------------------------------------------------------
Purchasing Shares
- --------------------------------------------------------------------------------
Investment Plans
- --------------------------------------------------------------------------------
Determining Offering Price
and Net Asset Value
- --------------------------------------------------------------------------------
Redemption and Repurchase
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Distributions and Taxes
- --------------------------------------------------------------------------------
Investment Management Agreement
- --------------------------------------------------------------------------------
Officers and Directors
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
General Information
- --------------------------------------------------------------------------------
Appendix A -- Ratings
- --------------------------------------------------------------------------------
Appendix B -- General Characteristics and Risks of Options and Futures
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
<PAGE>
Voyageur Mutual Funds, Inc. ("Mutual Funds, Inc.") is a
professionally-managed mutual fund of the series type. This Statement of
Additional Information ("Part B" of the registration statement) describes
National High Yield Municipal Bond Fund series (the "Fund") of Mutual Funds,
Inc. The Fund offers Class A Shares, Class B Shares and Class C Shares
(individually, a "Class" and collectively the "Classes").
Class B Shares and Class C Shares of the Fund may be purchased at a
price equal to the next determined net asset value per share. Class A Shares may
be purchased at the public offering price, which is equal to the next determined
net asset value per share, plus a front-end sales charge. Class A Shares are
subject to a maximum front-end sales charge of 3.75% and annual 12b-1 Plan
expenses of up to 0.25%. Class B Shares are subject to a contingent deferred
sales charge ("CDSC") which may be imposed on redemptions made within six years
of purchase and annual 12b-1 Plan expenses of up to 1% which are assessed
against Class B Shares for approximately eight years after purchase. See
Automatic Conversion of Class B Shares under Classes of Shares in the Fund's
Prospectus. Class C Shares are subject to a CDSC which may be imposed on
redemptions made within 12 months of purchase and annual 12b-1 Plan expenses of
up to 1% which are assessed against Class C Shares for the life of the
investment. All references to "shares" in this Part B refer to all Classes of
shares of the Fund, except where noted.
This Part B supplements the information contained in the current
Prospectus for the Fund dated August 28, 1997 as it may be amended from time to
time. It should be read in conjunction with the Prospectus. Part B is not itself
a prospectus but is, in its entirety, incorporated by reference into the
Prospectus. A prospectus may be obtained by writing or calling your investment
dealer or by contacting the Fund's national distributor, Delaware Distributors,
L.P. (the "Distributor"), 1818 Market Street, Philadelphia, PA 19103.
2
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
Investment Restrictions
The Fund has adopted certain investment restrictions set forth below
which, together with the investment objectives of the Fund and other policies
which are specifically identified as fundamental in the Prospectus or herein
cannot be changed without approval by holders of a majority of the outstanding
voting shares of the Fund. As defined in the Investment Company Act of 194
("1940 Act"), this means the lesser of the vote of (1) 67% of the shares of the
Fund at a meeting where more than 50% of the outstanding shares of the Fund are
present in person or by proxy or (2) more than 50% of the outstanding shares of
the Fund. The following investment restrictions apply to the Fund. The Fund will
not:
(1) Borrow money (provided that the Fund may enter into reverse
repurchase agreements with respect to not more than 10% of its total assets),
except from banks for temporary or emergency purposes in an amount not exceeding
20% of the value of the Fund's total assets, including the amount borrowed. The
Fund may not borrow for leverage purposes, provided that the Fund may enter into
reverse repurchase agreements for such purposes, and securities will not be
purchased while outstanding borrowings exceed 5% of the value of the Fund's
total assets.
(2) Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of portfolio investments, the Fund may
be deemed to be an underwriter under federal securities laws.
(3) Purchase or sell real estate, although it may purchase securities
which are secured by or represent interests in real estate.
(4) Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies, and through repurchase
agreements.
(5) Invest 25% or more if its total assets in the securities of any
industry, although, for purposes of this limitation, tax-exempt securities and
U.S. Government obligations are not considered to be part of any industry.
(6) Issue any senior securities (as defined in the 1940 Act), except as
set forth in investment restriction number (1) above, and except to the extent
that using options, futures contracts and options on futures contracts,
purchasing or selling on a when-issued or forward commitment basis or using
similar investment strategies may be deemed to constitute issuing a senior
security.
(7) Purchase or sell commodities or futures or options contracts with
respect to physical commodities. This restriction shall not restrict the Fund
from purchasing or selling, on a basis consistent with any restrictions
contained in its then-current Prospectus, any financial contracts or instruments
which may be deemed commodities (including, by way of example and not by way of
limitation, options, futures, and options on futures with respect, in each case,
to interest rates, currencies, stock indices, bond indices or interest rate
indices).
The following non-fundamental investment restrictions may be changed by
the Board of the Fund at any time. The Fund will not:
(1) Invest more than 5% of its total assets in securities of any single
investment company, nor more than 10% of its total assets in securities of two
or more investment companies, except as part of a merger, consolidation or
acquisition of assets.
(2) Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
3
<PAGE>
(3) Write puts if, as a result, more than 50% of the Fund's assets
would be required to be segregated to cover such puts.
(4) Make short sales of securities or maintain a short position for the
account of the Fund, unless at all times when a short position is open it owns
an equal amount of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable for securities
of the same issue as, and equal in amount to, the securities sold short.
Except for the Fund's policy with respect to borrowing, any investment
restriction or limitation which involves a maximum percentage of securities or
assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after an acquisition of securities or a
utilization of assets and such excess results therefrom.
The investment objectives, policies and restrictions of the National
High Yield Municipal Bond Fund (the "Fund") are set forth in the Prospectus.
Certain additional investment information is set forth below.
Diversification
Although the Fund is characterized as a non-diversified fund under the
1940 Act, the Fund intends to conduct its operations so that it will qualify
under the Internal Revenue Code of 1986 as a "regulated investment company." In
order to qualify as a regulated investment company, the Fund must limit its
investments so that, at the close of each quarter of the taxable year, with
respect to at least 50% of its total assets, not more than 5% of its total
assets will be invested in the securities of a single issuer. In addition, the
Code requires that not more than 25% in value of the Fund's total assets may be
invested in the securities of a single issuer at the close of each quarter of
the taxable year.
For purposes of such diversification, the identification of the issuer
of Municipal Obligations depends on the terms and conditions of the security. If
a State or a political subdivision thereof pledges its full faith and credit to
payment of a security, the State or the political subdivision, respectively, is
deemed the sole issuer of the security. If the assets and revenues of an agency,
authority or instrumentality of a State or a political subdivision thereof are
separate from those of the State or political subdivision and the security is
backed only by the assets and revenues of the agency, authority or
instrumentality, such agency, authority or instrumentality is deemed to be the
sole issuer. Moreover, if the security is backed only by revenues of an
enterprise or specific projects of the State, a political subdivision or agency,
authority or instrumentality, such as utility revenue bonds, and the full faith
and credit of the governmental unit is not pledged to the payment thereof, such
enterprise or specific project is deemed the sole issuer.
Similarly, in the case of an industrial development bond, if that bond
is backed only by certain revenues to be received from the non-governmental user
of the project financed by the bond, then such non-governmental user is deemed
to be the sole issuer. If, however, in any of the above cases, a State,
political subdivision or some other entity guarantees a security and the value
of all securities issued or guaranteed by the guarantor and owned by the Fund
exceeds 10% of the value of the Fund's total assets, the guarantee is considered
a separate security and is treated as an issue of the guarantor. Investments in
municipal obligations refunded with escrowed U.S. government securities will be
treated as investments in U.S. government securities for purposes of determining
the Fund's compliance with the 1940 Act diversification requirements.
Municipal Obligations
Municipal Obligations are generally issued to obtain funds for various
public purposes, including the construction or improvement 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 Obligations may be issued include refunding
outstanding obligations, obtaining funds for general operating expenses
4
<PAGE>
and lending such funds to other public institutions and facilities. In addition,
Municipal Obligations may be issued by or on behalf of public bodies to obtain
funds to provide for the construction, equipping, repair or improvement of
housing facilities, convention or trade show facilities, airport, mass transit,
industrial, port or parking facilities and certain local facilities for water
supply, gas, electricity, sewage or solid waste disposal.
Securities in which the Fund may invest, including Municipal
Obligations, are subject to the provisions of bankruptcy, insolvency,
reorganization and other laws affecting the rights and remedies of creditors,
such as the federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or a State's legislature extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations within constitutional limitations. There is also the possibility
that, as a result of litigation or other conditions, the power or ability of
issuers to meet their obligations for the payment of interest on and principal
of their Municipal Obligations may be materially affected.
From time to time, legislation has been introduced in Congress for the
purpose of restricting the availability of or eliminating the federal income tax
exemption for interest on Municipal Obligations, some of which have been
enacted. Additional proposals may be introduced in the future which, if enacted,
could affect the availability of Municipal Obligations for investment by the
Fund and the value of the Fund's portfolio. In such event, management of the
Fund may discontinue the issuance of shares to new investors and may reevaluate
the Fund's investment objective and policies and submit possible changes in the
structure of the Fund for shareholder approval.
To the extent that the ratings given by Moody's Investors Service, Inc.
("Moody's"), Fitch Investors Service LP ("Fitch"), or Standard & Poor's Ratings
Services ("S&P") for Municipal Obligations may change as a result of changes in
such organizations or their rating systems, the Fund will attempt to use
comparable ratings as standards for their investments in accordance with the
investment policies contained in the Fund's Prospectus and this Statement of
Additional Information. The ratings of Moody's, Fitch and S&P represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and subjective
and are not absolute standards of quality. Although these ratings provide an
initial criterion for selection of portfolio investments, the Fund's investment
adviser, Delaware Management Company, Inc. (the "Manager"), will subject these
securities to other evaluative criteria prior to investing in such securities.
Floating and Variable Rate Demand Notes
Variable rate master demand notes, in which the Fund may invest, are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Because master demand notes are direct lending arrangements
between the Fund and the issuer, they are not normally traded. Although there is
no secondary market in the notes, the Fund may demand payment of principal and
accrued interest at any time. While the notes are not typically rated by credit
rating agencies, issuers of variable amount master demand notes (which are
normally manufacturing, retail, financial, and other business concerns) must
satisfy the same criteria as set forth above for commercial paper. In
determining average weighted portfolio maturity, a variable amount master demand
note will be deemed to have a maturity equal to the period of time remaining
until the principal amount can be recovered from the issuer through demand.
A variable rate note is one whose terms provide for the adjustment of
its interest rate on set dates and which, upon such adjustment, can reasonably
be expected to have a market value that approximates its par value. A floating
rate note is one whose terms provide for the adjustment of its interest rate
whenever a specified interest rate changes and which, at any time, can
reasonably be expected to have a market value that approximates its par value.
Such notes are frequently not rated by credit rating agencies; however, unrated
variable and floating rate notes purchased by the Fund will be determined by the
Fund's Manager under guidelines established by the Fund's Board of Directors to
be of comparable quality at the time of purchase to rated instruments eligible
for purchase under the Fund's investment
5
<PAGE>
policies. In making such determinations, the Manager will consider the earning
power, cash flow and other liquidity ratios of the issuers of such notes (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
note purchased by the Fund, the Fund may re-sell the note at any time to a third
party. The absence of such an active secondary market, however, could make it
difficult for the Fund to dispose of the variable or floating rate note involved
in the event the issuer of the note defaulted on its payment obligations, and
the Fund could, for this or other reasons, suffer a loss to the extent of the
default. Variable or floating rate notes may be secured by bank letters of
credit.
Variable and floating rate notes for which no readily available market
exists will be purchased in an amount which, together with securities with legal
or contractual restrictions on resale or for which no readily available market
exists (including repurchase agreements providing for settlement more than seven
days after notice), exceed 10% of the Fund's total assets only if such notes are
subject to a demand feature that will permit the Fund to demand payment of the
Principal within seven days after demand by the Fund. If not rated, such
instruments must be found by the Fund's Manager and/or sub-adviser under
guidelines established by the Fund's Board of Directors, to be of comparable
quality to instruments that are rated high quality. A rating may be relied upon
only if it is provided by a nationally recognized statistical rating
organization that is not affiliated with the issuer or guarantor of the
instruments.
Escrow Secured Bonds or Defeased Bonds
Escrow secured bonds or defeased bonds are created when an issuer
refunds in advance of maturity (or pre-refunds) some of its outstanding bonds
and it becomes necessary or desirable to set aside funds for redemption or
payment of the bonds at a future date or dates. In an advance refunding, the
issuer will use the proceeds of a new bond issue to purchase high grade interest
bearing debt securities which are then deposited in an irrevocable escrow
account held by an escrow agent to secure all future payments of principal and
interest of the advance refunded bond. Escrow secured bonds will often receive a
triple A rating from S&P, Moody's and Fitch.
State or Municipal Lease Obligations
Municipal leases may take the form of a lease with an option to
purchase, an installment purchase contract, a conditional sales contract or a
participation certificate in any of the foregoing. In determining leases in
which the Fund will invest, the Manager will evaluate the credit rating of the
lessee and the terms of the lease. Additionally, the Manager may require that
certain municipal leases be secured by a letter of credit or put arrangement
with an independent financial institution. State or municipal lease obligations
frequently have the special risks described below which are not associated with
general obligation or revenue bonds issued by public bodies.
The Constitution and statutes of many states contain requirements with
which the state and municipalities must comply whenever incurring debt. These
requirements may include approving voter referendums, debt limits, interest rate
limits and public sale requirements. Leases have evolved as a means for public
bodies to acquire property and equipment without needing to comply with all of
the constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations may be inapplicable for one or more of the following
reasons: (1) the inclusion in many leases or contracts of "non-appropriation"
clauses that provide that the public body has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis
(the "non-appropriation" clause); (2) the exclusion of a lease or conditional
sales contract from the definition of indebtedness under relevant state law; or
(3) the lease provides for termination at the option of the public body at the
end of each fiscal year for any reason or, in some cases, automatically if not
affirmatively renewed.
If the lease is terminated by the public body for non-appropriation or
another reason not constituting a default under the lease, the rights of the
lessor or holder of a participation interest therein are limited to repossession
of the
6
<PAGE>
leased property without any recourse to the general credit of the public body.
The disposition of the leased property by the lessor in the event of termination
of the lease might, in many cases, prove difficult or result in loss.
Concentration Policy
As a fundamental policy, the Fund may not invest 25% or more of its
total assets in the securities of any industry, although, for purposes of this
limitation, tax-exempt securities and U.S. government obligations are not
considered to be part of any industry. The Fund may invest 25% or more of its
total assets in industrial development revenue bonds. In addition, it is
possible that the Fund from time to time will invest 25% or more of its total
assets in a particular segment of the municipal bond market, such as housing,
health care, utility, transportation, education or industrial obligations. In
such circumstances, economic, business, political or other changes affecting one
bond (such as proposed legislation affecting the financing of a project;
shortages or price increases of needed materials; or a declining market or need
for the project) might also affect other bonds in the same segment, thereby
potentially increasing market or credit risk.
Housing Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of public bodies, including state and
municipal housing authorities, issued to finance the purchase of single-family
mortgage loans or the construction of multifamily housing projects. Economic and
political developments, including fluctuations in interest rates, increasing
construction and operating costs and reductions in federal housing subsidy
programs, may adversely impact on revenues of housing authorities. Furthermore,
adverse economic conditions may result in an increasing rate of default of
mortgagors on the underlying mortgage loans. In the case of some housing
authorities, inability to obtain additional financing also could reduce revenues
available to pay existing obligations. Single-family mortgage revenue bonds are
subject to extraordinary mandatory redemption at par at any time in whole or in
part from the proceeds derived from prepayments of underlying mortgage loans and
also from the unused proceeds of the issue within a stated period which may be
within a year from the date of issue.
Health Care Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal authorities, to finance hospital or health care facilities or
equipment. The ability of any health care entity or hospital to make payments in
amounts sufficient to pay maturing principal and interest obligations is
generally subject to, among other things, the capabilities of its management,
the confidence of physicians in management, the availability of physicians and
trained support staff, changes in the population or economic condition of the
service area, the level of and restrictions on federal funding of Medicare and
federal and state funding of Medicaid, the demand for services, competition,
rates, government regulations and licensing requirements and future economic and
other conditions, including any future health care reform.
Utility Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations issued by public bodies, including state
and municipal utility authorities, to finance the operation or expansion of
utilities. Various future economic and other conditions may adversely impact
utility entities, including inflation, increases in financing requirements,
increases in raw material costs and other operating costs, changes in the demand
for services and the effects of environmental and other governmental
regulations.
Transportation Obligations. The Fund may invest, from time to time, 25%
or more of its total assets in obligations issued by public bodies, including
state and municipal authorities, to finance airports and highway, bridge and
toll road facilities. The major portion of an airport's gross operating income
is generally derived from fees received from signatory airlines pursuant to use
agreements which consist of annual payments for airport use, occupancy of
certain terminal space, service fees and leases. Airport operating income may
therefore be affected by the ability of the airlines to meet their obligations
under the use agreements. The air transport industry is experiencing significant
variations in earnings and traffic, due to increased competition, excess
capacity, increased costs,
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deregulation, traffic constraints and other factors, and several airlines are
experiencing severe financial difficulties. The revenues of issuers which derive
their payments from bridge, road or tunnel toll revenues could be adversely
affected by competition from toll-free vehicular bridges and roads and
alternative modes of transportation. Such revenues could also be adversely
affected by a reduction in the availability of fuel to motorists or significant
increases in the costs thereof.
Education Obligations. The Fund may invest, from time to time, 25% or
more of its total assets in obligations of issuers which are, or which govern
the operation of, schools, colleges and universities and whose revenues are
derived mainly from tuition, dormitory revenues, grants and endowments. General
problems of such issuers include the prospect of a declining percentage of the
population consisting of college aged individuals, possible inability to raise
tuition and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants, state funding and alumni
support, and government legislation or regulations which may adversely affect
the revenues or costs of such issuers.
Industrial Revenue Obligations. The Fund may invest, from time to time,
25% or more of its total assets in obligations issued by public bodies,
including state and municipal authorities, to finance the cost of acquiring,
constructing or improving various industrial projects. These projects are
usually operated by corporate entities. Issuers are obligated only to pay
amounts due on the bonds to the extent that funds are available from the
unexpended proceeds of the bonds or receipts or revenues of the issuer under an
arrangement between the issuer and the corporate operator of a project. The
arrangement may be in the form of a lease, installment sale agreement,
conditional sale agreement or loan agreement, but in each case the payments of
the issuer are designed to be sufficient to meet the payments of amounts due on
the bonds. Regardless of the structure, payment of bonds is solely dependent
upon the creditworthiness of the corporate operator of the project and, if
applicable, the corporate guarantor. Corporate operators or guarantors may be
affected by many factors which may have an adverse impact on the credit quality
of the particular company or industry. These include cyclicality of revenues and
earnings, regulatory and environmental restrictions, litigation resulting from
accidents or deterioration resulting from leveraged buy-outs or takeovers. The
bonds may be subject to special or extraordinary redemption provisions which may
provide for redemption at par or accredited value, plus, if applicable, a
premium.
Other Risks. The exclusion from gross income for purposes of federal
income taxes for certain housing, health care, utility, transportation,
education and industrial revenue bonds depends on compliance with relevant
provisions of the Code. The failure to comply with these provisions could cause
the interest on the bonds to become includable in gross income, possibly
retroactively to the date of issuance, thereby reducing the value of the bonds,
subjecting shareholders to unanticipated tax liabilities and possibly requiring
the Fund to sell the bonds at the reduced value. Furthermore, such a failure to
meet these ongoing requirements may not enable the holder to accelerate payment
of the bond or require the issuer to redeem the bond.
Taxable Obligations
As set forth in the Prospectus, the Fund may invest to a limited extent
in obligations and instruments, the interest on which is includable in gross
income for purposes of federal income taxation.
Government Obligations
The Fund may invest in securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities. These securities include a
variety of Treasury securities, which differ in their interest rates, maturities
and times of issuance. Treasury Bills generally have maturities of one year or
less; Treasury Notes generally have maturities of one to ten years; and Treasury
Bonds generally have maturities of greater than ten years. Some obligations
issued or guaranteed by U.S. government agencies and instrumentalities, such as
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S.
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Treasury; other obligations, such as those of the Federal Home Loan Banks, are
secured by the right of the issuer to borrow from the Treasury; other
obligations, such as those issued by the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. government to purchase
certain obligations of the agency or instrumentality; and other obligations,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the instrumentality itself. Although the U.S. government
provides financial support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it will always do so, since it
is not so obligated by law. The Fund will invest in such securities only when
the Manager is satisfied that the credit risk with respect to the issuer is
minimal.
Repurchase Agreements
A repurchase agreement is a short-term investment by which the
purchaser acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the purchaser's holding period. Should an issuer of a
repurchase agreement fail to repurchase the underlying security, the loss to the
Fund, if any, would be the difference between the repurchase price and the
market value of the security. The Fund will limit its investments in repurchase
agreements to those which the Manager, under the guidelines of the Board of
Directors, determines to present minimal credit risks and which are of high
quality. In addition, the Fund must have collateral of at least 100% of the
repurchase price, including the portion representing the Fund's yield under such
agreements which is monitored on a daily basis.
The funds in the Delaware Group have obtained an exemption from the
joint-transaction prohibitions of Section 17(d) of the 1940 Act to allow the
Delaware Group funds jointly to invest cash balances. The Fund may invest cash
balances in a joint repurchase agreement in accordance with the terms of the
Order and subject generally to the conditions described below.
Other Taxable Investments
The Fund also may invest in certificates of deposit, bankers'
acceptances and other time deposits. Certificates of deposit are certificates
representing the obligation of a bank to repay the funds deposited (plus
interest thereon) at a time certain after the deposit. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. Time deposits are non-negotiable deposits maintained in a
banking institution for a specified period of time at a stated interest rate.
Options
The Fund may purchase call options, write call options on a covered
basis, write secured put options and purchase put options on a covered basis
only, and will not engage in option writing strategies for speculative purposes.
The Fund may invest in options that are either Exchange listed or
traded over-the-counter. Certain over-the-counter options may be illiquid. Thus,
it may not be possible to close option positions and this may have an adverse
impact on the Fund's ability to effectively hedge its securities. The Fund will
not, however, invest more than 15% of its assets in illiquid securities.
A. Covered Call Writing--The Fund may write covered call options from
time to time on such portion of its portfolio, without limit, as the Manager
determines is appropriate in seeking to obtain the Fund's investment objective.
A call option gives the purchaser of such option the right to buy, and the
writer, in this case the Fund, has the obligation to sell the underlying
security at the exercise price during the option period. The advantage to the
Fund of writing covered calls is that the Fund receives a premium which is
additional income. However, if the security rises in value, the Fund may not
fully participate in the market appreciation.
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During the option period, a covered call option writer may be assigned
an exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction cannot be effected with respect to
an option once the option writer has received an exercise notice for such
option.
With respect to options on actual portfolio securities owned by the
Fund, the Fund may enter into closing purchase transactions. A closing purchase
transaction is one in which the Fund, when obligated as a writer of an option,
terminates its obligation by purchasing an option of the same series as the
option previously written.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of the underlying security or to enable the
Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. The Fund may realize a net
gain or loss from a closing purchase transaction depending upon whether the net
amount of the original premium received on the call option is more or less than
the cost of effecting the closing purchase transaction. Any loss incurred in a
closing purchase transaction may be partially or entirety offset by the premium
received from a sale of a different call option on the same underlying security.
Such a loss may also be wholly or partially offset by unrealized appreciation in
the market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
If a call option expires unexercised, the Fund will realize a
short-term capital gain in the amount of the premium on the option less the
commission paid. Such a gain, however, may be offset by depreciation in the
market value of the underlying security during the option period. If a call
option is exercised, the Fund will realize a gain or loss from the sale of the
underlying security equal to the difference between the cost of the underlying
security and the proceeds of the sale of the security plus the amount of the
premium on the option less the commission paid.
The market value of a call option generally reflects the market price
of an underlying security. Other principal factors affecting market value
include supply and demand, interest rates, the price volatility of the
underlying security and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means
that the Fund will own the underlying security subject to a call option at all
times during the option period. Unless a closing purchase transaction is
effected, the Fund would be required to continue to hold a security which it
might otherwise wish to sell or deliver a security it would want to hold.
Options written by the Fund will normally have expiration dates between one and
nine months from the date written. The exercise price of a call option may be
below, equal to or above the current market value of the underlying security at
the time the option is written.
B. Purchasing Call Options--The Fund may purchase call options to the
extent that premiums paid by the Fund do not aggregate more than 2% of the
Fund's total assets. The advantage of purchasing call options is that the Fund
may alter portfolio characteristics, and modify portfolio maturities without
incurring the cost associated with portfolio transactions.
The Fund may, following the purchase of a call option, liquidate its
position by effecting a closing sale transaction. This is accomplished by
selling an option of the same Fund as the option previously purchased. The Fund
will realize a profit from a closing sale transaction if the price received on
the transaction is more than the premium paid to purchase the original call
option; the Fund will realize a loss from a closing sale transaction if the
price received on the transaction is less than the premium paid to purchase the
original call option.
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Although the Fund will generally purchase only those call options for
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an Exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on a
Exchange may exist. In such event, it may not be possible to effect closing
transactions in particular options, with the results that the Fund would have to
exercise its options in order to realize any profit and would incur brokerage
commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Fund may expire without any value
to the Fund.
C. Purchasing Put Options--The Fund may invest up to 2% of its total
assets in the purchase of put options. The Fund will, at all times during which
it holds a put option, own the security covered by such option.
The Fund intends to purchase put options in order to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option ("protective puts"). The ability to
purchase put options will allow the Fund to protect an unrealized gain in an
appreciated security in its portfolio without actually selling the security. If
the security does not drop in value, the Fund will lose the value of the premium
paid. The Fund may sell a put option which it has previously purchased prior to
the sale of the securities underlying such option. Such sales will result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the put option which
is sold.
The Fund may sell a put option purchased on individual portfolio
securities. Additionally, the Fund may enter into closing sale transactions. A
closing sale transaction is one in which the Fund, when it is the holder of an
outstanding option, liquidates its position by selling an option of the same
series as the option previously purchased.
D. Writing Put Options--The Fund may also write put options on a
secured basis which means that the Fund will maintain in a segregated account
with its custodian, cash or U.S. government securities in an amount not less
than the exercise price of the option at all times during the option period. The
amount of cash or U.S. government securities held in the segregated account will
be adjusted on a daily basis to reflect changes in the market value of the
securities covered by the put option written by the Fund. Secured put options
will generally be written in circumstances where the Manager wishes to purchase
the underlying security for the Fund's portfolio at a price lower than the
current market price of the security. In such event, the Fund would write a
secured put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay.
Following the writing of a put option, the Fund may wish to terminate
the obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
Futures
Futures contracts are agreements 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 Fund enters into a futures
transaction, it must deliver to the futures commission merchant selected by the
Fund an amount referred to as "initial margin." This amount is maintained by the
futures commission merchant in an account at the Fund's custodian bank.
Thereafter, a "variation margin" may be paid by the Fund to, or drawn by the
Fund from, such account in accordance with controls set for such account,
depending upon changes in the price of the underlying securities subject to the
futures contract.
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In addition, when the Fund engages in futures transactions, to the
extent required by the Securities and Exchange Commission, it will 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 Fund with respect to such
futures contracts.
The Fund may enter into such futures contracts to protect against the
adverse effects of fluctuations in interest rates without actually buying or
selling such securities. Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to hedge in anticipation of
subsequent purchases of government securities at higher prices.
With respect to options on futures contracts, when the Fund is not
fully invested, it may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. The writing of a call
option on a futures contract constitutes a partial hedge against declining
prices of the securities which are deliverable upon exercise of the futures
contract. If the futures price at the expiration of the option is below the
exercise price, the Fund will retain the full amount of the option premium which
provides a partial hedge against any decline that may have occurred in the
portfolio holdings. The writing of a put option on a futures contract
constitutes a partial hedge against increasing prices of the securities which
are deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund will retain
the full amount of the option premium which provides a partial hedge against any
increase in the price of government securities which the Fund intends to
purchase.
If a put or call option the Fund has written is exercised, the Fund
will incur a loss which will be reduced by the amount of the premium it
receives. Depending on the degree of correlation between the value of its
portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may, to some extent, be reduced
or increased by changes in the value of portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates.
To the extent that interest rates move in an unexpected direction, the
Fund may not achieve the anticipated benefits of futures contracts or options on
futures contracts or may realize a loss. For example, if the Fund is hedged
against the possibility of an increase in interest rates which would adversely
affect the price of government securities held in its portfolio and interest
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of its government securities which it has because it will have
offsetting losses in its futures position. In addition, in such situations, if
the Fund had insufficient cash, it may be required to sell government securities
from its portfolio to meet daily variation margin requirements. Such sales of
government securities may, but will not necessarily, be at increased prices
which reflect the rising market. The Fund may be required to sell securities at
a time when it may be disadvantageous to do so.
Further, with respect to options on futures contracts, the Fund may
seek to close out an option position by writing or buying an offsetting position
covering the same securities or contracts and have the same exercise price and
expiration date. The ability to establish and close out positions on options
will be subject to the maintenance of a liquid secondary market, which cannot be
assured.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using securities index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making
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additional variation margin payments, investors may close the contracts through
offsetting transactions which could distort the normal relationship between the
index or security and the futures market. Second, the margin requirements in the
futures market are lower than margin requirements in the securities market, and
as a result the futures market may attract more speculators than does the
securities market. Increased participation by speculators in the futures market
may also cause temporary price distortions. Because of possible price distortion
in the futures market and because of imperfect correlation between movements in
indexes of securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by the Fund is subject to the
ability of the Manager to predict correctly movements in the direction of
interest rates or the relevant underlying securities market. If the Fund has
hedged against the possibility of an increase in interest rates adversely
affecting the value of fixed-income securities held in its portfolio and
interest rates decrease instead, the Fund will lose part or all of the benefit
of the increased value of its security which it has hedged because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the rising market or decline
in interest rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Liquidity of Futures Contracts. The Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. The Fund may close
its positions by taking opposite positions. Final determinations of variation
margin are then made, additional cash as required is paid by or to the Fund, and
the Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Fund intends to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
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Risk of Options. The use of options on financial instruments and
indexes and on interest rate and index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium, which may
partially offset a decline in the value of the Fund's portfolio assets. By
writing a call option, the Fund becomes obligated to sell an underlying
instrument or a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option generates a premium, but
the Fund becomes obligated to purchase the underlying instrument or futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options may exceed the amount of the premium
received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when the
Manager deems it desirable to do so. Although the Fund will enter into an option
position only if the Manager believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Fund's
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
The Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by the Manager,
which could prove to be inaccurate. Even if the expectations of the Manager are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of a
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss
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from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of their portfolios. By using put options in this way, the Fund will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in
price of securities that the Fund anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Fund to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when the Manager believes it would be advantageous to do so. Accordingly,
OTC options are subject to the Fund's limitation that a maximum of 15% of its
net assets be invested in illiquid securities. In the event of the bankruptcy of
the writer of an OTC option, the Fund could experience a loss of all or part of
the value of the option. The Manager anticipates that options on Municipal
Obligations will consist primarily of OTC options.
Illiquid Investments
The Fund may invest no more than 15% of the value of its net assets in
illiquid securities. The Fund may invest in restricted securities,
including securities eligible for resale without registration
pursuant to Rule 144A ("Rule 144A Securities") under the Securities Act of 1933.
Rule 144A permits many privately placed and legally restricted securities to be
freely traded among certain institutional buyers such as the Fund.
While maintaining oversight, the Board of Directors has delegated to
the Manager the day-to-day function of determining whether or not individual
Rule 144A Securities are liquid for purposes of a Fund's 15% limitation on
15
<PAGE>
investments in illiquid assets. The Board has instructed the Manager to consider
the following factors in determining the liquidity of a Rule 144A Security: (i)
the frequency of trades and trading volume for the security; (ii) whether at
least three dealers are willing to purchase or sell the security and the number
of potential purchasers; (iii) whether at least two dealers are making a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
If the Manager determines that a Rule 144A Security that was previously
determined to be liquid is no longer liquid and, as a result, the Fund's
holdings of illiquid securities exceed the Fund's 15% limit on investment in
such securities, the Manager will determine what action to take to ensure that
the Fund continues to adhere to such limitation.
16
<PAGE>
ACCOUNTING AND TAX ISSUES
When the Fund writes a call option, an amount equal to the premium
received by it is included in the section of the Fund's 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. The current market value of a written option is the last sale
price on the principal Exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an option
which the Fund has written expires on its stipulated expiration date, the Fund
reports a realized gain. If the Fund enters into a closing purchase transaction
with respect to an option which the Fund has written, the Fund 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 Fund has written is exercised, the Fund
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.
Other Tax Requirements -- The Fund has qualified and intend to continue
to qualify as regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). 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
consists 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. This 30% rule
is rescinded for tax years beginning after August 5, 1997.
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 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 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 straddle rules of Section 1092 may apply. Generally, the straddle
provisions require the deferral of losses to the extent of unrecognized gains
related to the offsetting positions in the straddle. Excess losses, if any, can
be recognized in the year of loss. Deferred losses will be carried forward and
recognized in the following year, subject to the same limitation.
17
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Fund may state each of its Classes' total return
in advertisements and other types of literature. Any statement of total return
performance data for a Class will be accompanied by information on the average
annual compounded rate of return for that Class over, as relevant, the most
recent one-, five- and ten-year (or life-of-fund, if applicable) periods. Each
Fund may also advertise aggregate and average total return information for its
Classes over additional periods of time.
In presenting performance information for Class A Shares, the Limited
CDSC applicable to only certain redemptions of those shares will not be deducted
from any computation of total return. See the Prospectus for a description of
the Limited CDSC and the limited instances in which it applies. All references
to a CDSC in this Performance Information section will apply to Class B Shares
or Class C Shares of the Fund.
Total return performance for each Class will be computed by adding all
reinvested income and realized securities profits distributions plus the change
in net asset value during a specific period and dividing by the offering price
at the beginning of the period. It will not reflect any income taxes payable by
shareholders on the reinvested distributions included in the calculation.
Because securities prices fluctuate, past performance should not be considered
as a representation of the results which may be realized from an investment in
the Fund in the future.
The average annual total rate of return for each Class is based on a
hypothetical $1,000 investment that includes capital appreciation and
depreciation during the stated periods. The following formula will be used for
the actual computations:
n
P(1 + T) = ERV
Where: P = a hypothetical initial purchase order of
$1,000 from which, in the case of only Class
A Shares, the maximum front-end sales charge
is deducted;
T = average annual total return;
n = number of years; and
ERV = redeemable value of the hypothetical
$1,000 purchase at the end of the period
after the deduction of the applicable CDSC,
if any, with respect to Class B Shares and
Class C Shares.
Aggregate or cumulative total return is calculated in a similar manner,
except that the results are not annualized. Each calculation assumes the maximum
front-end sales charge, if any, is deducted from the initial $1,000 investment
at the time it is made with respect to Class A Shares and that all distributions
are reinvested at net asset value, and, with respect to Class B Shares and Class
C Shares, reflects the deduction of the CDSC that would be applicable upon
complete redemption of such shares. In addition, the Fund may present total
return information that does not reflect the deduction of the maximum front-end
sales charge or any applicable CDSC.
The performance of Class A Shares of the Fund, as shown below, is the
average annual total return quotations through December 31, 1996, computed as
described above.
18
<PAGE>
The average annual total return for Class A Shares at offer reflects
the maximum front-end sales charge of 3.75% 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.
Securities prices fluctuated during the periods covered and past
results should not be considered as representative of future performance.
Average Annual Total Return
Class A Shares Class A Shares
(at Offer) (at NAV)
1 year ended
12/31/96 2.58% 6.53%
3 years ended
12/31/96 4.71% 6.06%
5 years ended
12/31/96 7.05% 7.87%
10 years ended
12/31/96 7.56% 7.98%
Period 9/22/86(1)
through 12/31/96 7.62% 8.02%
(1) Date of initial public offering.
As stated in the Prospectus, the Fund may also quote the current yield for
each Class in advertisements and investor communications. The yield computation
is determined by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period and
annualizing the resulting figure, according to the following formula:
a--b 6
YIELD = 2[(-------- + 1) -- 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends;
d = the maximum offering price per share on the last day
of the period.
19
<PAGE>
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 as of December 31, 1996 using this formula were 5.35% and 4.84%
for Class A Shares and Class B Shares, respectively. Yield assumes the maximum
front-end sales charge, if any, and does not reflect the deduction of any CDSC
or Limited CDSC and also reflects voluntary waivers in effect during the period.
Actual yield may be affected by variations in front-end sales charges on
investments. Past performance, such as is reflected in quoted yields, should not
be considered as a representation of the results which may be realized from an
investment in any class of the Fund in the future.
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 December 31, 1996, the tax-equivalent yield
(assuming a federal income tax rate of 31%) of Class A Shares was 8.36% and for
Class B Shares was 7.01%, reflecting voluntary waivers in effect during the
period. 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 Fund 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
Fund 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 Fund invests in longer-term securities that fluctuate in value and do
so in a manner inversely correlated with changing interest rates. The Fund's net
asset value will tend to rise when interest rates fall. Conversely, the Fund's
net asset value will tend to fall as interest rates rise. Normally, fluctuations
in interest rates have a greater effect on the prices of longer-term bonds. The
value of the securities held in the Fund will vary from day to day and investors
should consider the volatility of the Fund's net asset value as well as its
yield before making a decision to invest.
From time to time, the Fund may also quote actual total return
performance of its Classes in advertising and other types of literature compared
to indices or averages of alternative financial products available to
prospective investors. For example, the performance comparisons may include the
average return of various bank instruments, some of which may carry certain
return guarantees offered by leading banks and thrifts as monitored by Bank Rate
Monitor, and those of generally-accepted corporate bond and government security
price indices of various durations prepared by Lehman Brothers and Salomon
Brothers, Inc. These indices are not managed for any investment goal.
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 activity and performance of the Fund 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 Fund. 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.
20
<PAGE>
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.
Russell Indexes is an investment analysis service that provides both
current and historical stock performance information, focusing on the
business fundamentals of those firms issuing the security.
Salomon Brothers and Lehman Brothers are statistical research firms that
maintain databases of international market, bond market, corporate and
government-issued securities of various maturities. This information, as
well as unmanaged indices compiled and maintained by these firms, will
be used in preparing comparative illustrations. In addition, the
performance of multiple indices compiled and maintained by these firms
may be combined to create a blended performance result for comparative
purposes. Generally, the indices selected will be representative of the
types of securities in which the Fund may invest and the assumptions
that were used in calculating the blended performance will be described.
Comparative information on the Consumer Price Index may also be
included. 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.
The following table is an example, for purposes of illustration only, of
cumulative total return performance for Class A Shares and Class B Shares
through December 31, 1996. For these purposes, the calculations assume the
reinvestment of any realized securities profits distributions and income
dividends paid during the indicated periods. In addition, these calculations, as
shown below, reflect maximum sales charges, if any, paid on the purchase or
redemption of shares, as applicable, but not any income taxes payable by
shareholders on the reinvested distributions included in the calculations. The
performance of Class A Shares may also be shown without reflecting the impact of
any front-end sales charge. The performance of Class B Shares and Class C Shares
is calculated both with the applicable CDSC included and excluded.
The net asset value of a Class fluctuates so shares, when redeemed, may
be worth more or less than the original investment, and a Class' results should
not be considered as representative of future performance.
21
<PAGE>
Cumulative Total Return
National High Yield Municipal Bond Fund(3)
Class B Class B
Class A Shares Shares
Shares (including (excluding
(at offer) CDSC)(2) CDSC)
Period
3 months 12/18/96
ended through
12/31/96 (0.77%) 12/31/96 (3.57%) 0.43%
6 months
ended
12/31/96 1.72%(4)
9 months
ended
12/31/96 2.69%
1 year
ended
12/31/96 2.58%
3 years
ended
12/31/96 14.80%
5 years
ended
12/31/96 40.56%
10years
ended
12/31/96 107.32%
Period
9/22/86(1)
through
12/31/96 112.74%
(1) Date of initial public offering.
(2) Beginning June 9, 1997, the CDSC schedule for Class B Shares changed as
follows: (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. The above figures have been calculated using this new
schedule.
(3) Reflects voluntary waivers in effect during the period(s).
(4) For the six months ended December 31, 1996, cumulative total return for
Class A Shares at net asset value was 5.74%.
22
<PAGE>
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
personal financial planning. One typical way of addressing these issues is to
compare an individual's goals and the length of time the individual has to
attain these goals to his or her risk threshold. In addition, the Distributor
will provide information that discusses the Manager's overriding investment
philosophy and how that philosophy impacts the 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 Fund
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 for 10 years:
7% Rate 9% Rate 11% Rate
of Return of Return of Return
--------- --------- ---------
1 year $10,723 $10,938 $11,157
2 years $11,498 $11,964 $12,448
3 years $12,330 $13,086 $13,889
4 years $13,221 $14,314 $15,496
5 years $14,177 $15,657 $17,289
6 years $15,201 $17,126 $19,289
7 years $16,300 $18,732 $21,522
8 years $17,479 $20,489 $24,012
9 years $18,743 $22,411 $26,791
10 years $20,098 $24,514 $29,891
These figures are calculated assuming a fixed constant investment
return and assume no fluctuation in the value of principal. These figures, which
do not reflect payment of applicable taxes or 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.
23
<PAGE>
TRADING PRACTICES AND BROKERAGE
Portfolio transactions are executed by the Manager on behalf of the
Fund in accordance with the standards described below.
Brokers, dealers and banks are selected to execute transactions for
the purchase or sale of portfolio securities on the basis of the Manager's
judgment of their professional capability to provide the service. The primary
consideration is to have brokers, dealers or banks execute transactions at best
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. Trades are generally made on a net basis where
securities are either bought or sold directly from or to a broker, dealer or
bank. In these instances, there is no direct commission charged, but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission. When a commission is paid, 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, the Fund pays a minimal share
transaction cost when the transaction presents no difficulty.
The Manager may allocate out of all commission business generated by
all of the funds and accounts under its management, brokerage business to
brokers or dealers who provide brokerage and research services. These services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends; assisting in
determining portfolio strategy; providing computer software and hardware used in
security analyses; and providing portfolio performance evaluation and technical
market analyses. Such services are used by the Manager in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used, or used exclusively, with respect
to the fund or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 and the Fund's
Investment Management Agreement, higher commissions are permitted to be paid to
broker/dealers who provide brokerage and research services than to
broker/dealers who do not provide such services, if such higher commissions are
deemed reasonable in relation to the value of the brokerage and research
services provided. Although transactions are directed to broker/dealers who
provide such brokerage and research services, Mutual Funds, Inc. 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.
24
<PAGE>
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 Mutual Funds,
Inc.'s 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 expenses of the funds in the Delaware Group of
funds, such as custodian fees, and may, at the request of the Distributor, give
consideration to sales of such funds shares as a factor in the selection of
brokers and dealers to execute portfolio transactions.
Portfolio Turnover
Portfolio trading will be undertaken principally to accomplish the
Fund's objective in relation to anticipated movements in the general level of
interest rates. The Fund is free to dispose of portfolio securities at any time,
subject to complying with the Code and the 1940 Act, when changes in
circumstances or conditions make such a move desirable in light of the
investment objective. The Fund will not attempt to achieve or be limited to a
predetermined rate of portfolio turnover, such a turnover always being
incidental to transactions undertaken with a view to achieving the Fund's
investment objective. However, it is generally anticipated that the Fund's
portfolio turnover rate will be less than 100%.
The degree of portfolio activity may affect brokerage costs of the
Fund and taxes payable by the Fund's shareholders to the extent of any net
realized capital gains. The Fund's portfolio turnover rate is not expected to
exceed 100%; however, under certain market conditions the Fund may experience a
rate of portfolio turnover which could exceed 100%. The Fund's portfolio
turnover rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the particular fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the particular
fiscal year, exclusive of securities whose maturities at the time of acquisition
are one year or less. A turnover rate of 100% would occur, for example, if all
the investments in the Fund's portfolio at the beginning of the year were
replaced by the end of the year.
The Fund's portfolio turnover rates were 8.45% for the fiscal year
ended July 31, 1995 and 0.00% for the fiscal year ended July 31, 1996. For the
period August 1, 1996 through December 31, 1996, the Fund's portfolio turnover
rate was 7.51%.
The Fund may hold securities for any period of time. The Fund's
portfolio turnover will be increased if the Fund writes a large number of call
options which are subsequently exercised. The portfolio turnover rate also may
be affected by cash requirements from redemptions and repurchases of Fund
shares. Total brokerage costs generally increase with higher portfolio turnover
rates.
25
<PAGE>
PURCHASING SHARES
The Distributor serves as the national distributor for the Fund's
classes of shares - Class A Shares, Class B Shares and Class C Shares, and has
agreed to use its best efforts to sell shares of the Fund. See the Prospectus
for additional information on how to invest. Shares of the Fund are offered on a
continuous basis, and may be purchased through authorized investment dealers or
directly by contacting Mutual Funds, Inc. or the Distributor.
The minimum initial investment generally is $1,000 for Class A
Shares, Class B Shares and Class C Shares. Subsequent purchases of such classes
generally must be at least $100. The initial and subsequent minimum investments
for Class A Shares will be waived for purchases by officers, directors and
employees of any Delaware Group fund, the Manager or any of the its affiliates
if the purchases are made pursuant to a payroll deduction program. Shares
purchased pursuant to the Uniform Gifts to Minors Act or Uniform Transfers to
Minors Act and shares purchased in connection with an Automatic Investing Plan
are subject to a minimum initial purchase of $250 and a minimum subsequent
purchase of $25. Accounts opened under the Delaware Group Asset Planner service
are subject to a minimum initial investment of $2,000 per Asset Planner Strategy
selected.
Each purchase of Class B Shares is subject to a maximum purchase
limitation of $250,000. For Class C Shares, each purchase must be in an amount
that is less than $1,000,000. Mutual Funds, Inc. will reject any purchase order
for more than $250,000 of Class B Shares and $1,000,000 or more of Class C
Shares. An investor may exceed these limitations by making cumulative purchases
over a period of time. An investor should keep in mind, however, that reduced
front-end sales charges apply to investments of $100,000 or more in Class A
Shares, and that Class A Shares are subject to lower annual 12b-1 Plan expenses
than Class B Shares and Class C Shares and generally are not subject to a CDSC.
Selling dealers are responsible for transmitting orders promptly.
Mutual Funds, Inc. reserves the right to reject any order for the purchase of
shares of the Fund if in the opinion of management such rejection is in the
Fund's best interests.
The NASD has adopted Rules of Fair Practice, as amended, relating to
investment company sales charges. Mutual Funds, Inc. and the Distributor intend
to operate in compliance with these rules.
Class A Shares are purchased at the offering price which reflects a
maximum front-end sales charge of 4.00%; however, lower front-end sales charges
apply for larger purchases. See the table below. Class A Shares are also subject
to annual 12b-1 Plan expenses.
Class B Shares are purchased at net asset value and are subject to a
CDSC of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; (iv) 1% if
shares are redeemed during the sixth year following purchase; and (v) 0%
thereafter. Class B Shares are also subject to annual 12b-1 Plan expenses which
are higher than those to which Class A Shares are subject and are assessed
against Class B Shares for approximately eight years after purchase. See
Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus.
Class C Shares are purchased at net asset value and are subject to a
CDSC of 1% if shares are redeemed within 12 months following purchase. Class C
Shares are also subject to annual 12b-1 Plan expenses for the life of the
investment which are equal to those to which Class B Shares are subject.
26
<PAGE>
Class A Shares, Class B Shares and Class C Shares shares represent a
proportionate interest in a Fund's assets and will receive a proportionate
interest in that Fund's income, before application, as to Class A, Class B and
Class C Shares, of any expenses under that Fund's 12b-1 Plans.
Certificates representing shares purchased are not ordinarily issued
in the Class A Shares, unless a shareholder submits a specific request. However,
purchases not involving the issuance of certificates are confirmed to the
investor and credited to the shareholder's account on the books maintained by
Delaware Service Company, Inc. (the "Transfer Agent"). The investor will have
the same rights of ownership with respect to such shares as if certificates had
been issued. An investor that is permitted to obtain a certificate may receive a
certificate representing full share denominations purchased by sending a letter
signed by each owner of the account to the Transfer Agent requesting the
certificate. No charge is assessed by Mutual Funds, Inc. for any certificate
issued. A shareholder may be subject to fees for replacement of a lost or stolen
certificate under certain conditions, including the cost of obtaining a bond
covering the lost or stolen certificate. Please contact the Fund for further
information. Investors who hold certificates representing any of their shares
may only redeem those shares by written request. The investor's certificate(s)
must accompany such request.
Alternative Purchase Arrangements
The alternative purchase arrangements of Class A, Class B and Class
C Shares of the Fund permit investors to choose the method of purchasing shares
that is most suitable for their needs given the amount of their purchase, the
length of time they expect to hold their shares and other relevant
circumstances. Investors should determine whether, given their particular
circumstances, it is more advantageous to purchase Class A Shares of a Fund and
incur a front-end sales charge and annual 12b-1 Plan expenses of up to a maximum
of 0.25% of the average daily net assets of Class A Shares or to purchase either
Class B or Class C Shares of a Fund and have the entire initial purchase amount
invested in the Fund with the investment thereafter subject to a CDSC and annual
12b-1 Plan expenses. Class B Shares are subject to a CDSC if the shares are
redeemed within six years of purchase, and Class C Shares are subject to a CDSC
if the shares are redeemed within 12 months of purchase. Class B and Class C
Shares are each subject to annual 12b-1 Plan expenses of up to a maximum of 1%
(0.25% of which are service fees to be paid to the Distributor, dealers or
others for providing personal service and/or maintaining shareholder accounts)
of average daily net assets of the respective Class. Class B Shares will
automatically convert to Class A Shares at the end of approximately eight years
after purchase and, thereafter, be subject to annual 12b-1 Plan expenses of up
to a maximum of 0.25% 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.
27
<PAGE>
<TABLE>
<CAPTION>
Class A Shares
- -------------------------------------------------------------------------------------------------------------------------------
Dealer's
Commission***
Front-End Sales Charge as a % of as % of
Offering Amount Offering
Amount of Purchase Price Invested** Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 3.75% 3.94% 3.25%
$100,000 but under $250,000 3.00 3.08 2.50
$250,000 but under $500,000 2.50 2.60 2.00
$500,000 but under $1,000,000* 2.00 2.02 1.75
</TABLE>
* There is no front-end sales charge on purchases of $1 million or more of
Class A Shares but, under certain limited circumstances, a 1% contingent
deferred sales charge may apply upon redemption of such shares.
** Based on an initial net asset value of the Class A Shares of the end of
Mutual Funds, Inc.'s most recent fiscal year.
*** Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
- --------------------------------------------------------------------------------
The Fund must be notified when a sale takes place which would qualify
for the reduced front-end sales charge on the basis of previous or
current purchases. The reduced front-end sales charge will be granted
upon confirmation of the shareholder's holdings by the Fund. Such
reduced front-end sales charges are not retroactive.
From time to time, upon written notice to all of its dealers, the
Distributor may hold special promotions for specified periods during
which the Distributor may reallow to dealers up to the full amount of
the front-end sales charges 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 commission of up to 0.15% of
the offering price in connection with sales of Class A Shares. Such dealers must
meet certain requirements in terms of organization and distribution capabilities
and their ability to increase sales. The Distributor should be contacted for
further information on these requirements as well as the basis and circumstances
upon which the additional commission will be paid. Participating dealers may be
deemed to have additional responsibilities under the securities laws.
Dealer's Commission
For initial purchases of Class A Shares of $1,000,000 or more, a
dealer's commission may be paid by the Distributor to financial advisers through
whom such purchases are effected in accordance with the following schedule:
28
<PAGE>
Dealer's Commission
-------------------
(as a percentage of
Amount of Purchase amount purchased)
------------------
Up to $2 million 1.00%
Next $1 million up to $3 million 0.75
Next $2 million up to $5 million 0.50
Amount over $5 million 0.25
In determining a financial adviser's eligibility for the dealer's
commission, purchases of Class A Shares of other Delaware Group funds as to
which a Limited CDSC applies (see Contingent Deferred Sales Charge for Certain
Redemptions of Class A Shares Purchased at Net Asset Value under Redemption and
Exchange in the Prospectus) may be aggregated with those of Class A Shares of
the Fund. Financial advisers also may be eligible for a dealer's commission in
connection with certain purchases made under a Letter of Intention or pursuant
to an investor's Right of Accumulation. Financial advisers should contact the
Distributor concerning the applicability and calculation of the dealer's
commission in the case of combined purchases.
An exchange from other Delaware Group funds will not qualify for
payment of the dealer's commission, unless a dealer's commission or similar
payment has not been previously paid on the assets being exchanged. The schedule
and program for payment of the dealer's commission are subject to change or
termination at any time by the Distributor at its discretion.
Contingent Deferred Sales Charge - Class B Shares and Class C Shares
Class B Shares and Class C Shares are purchased without a front-end
sales charge. Class B Shares redeemed within six years of purchase may be
subject to a CDSC at the rates set forth below, and Class C Shares redeemed
within 12 months of purchase may be subject to a CDSC of 1%. CDSCs are charged
as a percentage of the dollar amount subject to the CDSC. The charge will be
assessed on an amount equal to the lesser of the net asset value at the time of
purchase of the shares being redeemed or the net asset value of those shares at
the time of redemption. No CDSC will be imposed on increases in net asset value
above the initial purchase price, nor will a CDSC be assessed on redemptions of
shares acquired through reinvestment of dividends or capital gains
distributions. See Waiver of Contingent Deferred Sales Charge - Class B and
Class C Shares under Redemption and Exchange in the Prospectus for a list of the
instances in which the CDSC is waived.
The following table sets forth the rates of the CDSC for Class B Shares
of each Fund:
Contingent Deferred
Sales Charge (as a
Percentage of
Dollar Amount
Year After Purchase Made Subject to Charge)
------------------------ ------------------
0-2 4%
3-4 3%
5 2%
6 1%
7 and thereafter None
29
<PAGE>
During the seventh year after purchase and, thereafter, until converted
automatically into Class A Shares, Class B Shares will still be subject to the
annual 12b-1 Plan expenses of up to 1% of average daily net assets of those
shares. At the end of approximately eight years after purchase, the investor's
Class B Shares will be automatically converted into Class A Shares of the Fund.
See Automatic Conversion of Class B Shares under Classes of Shares in the
Prospectus. Such conversion will constitute a tax-free exchange for federal
income tax purposes. See Taxes in the Prospectus.
Plans Under Rule 12b-1 for the Fund Classes
Pursuant to Rule 12b-1 under the 1940 Act, Mutual Funds, Inc. has
adopted a separate plan for each of the Class A Shares, Class B Shares and Class
C Shares of the Fund (the "Plans"). Each Plan permits the Fund to pay for
certain distribution, promotional and related expenses involved in the marketing
of only the class of shares to which the Plan applies. Such shares are not
included in calculating the Plans' fees.
The Plans permit the Fund, pursuant to its Distribution Agreement, to
pay out of the assets of the Class A Shares, Class B Shares and Class C Shares
monthly fees to the Distributor for its services and expenses in distributing
and promoting sales of shares of such classes. These expenses include, among
other things, preparing and distributing advertisements, sales literature and
prospectuses and reports used for sales purposes, compensating sales and
marketing personnel, and paying distribution and maintenance fees to securities
brokers and dealers who enter into agreements with the Distributor. The Plan
expenses relating to Class B and Class C Shares are also used to pay the
Distributor for advancing the commission costs to dealers with respect to the
initial sale of such shares.
In addition, the Fund may make payments out of the assets of Class A,
Class B and Class C Shares directly to other unaffiliated parties, such as
banks, who either aid in the distribution of shares of, or provide services to,
such classes.
The maximum aggregate fee payable by the Fund under its Plans, and the
Fund's Distribution Agreement, is on an annual basis, up to 0.25% of the Class A
Shares' average daily net assets for the year, and up to 1% (0.25% of which are
service fees to be paid to the Distributor, dealers and others for providing
personal service and/or maintaining shareholder accounts) of each of the Class B
Shares' and the Class C Shares' average daily net assets for the year. Mutual
Funds, Inc.'s Board of Directors may reduce these amounts at any time.
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 the 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 Agreement, as amended, have all been
approved by the Board of Directors of Mutual Funds, Inc., including a majority
of the directors who are not "interested persons" (as defined in the 1940 Act)
of Mutual Funds, Inc. and who have no direct or indirect financial interest in
the Plans, by vote cast in person at a meeting duly called for the purpose of
voting on the Plans and such Agreements. Continuation of the Plans and the
Distribution Agreements, as amended, must be approved annually by the Board of
Directors in the same manner as specified above.
Each year, the directors must determine whether continuation of the
Plans is in the best interest of shareholders of, respectively, Class A Shares,
Class B Shares and Class C Shares of the Fund and that there is a
30
<PAGE>
reasonable likelihood of the Plan relating to a Class providing a benefit to
that Class. The Plans and the Distribution Agreement, as amended, may be
terminated with respect to a Class at any time without penalty by a majority of
those directors who are not "interested persons" or by a majority vote of the
outstanding voting securities of the Class. Any amendment materially increasing
the percentage payable under the Plans must likewise be approved by a majority
vote of the outstanding voting securities of the Class, as well as by a majority
vote of those directors who are not "interested persons." With respect to the
Class A Shares' Plan, any material increase in the maximum percentage payable
thereunder must also be approved by a majority of the outstanding voting
securities Class B Shares of the Fund. Also, any other material amendment to the
Plans must be approved by a majority vote of the directors including a majority
of the noninterested directors of Mutual Funds, Inc. having no interest in the
Plans. In addition, in order for the Plans to remain effective, the selection
and nomination of directors who are not "interested persons" of Mutual Funds,
Inc. must be effected by the directors who themselves are not "interested
persons" and who have no direct or indirect financial interest in the Plans.
Persons authorized to make payments under the Plans must provide written reports
at least quarterly to the Board of Directors for their review.
For the fiscal years ended July 31, 1996, 1995 and 1994, the Fund's
predecessor Distributors earned distribution fees of $120,396, $126,890 and
$140,340 and waived distribution fees of $73,210, $78,426 and $71,584,
respectively. For the period August 1, 1996 through December 31, 1996, the Fund
paid $72,184 in Rule 12b-1 fees.
Other Payments to Dealers -- Class A, Class B and Class C Shares
From time to time, at the discretion of the Distributor, all
registered broker/dealers whose aggregate sales of Fund Classes exceed certain
limits as set by the Distributor, may receive from the Distributor an additional
payment of up to 0.25% of the dollar amount of such sales. The Distributor may
also provide additional promotional incentives or payments to dealers that sell
shares of the Delaware Group of funds. In some instances, these incentives or
payments may be offered only to certain dealers who maintain, have sold or may
sell certain amounts of shares. The Distributor may also pay a portion of the
expense of preapproved dealer advertisements promoting the sale of Delaware
Group fund shares.
Special Purchase Features--Class A Shares
Buying Class A Shares at Net Asset Value
Class A Shares may be purchased without a front-end sales charge under
the Dividend Reinvestment Plan and, under certain circumstances, the Exchange
Privilege and the 12-Month Reinvestment Privilege.
Current and former officers, directors and employees of Mutual Funds,
Inc., any other fund in the Delaware Group, the Manager, the Manager's
affiliates, or any of the Manager's affiliates that may in the future be
created, legal counsel to the funds, and registered representatives and
employees of broker/dealers who have entered into Dealer's Agreements with the
Distributor may purchase Class A Shares of the Fund and any such class of shares
of any of the other funds in the Delaware Group, including any fund that may be
created, at the net asset value per share. Family members of such persons at
their direction, and any employee benefit plan established by any of the
foregoing funds, corporations, counsel or broker/dealers may also purchase Class
A Shares at net asset value. Class A Shares may also be purchased at net asset
value by current and former officers, directors and employees (and members of
their families) of the Dougherty Financial Group LLC.
Purchases of Class A Shares may also be made by clients of registered
representatives of an authorized investment dealer at net asset value within 12
months after the registered representative changes employment, if the purchase
is funded by proceeds from an investment where a front-end sales charge,
contingent deferred sales charge or other sales charge has been assessed.
Purchases of Class A Shares may also be made at net asset value by bank
employees who provide services in connection with agreements between the bank
and unaffiliated brokers or dealers
31
<PAGE>
concerning sales of shares of Delaware Group funds. Officers, directors and key
employees of institutional clients of the Manager or any of its affiliates may
purchase Class A Shares at net asset value. Moreover, purchases may be effected
at net asset value for the benefit of the clients of brokers, dealers and
registered investment advisers affiliated with a broker or dealer, if such
broker, dealer or investment adviser has entered into an agreement with the
Distributor providing specifically for the purchase of Class A Shares in
connection with special investment products, such as wrap accounts or similar
fee based programs.
Investors in Delaware-Voyageur Unit Investment Trusts may reinvest
monthly dividend checks and/or repayment of invested capital into Class A Shares
of any of the funds in the Delaware Group at net asset value.
The Fund must be notified in advance that an investment qualifies for
purchase at net asset value.
Letter of Intention
The reduced front-end sales charges described above with respect to
Class A Shares are also applicable to the aggregate amount of purchases made
within a 13-month period pursuant to a written Letter of Intention provided by
the Distributor and signed by the purchaser, and not legally binding on the
signer or Mutual Funds, Inc., which provides for the holding in escrow by the
Transfer Agent of 5% of the total amount of Class A Shares intended to be
purchased until such purchase is completed within the 13-month period. A Letter
of Intention may be dated to include shares purchased up to 90 days prior to the
date the Letter is signed. The 13-month period begins on the date of the
earliest purchase. If the intended investment is not completed, except as noted
below, the purchaser will be asked to pay an amount equal to the difference
between the front-end sales charge on Class A Shares purchased at the reduced
rate and the front-end sales charge otherwise applicable to the total shares
purchased. If such payment is not made within 20 days following the expiration
of the 13-month period, the Transfer Agent will surrender an appropriate number
of the escrowed shares for redemption in order to realize the difference. Such
purchasers may include the value (at offering price at the level designated in
their Letter of Intention) of all their shares of the Fund 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.
Combined Purchases Privilege
In determining the availability of the reduced front-end sales charge
previously set forth with respect to Class A Shares, purchasers may combine the
total amount of any combination of Class A Shares, Class B Shares and/or Class C
Shares of the Fund, as well as shares of any other class of any of the other
Delaware Group funds (except shares of any Delaware Group fund which do not
carry a front-end sales charge, CDSC or Limited CDSC, other than shares of
Delaware Group Premium Fund, Inc. beneficially owned in connection with the
ownership of variable insurance products, unless they were acquired through an
exchange from a Delaware Group fund which carried a front-end sales charge, CDSC
or Limited CDSC). In addition, assets held in any stable value product available
through the Delaware Group may be combined with other Delaware Group fund
holdings.
The privilege also extends to all purchases made at one time by an
individual; or an individual, his or her spouse and their children under 21; or
a trustee or other fiduciary of trust estates or fiduciary accounts for the
benefit of such family members (including certain employee benefit programs).
32
<PAGE>
Right of Accumulation
In determining the availability of the reduced front-end sales charge
with respect to Class A Shares, purchasers may also combine any subsequent
purchases of Class A Shares, Class B Shares and Class C Shares of a Fund, as
well as shares of any other class of any of the other Delaware Group funds which
offer such classes (except shares of any Delaware Group fund which do not carry
a front-end sales charge, CDSC or Limited CDSC, other than shares of Delaware
Group Premium Fund, Inc. beneficially owned in connection with the ownership of
variable insurance products, unless they were acquired through an exchange from
a Delaware Group fund which carried a front-end sales charge, CDSC or Limited
CDSC). If, for example, any such purchaser has previously purchased and still
holds Class A Shares and/or shares of any other of the classes described in the
previous sentence with a value of $40,000 and subsequently purchases $60,000 at
offering price of additional shares of Class A Shares, the charge applicable to
the $60,000 purchase would currently be 3.00%. For the purpose of this
calculation, the shares presently held shall be valued at the public offering
price that would have been in effect were the shares purchased simultaneously
with the current purchase. Investors should refer to the table of sales charges
for Class A Shares to determine the applicability of the Right of Accumulation
to their particular circumstances.
12-Month Reinvestment Privilege
Holders of Class A Shares of the Fund 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 the Fund or in Class A Shares of any of the other
funds in the Delaware Group, subject to applicable eligibility and minimum
purchase requirements, in states where shares of such other funds may be sold,
at net asset value without the payment of a front-end sales charge. This
privilege does not extend to Class A Shares where the redemption of the shares
triggered the payment of a Limited CDSC. Persons investing redemption proceeds
from direct investments in mutual funds in the Delaware Group offered without a
front-end sales charge will be required to pay the applicable sales charge when
purchasing Class A Shares. The reinvestment privilege does not extend to a
redemption of either Class B Shares or Class C Shares.
Any such reinvestment cannot exceed the redemption proceeds (plus any
amount necessary to purchase a full share). The reinvestment will be made at the
net asset value next determined after receipt of remittance. A redemption and
reinvestment could have income tax consequences. It is recommended that a tax
adviser be consulted with respect to such transactions. Any reinvestment
directed to a fund in which the investor does not then have an account will be
treated like all other initial purchases of a fund's shares. Consequently, an
investor should obtain and read carefully the prospectus for the fund in which
the investment is intended to be made before investing or sending money. The
prospectus contains more complete information about the fund, including charges
and expenses.
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 CDSC (see Contingent Deferred Sales Charge for
Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus) in connection with the features
described above.
INVESTMENT PLANS
Reinvestment of Dividends in Other Delaware Group Funds
Subject to applicable eligibility and minimum initial purchase
requirements and the limitations set forth below, holders of Class A, Class B
and Class C Shares may automatically reinvest dividends and/or distributions in
any of the mutual funds in the Delaware Group, including the Fund, in states
where their shares may be sold. Such investments will be at net asset value at
the close of business on the reinvestment date without any front-end sales
charge or service fee. The shareholder must notify the Transfer Agent in writing
and must have established an account in the fund into which the dividends and/or
distributions are to be invested. Any reinvestment directed to a fund in which
the investor does not then have an account will be treated like all other
initial purchases of a fund's shares.
33
<PAGE>
Consequently, an investor should obtain and read carefully the prospectus for
the fund in which the investment is intended to be made before investing or
sending money. The prospectus contains more complete information about the fund,
including charges and expenses. See also Additional Methods of Adding to Your
Investment - Dividend Reinvestment Plan under How to Buy Shares in the
Prospectus.
Subject to the following limitations, dividends and/or distributions
from other funds in the Delaware Group may be invested in shares of the Fund,
provided an account has been established. Dividends from Class A Shares may not
be directed to Class B Shares or Class C Shares. Dividends from Class B Shares
may only be directed to other Class B Shares and dividends from Class C Shares
may only be directed to other Class C Shares. See Appendix B -- Classes Offered
in the Prospectus for the funds in the Delaware Group that are eligible for
investment by holders of Fund shares.
Investing by Electronic Fund Transfer
Direct Deposit Purchase Plan -- Investors may arrange for the Fund to
accept for investment in Class A, Class B or Class C Shares, through an agent
bank, preauthorized government or private recurring payments. This method of
investment assures the timely credit to the shareholder's account of payments
such as social security, veterans' pension or compensation benefits, federal
salaries, Railroad Retirement benefits, private payroll checks, dividends, and
disability or pension fund benefits. It also eliminates lost, stolen and delayed
checks.
Automatic Investing Plan -- Shareholders of Class A, Class B and Class
C Shares may make automatic investments by authorizing, in advance, monthly
payments directly from their checking account for deposit into their Fund
account. This type of investment will be handled in either of the following
ways. (1) If the shareholder's bank is a member of the National Automated
Clearing House Association ("NACHA"), the amount of the investment will be
electronically deducted from his or her account by Electronic Fund Transfer
("EFT"). The shareholder's checking account will reflect a debit each month at a
specified date although no check is required to initiate the transaction. (2) If
the shareholder's bank is not a member of NACHA, deductions will be made by
preauthorized checks, known as Depository Transfer Checks. Should the
shareholder's bank become a member of NACHA in the future, his or her
investments would be handled electronically through EFT.
* * *
Initial investments under the Direct Deposit Purchase Plan and the
Automatic Investing Plan must be for $250 or more and subsequent investments
under such Plans must be for $25 or more. An investor wishing to take advantage
of either service must complete an authorization form. Either service can be
discontinued by the shareholder at any time without penalty by giving written
notice.
Payments to the Fund from the federal government or its agencies on
behalf of a shareholder may be credited to the shareholder's account after such
payments should have been terminated by reason of death or otherwise. Any such
payments are subject to reclamation by the federal government or its agencies.
Similarly, under certain circumstances, investments from private sources may be
subject to reclamation by the transmitting bank. In the event of a reclamation,
the Fund may liquidate sufficient shares from a shareholder's account to
reimburse the government or the private source. In the event there are
insufficient shares in the shareholder's account, the shareholder is expected to
reimburse the Fund.
Direct Deposit Purchases by Mail
Shareholders may authorize a third party, such as a bank or employer,
to make investments directly to their Fund accounts. The Fund will accept these
investments, such as bank-by-phone, annuity payments and payroll
34
<PAGE>
allotments, by mail directly from the third party. Investors should contact
their employers or financial institutions who in turn should contact Mutual
Funds, Inc. for proper instructions.
Wealth Builder Option
Shareholders can use the Wealth Builder Option to invest in the
Classes through regular liquidations of shares in their accounts in other mutual
funds in the Delaware Group. Shareholders of the Classes may elect to invest in
one or more of the other mutual funds in the Delaware Group through the Wealth
Builder Option. See Wealth Builder Option and Redemption and Exchange in the
Prospectus.
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 Prospectus.
The investment will be made on the 20th day of each month (or, if the fund
selected is not open that day, the next business day) at the public offering
price or net asset value, as applicable, of the fund selected on the date of
investment. No investment will be made for any month if the value of the
shareholder's account is less than the amount specified for investment.
Periodic investment through the Wealth Builder Option does not insure
profits or protect against losses in a declining market. The price of the fund
into which investments are made could fluctuate. Since this program involves
continuous investment regardless of such fluctuating value, investors selecting
this option should consider their financial ability to continue to participate
in the program through periods of low fund share prices. This program involves
automatic exchanges between two or more fund accounts and is treated as a
purchase of shares of the fund into which investments are made through the
program. See Exchange Privilege for a brief summary of the tax consequences of
exchanges. Shareholders can terminate their participation at any time by giving
written notice to their Fund.
35
<PAGE>
DETERMINING OFFERING PRICE AND NET ASSET VALUE
Orders for purchases of Class A Shares are effected at the offering
price next calculated by the Fund in which shares are being purchased after
receipt of the order by the Fund, its agent or designee. Orders for purchases of
Class B Shares and Class C Shares are effected at the net asset value per share
next calculated by the Fund in which shares are being purchased after receipt of
the order by the Fund, its agent or designee. Selling dealers are responsible
for transmitting orders promptly.
The offering price for Class A Shares consists of the net asset value
per share plus any applicable front-end sales charges. Offering price and net
asset value are computed as of the close of regular trading on the New York
Stock Exchange (ordinarily, 4 p.m., Eastern time) on days when the Exchange is
open. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year except for New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas. When the New York Stock Exchange is closed, the
Fund will generally be closed, pricing calculations will not be made and
purchase and redemption orders will not be processed.
The Fund's net asset value per share is computed by adding the value
of all the Fund's securities and other assets, deducting any liabilities of the
Fund, and dividing by the number of Fund shares outstanding. Expenses and fees
are accrued daily. Portfolio securities, except for bonds, which are primarily
traded on a national or foreign securities exchange are valued at the last sale
price on that exchange. Options are valued at the last reported sales price or,
if no sales are reported, at the mean between bid and asked prices. Securities
not traded on a particular day, over-the-counter securities and government and
agency securities are valued at the mean value between bid and asked prices.
Money market instruments having a maturity of less than 60 days are valued at
amortized cost. Debt securities (other than short-term obligations) are valued
on the basis of valuations provided by a pricing service when such prices are
believed to reflect the fair value of such securities. Use of a pricing service
has been approved by the Board of Directors. Subject to the foregoing,
securities for which market quotations are not readily available and other
assets are valued at fair value as determined in good faith and in a method
approved by the Board of Directors.
Net asset value data of the Fund as of December 31, 1996 was
calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Class A Net Assets ($59,104,609) = Net Asset Value Per Share ($10.40)
-----------------------------
Shares Outstanding (5,684,868)
Maximum Public Offering Price = $10.40 + 3.75% of POP = $10.81
Class B Net Assets ($88,367) = Net Asset Value Per Share ($10.40)
--------------------------------
Shares Outstanding (8,498)
</TABLE>
Each Class of the Fund will bear, pro-rata, all of the common expenses
of the Fund. The net asset values of all outstanding shares of each Class of the
Fund will be computed on a pro-rata basis for each outstanding share based on
the proportionate participation in the Fund represented by the value of shares
of that Class. All income earned and expenses incurred by the Fund will be borne
on a pro-rata basis by each outstanding share of a Class, based on each Class'
percentage in the Fund represented by the value of shares of such Classes. Due
to the specific distribution expenses and other costs that may be allocable to
each Class, the dividends paid to each Class may vary. The net asset value per
share of each Class is expected to be equivalent.
36
<PAGE>
REDEMPTION AND REPURCHASE
Any shareholder may require the Fund to redeem shares by sending a
written request, signed by the record owner or owners exactly as the shares are
registered, to the Fund at 1818 Market Street, Philadelphia, PA 19103. In
addition, certain expedited redemption methods described below are available
when stock certificates have not been issued. Certificates are issued for Class
A Shares only if a shareholder specifically requests them. Certificates are not
issued for Class B Shares or Class C Shares. If stock certificates have been
issued for shares being redeemed, they must accompany the written request. For
redemptions of $50,000 or less paid to the shareholder at the address of record,
the request must be signed by all owners of the shares or the investment dealer
of record, but a signature guarantee is not required. When the redemption is for
more than $50,000, or if payment is made to someone else or to another address,
signatures of all record owners are required and a signature guarantee may be
required. Each signature guarantee must be supplied by an eligible guarantor
institution. 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 Fund shares, the Distributor, acting as
agent of the Fund, offers to repurchase Fund shares from broker/dealers acting
on behalf of shareholders. The redemption or repurchase price, which may be more
or less than the shareholder's cost, is the net asset value per share next
determined after receipt of the request in good order by the Fund or its agent,
subject to any applicable CDSC or Limited CDSC. This is computed and effective
at the time the offering price and net asset value are determined. See
Determining Offering Price and Net Asset Value. The Fund and the Distributor end
their business days at 5 p.m., Eastern time. This offer is discretionary and may
be completely withdrawn without further notice by the Distributor.
Orders for the repurchase of Fund shares which are submitted to the
Distributor prior to the close of its business day will be executed at the net
asset value per share computed that day (subject to the applicable CDSC or
Limited CDSC), if the repurchase order was received by the broker/dealer from
the shareholder prior to the time the offering price and net asset value are
determined on such day. The selling dealer has the responsibility of
transmitting orders to the Distributor promptly. Such repurchase is then settled
as an ordinary transaction with the broker/dealer (who may make a charge to the
shareholder for this service) delivering the shares repurchased.
Certain redemptions of Class A Shares purchased at net asset value may
result in the imposition of a Limited CDSC. See Contingent Deferred Sales Charge
for Certain Redemptions of Class A Shares Purchased at Net Asset Value under
Redemption and Exchange in the Prospectus. Class B Shares are subject to a CDSC
of: (i) 4% if shares are redeemed within two years of purchase; (ii) 3% if
shares are redeemed during the third or fourth year following purchase; (iii) 2%
if shares are redeemed during the fifth year following purchase; (iv) 1% if
shares are redeemed during the sixth year following purchase; and (v) 0%
thereafter. Class C Shares are subject to a CDSC of 1% if shares are redeemed
within 12 months following purchase. See Contingent Deferred Sales Charge -
Class B Shares and Class C Shares under Classes of Shares in the Prospectus.
Except for the applicable CDSC or Limited CDSC and, with respect to the
expedited payment by wire described below for which, in the case of the Classes,
there is currently a $7.50 bank wiring cost, neither the Fund nor the Fund's
Distributor charges a fee for redemptions or repurchases, but such fees could be
charged at any time in the future.
Payment for shares redeemed will ordinarily be mailed the next business
day, but in no case later than seven days, after receipt of a redemption request
in good order; provided, however, that each commitment to mail or wire
redemption proceeds by a certain time, as described below, is modified by the
qualifications described in the next paragraph.
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<PAGE>
The Fund will process written or telephone redemption requests to the
extent that the purchase orders for the shares being redeemed have already
settled. The Fund will honor redemption requests as to shares for which a check
was tendered as payment, but the Fund will not mail or wire the proceeds until
it is reasonably satisfied that the check has cleared. 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 shares
purchased by the check plus any dividends earned thereon. Shareholders may be
responsible for any losses to the Fund or to the Distributor.
In case of a suspension of the determination of the net asset value
because the New York Stock Exchange is closed for other than weekends or
holidays, or trading thereon is restricted or an emergency exists as a result of
which disposal by the Fund of securities owned by it is not reasonably
practical, or it is not reasonably practical for the Fund fairly to value its
assets, or in the event that the SEC has provided for such suspension for the
protection of shareholders, the Fund may postpone payment or suspend the right
of redemption or repurchase. In such case, the shareholder may withdraw the
request for redemption or leave it standing as a request for redemption at the
net asset value next determined after the suspension has been terminated.
Payment for shares redeemed or repurchased may be made either in cash
or kind, or partly in cash and partly in kind. Any portfolio securities paid or
distributed in kind would be valued as described in Determining Offering Price
and Net Asset Value. Subsequent sale by an investor receiving a distribution in
kind could result in the payment of brokerage commissions. However, Mutual
Funds, Inc. has elected to be governed by Rule 18f-1 under the 1940 Act pursuant
to which the Fund is obligated to redeem shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
The value of the Fund's investments is subject to changing market
prices. Thus, a shareholder reselling shares to the Fund 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 noted in the Prospectus, has remained below the minimum
amounts required by the Prospectus 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 How to Buy Shares in the Prospectus.
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 made 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 of the Fund Classes or their investment dealers of record
wishing to redeem any amount of shares of $50,000 or less for which certificates
have not been issued may call the Shareholder Service Center at 800-523-1918
prior to the time the offering price and net asset value are determined, as
noted above, and have the proceeds mailed to them at the address of record.
Checks payable to the shareholder(s) of record will normally be
38
<PAGE>
mailed the next business day, but no later than seven days, after the receipt of
the redemption request. This option is only available to individual, joint and
individual fiduciary-type accounts.
In addition, redemption proceeds of $1,000 or more can be transferred
to your predesignated bank account by wire or by check by calling the phone
numbers listed above. An authorization form must have been completed by the
shareholder and filed with the 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, from the date of the
telephone request. This procedure will take longer than the Payment by Wire
option (1 above) because of the extra time necessary for the mailing and
clearing of the check after the bank receives it.
Redemption Requirements: In order to change the name of the bank and
the account number it will be necessary to send a written request to the Fund
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.
If expedited payment under these procedures could adversely affect the
Fund, the Fund may take up to seven days to pay the shareholder.
Neither the Fund nor the Fund's Transfer Agent is responsible for any
shareholder loss incurred in acting upon written or telephone instructions for
redemption or exchange of Fund shares which are reasonably believed to be
genuine. With respect to such telephone transactions, the Fund will follow
reasonable procedures to confirm that instructions communicated by telephone are
genuine (including verification of a form of personal identification) as, if it
does not, the Fund or the Transfer Agent may be liable for any losses due to
unauthorized or fraudulent transactions. Telephone instructions received by
shareholders of the Fund Classes are generally tape recorded. A written
confirmation will be provided for all purchase, exchange and redemption
transactions initiated by telephone.
Systematic Withdrawal Plans
Shareholders 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.
39
<PAGE>
Checks are dated either the 1st or the 15th of the month, as selected
by the shareholder (unless such date falls on a holiday or a weekend), and are
normally mailed within two business days. Both ordinary income dividends and
realized securities profits distributions will be automatically reinvested in
additional shares of the Class at net asset value. This plan is not recommended
for all investors and should be started only after careful consideration of its
operation and effect upon the investor's savings and investment program. To the
extent that withdrawal payments from the plan exceed any dividends and/or
realized securities profits distributions paid on shares held under the plan,
the withdrawal payments will represent a return of capital and the share balance
may, in time, be depleted, particularly in a declining market.
The sale of shares for withdrawal payments constitutes a taxable event
and a shareholder may incur a capital gain or loss for federal income tax
purposes. This gain or loss may be long-term or short-term depending on the
holding period for the specific shares liquidated.
Withdrawals under this plan made concurrently with the purchases of
additional shares may be disadvantageous to the shareholder. Purchases of Class
A Shares through a periodic investment program in a fund managed by the Manager
must be terminated before a Systematic Withdrawal Plan with respect to such
shares can take effect, except if the shareholder is investing in Delaware Group
funds which do not carry a sales charge. Redemptions of Class A Shares pursuant
to a Systematic Withdrawal Plan may be subject to a Limited CDSC if the purchase
was made at net asset value and a dealer's commission has been paid on that
purchase. Redemptions of Class B Shares or Class C Shares pursuant to a
Systematic Withdrawal Plan may be subject to a CDSC, unless the annual amount
selected to be withdrawn is less than 12% of the account balance on the date
that the Systematic Withdrawal Plan was established. See Waiver of Contingent
Deferred Sales Charge - Class B and Class C Shares and Waiver of Limited
Contingent Deferred Sales Charge - Class A Shares under Redemption and Exchange
in the Prospectus. Shareholders should consult their financial advisers to
determine whether a Systematic Withdrawal Plan would be suitable for them.
An investor wishing to start a Systematic Withdrawal Plan must
complete an authorization form. If the recipient of Systematic Withdrawal Plan
payments is other than the registered shareholder, the shareholder's signature
on this authorization must be guaranteed. Each signature guarantee must be
supplied by an eligible guarantor institution. The 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.
40
<PAGE>
DISTRIBUTIONS AND TAXES
The Fund declares a dividend to shareholders of each Class from net
investment income on a daily basis. Dividends are declared each day the Fund is
open and paid monthly. 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
shares of the Fund by wire begin earning dividends when converted into Federal
Funds and are available for investment, normally the next business day after
receipt. However, if the respective Fund is given prior notice of Federal Funds
wire and an acceptable written guarantee of timely receipt from an investor
satisfying the Fund's credit policies, the purchase will start earning dividends
on the date the wire is received. Investors desiring to guarantee wire payments
must have an acceptable financial condition and credit history in the sole
discretion of the Fund. Mutual Funds, Inc. reserves the right to terminate this
option at any time. Purchases by check earn dividends upon conversion to Federal
Funds, normally one business day after receipt.
Each Class of shares of the Fund will share proportionately in the
investment income and expenses of the Fund, except that Class A Shares, Class B
Shares and Class C Shares alone will incur distribution fees under their
respective 12b-1 Plans.
Dividends are automatically reinvested in additional shares of the
same Class of the respective Fund at net asset value, unless an election to
receive dividends in cash has been made. Payment by check of cash dividends will
ordinarily be mailed within three business days after the payable date. Dividend
payments of $1.00 or less will be automatically reinvested, notwithstanding a
shareholder's election to receive dividends in cash. If such a shareholder's
dividends increase to greater than $1.00, the shareholder would have to file a
new election in order to begin receiving dividends in cash again. If a
shareholder redeems an entire account, all dividends accrued to the time of the
withdrawal will be paid by separate check at the end of that particular monthly
dividend period, consistent with the payment and mailing schedule described
above. Any check in payment of dividends or other distributions which cannot be
delivered by the United States Post Office or which remains uncashed for a
period of more than one year may be reinvested in the shareholder's account at
the then-current net asset value and the dividend option may be changed from
cash to reinvest. The Fund may deduct from a shareholder's account the costs of
the Fund's effort to locate a shareholder if a shareholder's mail is returned by
the United States Post Office or the Fund is otherwise unable to locate the
shareholder or verify the shareholder's mailing address. These costs may include
a percentage of the account when a search company charges a percentage fee in
exchange for their location services.
Any distributions from net realized securities profits will be made
annually. Payments would be made during the first quarter of the next fiscal
year. Such distributions will be reinvested in shares, unless the shareholders
elect to receive them in cash. The Fund will mail a quarterly statement showing
the dividends paid and all the transactions made during the period.
41
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
The Manager, located at One Commerce Square, Philadelphia, PA 19103,
furnishes investment management services to the Fund, subject to the supervision
and direction of Mutual Funds, Inc.'s Board of Directors.
The Manager and its predecessors have been managing the funds in the
Delaware Group since 1938. On June 30, 1997, the Manager and its affiliates
within the Delaware Group, including Delaware International Advisers Ltd., were
managing in the aggregate more than $37 billion in assets in the various
institutional or separately managed (approximately $22,302,518,000) and
investment company (approximately $15,246,733,000) accounts.
Prior to May 1, 1997, Voyageur Fund Managers, Inc. ("Voyageur") had
been retained under an investment advisory contract to act as the Fund's
investment adviser, subject to the authority of the Board of Directors. Voyageur
was an indirect, wholly-owned subsidiary of Dougherty Financial Group, Inc.
("DFG"). After the close of business on April 30, 1997, Voyageur became an
indirect, wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") as a result of Lincoln National's acquisition of DFG. LNC,
headquartered in Fort Wayne, Indiana, owns and operates insurance and investment
management businesses, including Delaware Management Holding, Inc. ("DMH").
Affiliates of DMH serve as adviser, distributor and transfer agent for the
Delaware Group of Mutual Funds.
Because Lincoln National's acquisition of DFG resulted in a change of
control of Voyageur, the National High Yield Muncipal Bond Fund's previous
investment advisory agreement with Voyageur was "assigned", as that term is
defined by the Investment Company Act of 1940, and the previous agreements
therefore terminated upon the completion of the acquisition. The Board of
Directors of Mutual Funds, Inc. unanimously approved new advisory agreements at
a meeting held in person on February 14, 1997, and called for a shareholders
meeting to approve the new agreement. At a meeting held on April 11, 1997, the
shareholders of National High Yield Municipal Bond Fund approved its Investment
Management Agreement with the Manager, an indirect wholly-owned subsidiary of
LNC, to become effective after the close of business on April 30, 1997, the date
the acquisition was completed.
Beginning May 1, 1997, Delaware Management Company, Inc. became the
Funds' investment manager. The Investment Management Agreement into which the
Fund's investment manager has entered has an initial term of two years and may
be renewed each year only so long as such renewal and continuance are
specifically approved at least annually by the Board of Directors or by vote of
a majority of the outstanding voting securities of the Fund, and only if the
terms and the renewal thereof have been approved by the vote of a majority of
the directors of Mutual Funds, Inc. who are not parties thereto or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Agreement is terminable without penalty on 60 days'
notice by the directors of Mutual Funds, Inc. or by the Manager. The Agreement
will terminate automatically in the event of its assignment.
Under its Investment Management Agreement, the Fund pays the Manager
an annual fee equal to 0.65% of its average daily net assets.
Beginning June 9, 1997, the Manager has elected voluntarily to waive
that portion, if any, of the annual management fees payable by the Fund and to
pay certain expenses of the Fund to the extent necessary to ensure that the
Total Operating Expenses of Class A Shares, Class B Shares and Class C Shares of
the Fund (exclusive of taxes, interest, brokerage commissions, extraordinary
expenses but including 12b-1 fees) do not exceed, on an annual basis, 0.84%,
1.59% and 1.59%, respectively, through December 31, 1997.
The Fund is responsible for all of its own expenses other than those
borne by the Manager under the Investment Management Agreement and those borne
by the Distributor under the Distribution Agreement. In
42
<PAGE>
connection with the merger transaction described above, the Manager has agreed
for a period of two years ending on April 30, 1999, to pay the operating
expenses (excluding interest expense, taxes, brokerage fees, commissions and
Rule 12b-1 fees) of the Fund which exceed 1% of the Fund's average daily net
assets on an annual basis up to certain limits as set forth in this Part B. This
agreement replaces a similar provision in the Fund's investment advisory
contracts with the Fund's predecessor investment adviser.
For the fiscal years ended July 31, 1996, 1995 and 1994, the Fund's
predecessor adviser paid advisory fees of $322,677, $342,193 and $353,208,
respectively. For the period August 1, 1996 through December 31, 1996, the Fund
paid $140,548 in advisory fees.
Under the general supervision of the Board of Directors, the Manager
makes and executes all investment decisions for the Fund. The Manager pays the
salaries of all directors, officers and employees of Mutual Funds, Inc.
who are affiliated with the Manager. The Fund pays all of its other expenses.
The ratios of expenses to average daily net assets for each Class of
the Fund were as follows:
National High Yield Municipal Bond Fund
Period
12/18/96
through Year ended
12/31/96 7/31/96
-------- ----------
Class A Shares 0.87%* 0.85%
Class B Shares(1) 1.45%* N/A
*Annualized
(1) For the period December 18, 1996 (commencement of operations) through
December 31, 1996.
The expense ratios for Class A Shares, Class B Shares and Class C
Shares reflect the impact of their 12b-1 Plans and the voluntary waivers of fees
in effect during the year.
Distribution and Service
The Distributor, Delaware Distributors, L.P., located at 1818 Market
Street, Philadelphia, PA 19103, serves as the national distributor of the Fund's
shares under a Distribution Agreement dated March 1, 1997. The Distributor is
an affiliate of the Manager and bears all of the costs of promotion and
distribution, except for payments by the Fund on behalf of Class A, Class B and
Class C Shares under their respective 12b-1 Plans. The Distributor is an
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 Fund's shareholder servicing, dividend disbursing and transfer agent
pursuant to an Amended and Restated Shareholders Services Agreement dated as of
April 30, 1997. The Transfer Agent also provides accounting services to the Fund
pursuant to the terms of a separate Fund Accounting Agreement. The Transfer
Agent is also an indirect, wholly owned subsidiary of Delaware Management
Holdings, Inc.
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<PAGE>
OFFICERS AND DIRECTORS
The business and affairs of Mutual Funds, Inc. are managed under the
direction of its Board of Directors.
Certain officers and directors of Mutual Funds, Inc. hold identical
positions in each of the other funds in the Delaware Group. On July 31, 1997,
Mutual Funds, Inc.'s officers and directors owned less than 1% of the
outstanding shares of each Class of the Fund.
As of July 31, 1997, management believes the following shareholders
held 5% or more of the outstanding shares of a Class:
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
National High Yield Dain Bosworth Inc. FBO 385,416 7.66%
Municipal Bond Fund Juanita M. Daly
Class A Shares 1200 Racho Cr.
Las Vegas NV 89107-4629
National High Yield PaineWebber for the benefit of 21,067 15.00%
Municipal Bond Fund Katherine C. Sladky
Class B Shares 1121 SE 13th Street
Cape Coral FL 33990-3711
Wilma Kobrinsky TTEE Wilma 11,917 8.48%
Kobrinsky Living Trust
1230 Calle Lerrito
Santa Barbara CA 93101-4966
Southwest Securities Inc. FBO 9,053 6.44%
Phyllis Cox Frank 1994 Trust
P.O. Box 509002
Dallas TX 75250-9002
Southwest Securities Inc. FBO 9,053 6.44%
Suzanne Cox 1994 Trust
P.O. Box 509002
Dallas TX 75250-9002
Southwest Securities Inc. FBO 9,053 6.44%
Carolyn Cox Smith 1994 Trust
P.O. Box 509002
Dallas TX 75250-9002
Lorrain K. Linderman 8,771 6.24%
Arthur Gratias
605 Jefferson Street
Dysart IA 52224-9708
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Class Name and Address of Account Share Amount Percentage
- ----- --------------------------- ------------ ----------
<S> <C> <C> <C>
National High Yield BHC Securities Inc. 8,581 6.11%
Municipal Bond Fund Attn: Mutual Funds Dept.
Class B Shares One Commerce Square
2005 Market Street, Suite 1200
Philadelphia PA 19103-7042
National High Yield PaineWebber for the benefit of 9,469 43.09%
Municipal Bond Fund Donald L. Barnett and Carrie J.
Class C Shares Barnett TEN COM
P.O. Box 25233
Houston TX 77265-5233
Merrill Lynch 6,796 30.92%
4800 Deer Lake Drive E.
Jacksonville FL 32246-6484
Calvin Romriell & Colleen Reeves & 1,933 8.79%
Gordon Romriell JT TEN
4702 Mills Drive
Anchorage AK 99508-4733
Woodrow F. Hatcher 1,892 8.61%
Mary Ann Glaeser
117 Hibiscus Ave.
Gulf Breeze FL 32561-4321
PaineWebber for the benefit of 1,883 8.56%
Miss Alma Helen Goolsby
2711 Briarhurst
Apt. #23
Houston TX 77057-5365
</TABLE>
45
<PAGE>
DMH Corp., Delaware Voyageur Holdings, Inc., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware Distributors, Inc.,
Delaware Service Company, Inc., Delaware Management Trust Company, Delaware
International Holdings Ltd., Founders Holdings, Inc., Delaware International
Advisers Ltd., Delaware Capital Management, Inc. and Delaware Investment &
Retirement Services, Inc. are direct or indirect, wholly owned subsidiaries of
Delaware Management Holdings, Inc. ("DMH"). On April 3, 1995, a merger between
DMH and a wholly owned subsidiary of Lincoln National Corporation ("Lincoln
National") was completed. DMH and the Manager are indirect, wholly owned
subsidiaries, and subject to the ultimate control, of Lincoln National. Lincoln
National, with headquarters in Fort Wayne, Indiana, is a diversified
organization with operations in many aspects of the financial services industry,
including insurance and investment management.
As noted under Investment Management Agreement, after the close of
business on April 30, 1997, Voyageur became an indirect wholly-owned subsidiary
of Lincoln National as a result of Lincoln National's acquisition of DGF.
Directors and principal officers of Mutual Funds, Inc. are noted below
along with their ages and their business experience for the past five years.
Unless otherwise noted, the address of each officer and director is One Commerce
Square, Philadelphia, PA 19103.
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<PAGE>
*Wayne A. Stork (60)
Chairman, President, Chief Executive Officer, Director and/or Trustee
of Mutual Funds, Inc., 32 other investment companies in the
Delaware Group, Delaware Management Holdings, Inc., DMH Corp.,
Delaware International Holdings Ltd. and Founders Holdings,
Inc.
Chairman, President, Chief Executive Officer, Chief Investment Officer
and Director of Delaware Management Company, Inc.
Chairman and Director of Delaware Distributors, Inc. and Delaware
Capital Management, Inc.
Chairman, Chief Executive Officer and Director of Delaware
International Advisers Ltd.
Director of Delaware Service Company, Inc. and Delaware Investment &
Retirement Services, Inc.
During the past five years, Mr. Stork has served in various executive
capacities at different times within the Delaware
organization.
Richard G. Unruh, Jr. (57)
Executive Vice President of Mutual Funds, Inc., each of the other 32
investment companies in the Delaware Group, Delaware
Management Holdings, Inc. and Delaware Capital Management,
Inc.
Executive Vice President and Director of Delaware Management Company,
Inc.
Director of Delaware International Advisers Ltd.
During the past five years, Mr. Unruh has served in various executive
capacities at different times within the Delaware
organization.
Paul E. Suckow (50)
Executive Vice President/Chief Investment Officer, Fixed Income of
Mutual Funds, Inc., each of the other 32 investment companies
in the Delaware Group, Delaware Management Company, Inc. and
Delaware Management Holdings, Inc.
Executive Vice President and Director of Founders Holdings, Inc.
Executive Vice President of Delaware Capital Management, Inc.
Director of Founders CBO Corporation.
Director of HYPPCO Finance Company Ltd.
Before returning to the Delaware Group in 1993, Mr. Suckow was
Executive Vice President and Director of Fixed Income for
Oppenheimer Management Corporation, New York, NY from 1985 to
1992. Prior to that, Mr. Suckow was a fixed-income portfolio
manager for the Delaware Group.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
47
<PAGE>
Walter P. Babich (69)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
460 North Gulph Road, King of Prussia, PA 19406.
Board Chairman, Citadel Constructors, Inc.
From 1986 to 1988, Mr. Babich was a partner of Irwin & Leighton and
from 1988 to 1991, he was a partner of I&L Investors.
Anthony D. Knerr (58)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
500 Fifth Avenue, New York, NY 10110.
Founder and Managing Director, Anthony Knerr & Associates.
From 1982 to 1988, Mr. Knerr was Executive Vice President/Finance
and Treasurer of Columbia University, New York. From 1987 to
1989, he was also a lecturer in English at the University. In
addition, Mr. Knerr was Chairman of The Publishing Group,
Inc., New York, from 1988 to 1990. Mr. Knerr founded The
Publishing Group, Inc. in 1988.
Ann R. Leven (56)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
785 Park Avenue, New York, NY 10021.
Treasurer, National Gallery of Art.
From 1984 to 1990, Ms. Leven was Treasurer and Chief Fiscal Officer
of the Smithsonian Institution, Washington, DC, and from 1975
to 1992, she was Adjunct Professor of Columbia Business
School.
W. Thacher Longstreth (76)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
City Hall, Philadelphia, PA 19107.
Philadelphia City Councilman.
Thomas F. Madison (61)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
President and Chief Executive Officer, MLM Partners, Inc.
200 South Fifth Street, Suite 2100, Minneapolis, Minnesota 55402.
Mr. Madison has also been Chairman of the Board of Communications
Holdings, Inc. since 1996. From February to September 1994,
Mr. Madison served as Vice Chairman--Office of the CEO of The
Minnesota Mutual Life Insurance Company and from 1988 to 1993,
he was President of U.S. WEST Communications--Markets.
48
<PAGE>
* Jeffrey J. Nick (44)
Director and/or Trustee of Mutual Funds, Inc. and 32 other investment
companies in the Delaware Group.
President, Chief Executive Officer and Director of Lincoln National
Investment Companies, Inc. From 1992 to 1996, Mr. Nick was
Managing Director of Lincoln National UK plc and from 1989 to
1992, he was Senior Vice President responsible for corporate
planning and development for Lincoln National Corporation.
Charles E. Peck (71)
Director and/or Trustee of Mutual Funds, Inc. and each of the other 32
investment companies in the Delaware Group.
P.O. Box 1102, Columbia, MD 21044.
Secretary/Treasurer, Enterprise Homes, Inc.
From 1981 to 1990, Mr. Peck was Chairman and Chief Executive Officer of
The Ryland Group, Inc., Columbia, MD.
David K. Downes (57)
Executive Vice President/Chief Operating Officer/Chief Financial
Officer of Mutual Funds, Inc., each of the other 32 investment
companies in the Delaware Group, Delaware Management Holdings,
Inc, Founders CBO Corporation, Delaware Capital Management,
Inc. and Delaware Distributors, L.P.
Executive Vice President, Chief Operating Officer, Chief Financial
Officer and Director of Delaware Management Company, Inc., DMH
Corp., Delaware Distributors, Inc., Founders Holdings, Inc.
and Delaware International Holdings Ltd.
President/Chief Executive Officer/Chief Financial Officer and Director
of Delaware Service Company, Inc.
Chairman,Chief Executive Officer and Director of Delaware Management
Trust Company and Delaware Investment & Retirement Services,
Inc.
Director of Delaware International Advisers Ltd.
Before joining the Delaware Group in 1992, Mr. Downes was Chief
Administrative Officer, Chief Financial Officer and Treasurer
of Equitable Capital Management Corporation, New York, from
December 1985 through August 1992, Executive Vice President
from December 1985 through March 1992, and Vice Chairman from
March 1992 through August 1992.
- ----------------------
*Director affiliated with the Fund's investment manager and considered an
"interested person" as defined in the 1940 Act.
49
<PAGE>
George M. Chamberlain, Jr. (50)
Senior Vice President, Secretary and General Counsel of Mutual Funds,
Inc., each of the other 32 investment companies in the
Delaware Group, Delaware Distributors, L.P. and Delaware
Management Holdings, Inc.
Senior Vice President, Secretary, General Counsel and Director of DMH
Corp., Delaware Management Company, Inc., Delaware
Distributors, Inc., Delaware Service Company, Inc., Founders
Holdings, Inc., Delaware Investment & Retirement Services,
Inc. and Delaware Capital Management, Inc.
Executive Vice President, Secretary, General Counsel and Director of
Delaware Management Trust Company.
Secretary and Director of Delaware International Holdings Ltd.
Director of Delaware International Advisers Ltd.
Attorney.
During the past five years, Mr. Chamberlain has served in various
capacities at different times within the Delaware
organization.
Joseph H. Hastings (47)
Senior Vice President/Corporate Controller of Mutual Funds, Inc.,
each of the other 32 investment companies in theDelaware Group
and Founders Holdings, Inc.
Senior Vice President/Corporate Controller and Treasurer of Delaware
Management Holdings, Inc., DMH Corp., Delaware Management
Company, Inc., Delaware Distributors, L.P., Delaware
Distributors, Inc., Delaware Service Company, Inc., Delaware
Capital Management, Inc. and Delaware International Holdings
Ltd.
Chief Financial Officer/Treasurer of Delaware Investment &
Retirement Services, Inc.
Executive Vice President/Chief Financial Officer/Treasurer of Delaware
Management Trust Company.
Senior Vice President/Assistant Treasurer of Founders CBO Corporation.
1818 Market Street, Philadelphia, PA 19103.
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.
50
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Michael P. Bishof (35)
Senior Vice President/Treasurer of Mutual Funds, Inc., each of the
other 32 investment companies in the Delaware Group, Delaware
Distributors, Inc. and Founders Holdings, Inc.
Senior Vice President/Investment Accounting of Delaware Management
Company, Inc. and Delaware Service Company, Inc.
Senior Vice President and Treasurer/Manager of Investment Accounting
of Delaware Distributors, L.P.
Senior Vice President and Manager of Investment Accounting of
Delaware International Holdings Ltd.
Assistant Treasurer of Founders CBO Corporation.
Before joining the Delaware Group in 1995, Mr. Bishof was a Vice
President for Bankers Trust, New York, NY from 1994 to 1995, a
Vice President for CS First Boston Investment Management, New
York, NY from 1993 to 1994 and an Assistant Vice President for
Equitable Capital Management Corporation, New York, NY from
1987 to 1993.
Patrick P. Coyne (34)
Vice President/Senior Portfolio Manager of Mutual Funds, Inc., and
each of the tax-exempt and the fixed-income funds in the
Delaware Group and Delaware Capital Management, Inc.
During the past five years, Mr. Coyne has served in various
capacities at different times within the Delaware
organization.
Mitchell L. Conery (38)
Vice President/Senior Portfolio Manager of Mutual Funds, Inc., each
of the tax-exempt and the fixed-income funds in the Delaware
Group and Delaware Capital Management.
Before joining the Delaware Group in 1997, Mr. Conery was an
investment officer with Travelers Insurance from 1995 through
1996 and a research analyst with CS First Boston from 1992 to
1995.
51
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The following is a compensation table listing for each director
entitled to receive compensation, the aggregate compensation expected to be
received from Mutual Funds, Inc. during the actual fiscal year, the total
compensation received from all Delaware Group investment companies for the
fiscal year ended December 31, 1996, and an estimate of annual benefits to be
received upon retirement under the Delaware Group Retirement Plan for
Directors/Trustees as of December 31, 1996.
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated Compensation
Aggregate Accrued Annual from all 18
Compensation as Part of Benefits Delaware
from Mutual Mutual Funds, Upon Group Investment
Name Funds, Inc.(1) Inc. Expenses Retirement* Companies
<S> <C> <C> <C> <C>
W. Thacher Longstreth $826 None $30,000 $46,187
Ann R. Leven $872 None $30,000 $54,323
Walter P. Babich $863 None $30,000 $53,323
Anthony D. Knerr $863 None $30,000 $53,323
Charles E. Peck $826 None $30,000 $49,323
Thomas F. Madison(2) $826 None $30,000 N/A
</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 December 31, 1996, he or she would be
entitled to annual payments totaling $30,000, in the aggregate, from all of
the funds in the Delaware Group, based on the number of funds in the
Delaware Group as of that date.
(1) The current Board of Directors was elected by shareholders of Mutual Funds,
Inc. on April 11, 1997 and began serving on May 1, 1997. With the exception
of Thomas F. Madison, none of the current directors had served on the prior
Board. Compensation figures are estimates of payments for Mutual Funds,
Inc.'s current fiscal year.
(2) Thomas F. Madison also received $1,462 for his service on the previous
Board of Directors during the last fiscal year.
52
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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 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
Shareholder Service Center at 800-523-1918 to effect an exchange. The
shareholder's current Fund account number must be identified, as well as the
registration of the account, the share or dollar amount to be exchanged and the
fund into which the exchange is to be made. Requests received on any day after
the time the offering price and net asset value are determined will be processed
the following day. See Determining Offering Price and Net Asset Value. Any new
account established through the exchange will automatically carry the same
registration, shareholder information and dividend option as the account from
which the shares were exchanged. The exchange requirements of the fund into
which the exchange is being made, such as sales charges, eligibility and
investment minimums, must be met. (See the prospectus of the fund desired or
inquire by calling the Transfer Agent or, as relevant, your Client Services
Representative.) Certain funds are not available for retirement plans.
The telephone exchange privilege is intended as a convenience to
shareholders and is not intended to be a vehicle to speculate on short-term
swings in the securities market through frequent transactions in and out of the
funds in the Delaware Group. Telephone exchanges may be subject to limitations
as to amounts or frequency. The Transfer Agent and the Fund reserve the right to
record exchange instructions received by telephone and to reject exchange
requests at any time in the future.
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<PAGE>
As described in the Fund's Prospectus, 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 Fund shares
which are reasonably believed to be genuine.
Right to Refuse Timing Accounts
With regard to accounts that are administered by market timing services
("Timing Firms") to purchase or redeem shares based on changing economic and
market conditions ("Timing Accounts"), 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 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 stocks issued
by emerging growth companies exhibiting strong capital appreciation potential.
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<PAGE>
Small Cap Value Fund seeks capital appreciation by investing primarily
in common stocks whose market values appear low relative to their underlying
value or future potential.
DelCap Fund seeks long-term capital growth by investing in common
stocks and securities convertible into common stocks of companies that have a
demonstrated history of growth and have the potential to support continued
growth.
Decatur Income Fund seeks the highest possible current income by
investing primarily in common stocks that provide the potential for income and
capital appreciation without undue risk to principal. Decatur Total Return Fund
seeks long-term growth by investing primarily in securities that provide the
potential for income and capital appreciation without undue risk to principal.
Blue Chip Fund seeks to achieve long-term capital appreciation. Current income
is a secondary objective. It seeks to achieve these objectives by investing
primarily in equity securities and any securities that are convertible into
equity securities. Quantum Fund seeks to achieve long-term capital appreciation.
It seeks to achieve this objective by investing primarily in equity securities
of medium- to large-sized companies expected to grow over time that meet the
Fund's "Social Criteria" strategy.
Delchester Fund seeks as high a current income as possible by investing
principally in high yield, high risk corporate bonds, and also in U.S.
government securities and commercial paper. Strategic Income Fund seeks to
provide investors with high current income and total return by using a
multi-sector investment approach, investing principally in three sectors of the
fixed-income securities markets: high yield, higher risk securities, investment
grade fixed-income securities and foreign government and other foreign
fixed-income securities.
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 USA Fund seeks high current income exempt from federal income
tax by investing in municipal bonds of geographically-diverse issuers. Tax-Free
Insured Fund invests in these same types of securities but with an emphasis on
municipal bonds protected by insurance guaranteeing principal and interest are
paid when due. Tax-Free USA Intermediate Fund seeks a high level of current
interest income exempt from federal income tax, consistent with the preservation
of capital by investing primarily in municipal bonds.
Tax-Free Money Fund seeks high current income, exempt from federal
income tax, by investing in short-term municipal obligations, while maintaining
a stable net asset value.
Tax-Free Pennsylvania Fund seeks a high level of current interest
income exempt from federal and, to the extent possible, certain Pennsylvania
state and local taxes, consistent with the preservation of capital.
55
<PAGE>
International Equity Fund seeks to achieve long-term growth without
undue risk to principal by investing primarily in international securities that
provide the potential for capital appreciation and income. Global Bond Fund
seeks to achieve current income consistent with the preservation of principal by
investing primarily in global fixed-income securities that may also provide the
potential for capital appreciation. Global Assets Fund seeks to achieve
long-term total return by investing in global securities which will provide
higher current income than a portfolio comprised exclusively of equity
securities, along with the potential for capital growth. Emerging Markets Fund
seeks long-term capital appreciation by investing primarily in equity securities
of issuers located or operating in emerging countries.
Enterprise Fund seeks to provide maximum appreciation of capital by
investing in medium-sized companies which have a dominant position within their
industry, are undervalued, or have potential for growth in earnings. U.S. Growth
Fund seeks to maximize capital appreciation by investing in companies of all
sizes which have low dividend yields, strong balance sheets and high expected
earnings growth rates relative to their industry. World Growth Fund seeks to
maximize total return (capital appreciation and income), principally through
investments in an internationally diversified portfolio of equity securities.
New Pacific Fund seeks long-term capital appreciation by investing primarily in
companies which are domiciled in or have their principal business activities in
the Pacific Basin. Federal Bond Fund seeks to maximize current income consistent
with preservation of capital. The fund attempts to achieve this objective by
investing primarily in securities issued by the U.S. government, its agencies
and instrumentalities. Corporate Income Fund seeks to provide high current
income consistent with preservation of capital. The fund attempts to achieve
this objective primarily by investing in a diversified portfolio of investment
grade fixed-income securities issued by U.S. corporations.
Delaware Group Premium Fund, Inc. offers 15 funds available exclusively
as funding vehicles for certain insurance company separate accounts. Decatur
Total Return Series seeks the highest possible total rate of return by selecting
issues that exhibit the potential for capital appreciation while providing
higher than average dividend income. Delchester Series seeks as high a current
income as possible by investing in rated and unrated corporate bonds, U.S.
government securities and commercial paper. Capital Reserves Series seeks a high
stable level of current income while minimizing fluctuations in principal by
investing in a diversified portfolio of short- and intermediate-term securities.
Cash Reserve Series seeks the highest level of income consistent with
preservation of capital and liquidity through investments in short-term money
market instruments. DelCap Series seeks long-term capital appreciation by
investing its assets in a diversified portfolio of securities exhibiting the
potential for significant growth. Delaware Series seeks a balance of capital
appreciation, income and preservation of capital. It uses a dividend-oriented
valuation strategy to select securities issued by established companies that are
believed to demonstrate potential for income and capital growth. International
Equity Series seeks long-term growth without undue risk to principal by
investing primarily in equity securities of foreign issuers that provide the
potential for capital appreciation and income. Value Series seeks capital
appreciation by investing in small- to mid-cap common stocks whose market values
appear low relative to their underlying value or future earnings and growth
potential. Emphasis will also be placed on securities of companies that may be
temporarily out of favor or whose value is not yet recognized by the market.
Trend Series seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. Global Bond
Series seeks to achieve current income consistent with the preservation of
principal by investing primarily in global fixed-income securities that may also
provide the potential for capital appreciation. Strategic Income Series seeks
high current income and total return by using a multi-sector investment
approach, investing primarily in three sectors of the fixed-income securities
markets: high-yield, higher risk securities; investment grade fixed-income
securities; and foreign government and other foreign fixed-income securities.
Devon Series seeks current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on common stocks that
the investment manager believes have the potential for above-average dividend
increases over
56
<PAGE>
time. Emerging Markets Series seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located or operating in
emerging countries. Convertible Securities Series seeks a high level of total
return on its assets through a combination of capital appreciation and current
income by investing primarily in convertible securities. Quantum Series seeks to
achieve long-term capital appreciation by investing primarily in equity
securities of medium to large-sized companies expected to grow over time that
meet the Series' "Social Criteria" strategy.
Delaware-Voyageur US Government Securities Fund seeks to provide a high
level of current income consistent with the prudent investment risk by investing
in U.S. Treasury bills, notes, bonds, and other obligations issued or
unconditionally guaranteed by the full faith and credit of the U.S. Treasury,
and repurchase agreements fully secured by such obligations.
Delaware-Voyageur Tax-Free Arizona Insured Fund seeks to provide a high
level of current income exempt from federal income tax and the Arizona personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Minnesota Insured Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax, consistent with
the preservation of capital.
Delaware-Voyageur Tax-Free Minnesota Intermediate Fund seeks to provide
a high level of current income exempt from federal income tax and the Minnesota
personal income tax, consistent with preservation of capital. The Fund seeks to
reduce market risk by maintaining an average weighted maturity from five to ten
years.
Delaware-Voyageur Tax-Free California Insured Fund seeks to provide a
high level of current income exempt from federal income tax and the California
personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Florida Insured Fund seeks to provide a high level of
current income exempt from federal income tax, consistent with the preservation
of capital. The Fund will seek to select investments that will enable its shares
to be exempt from the Florida intangible personal property tax.
Delaware-Voyageur Tax-Free Florida Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. The Fund will seek to select investments that will enable its shares to
be exempt from the Florida intangible personal property tax. Delaware-Voyageur
Tax-Free Kansas Fund seeks to provide a high level of current income exempt from
federal income tax, the Kansas personal income tax and the Kansas Intangible
personal property tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Missouri Insured Fund seeks to provide a high level
of current income exempt from federal income tax and the Missouri personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free New Mexico Fund seeks to provide a high level of current income exempt
from federal income tax and the New Mexico personal income tax, consistent with
the preservation of capital. Delaware-Voyageur Tax-Free Oregon Insured Fund
seeks to provide a high level of current income exempt from federal income tax
and the Oregon personal income tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Utah Fund seeks to provide a high level of current
income exempt from federal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Washington Insured Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital.
Delaware-Voyageur Tax-Free Florida Intermediate Fund seeks to provide a
high level of current income exempt from federal income tax, consistent with the
preservation of capital. The Fund will seek to select investments that will
enable its shares to be exempt from the Florida intangible personal property
tax. The Fund seeks to reduce market risk by maintaining an average weighted
maturity from five to ten years.
Delaware-Voyageur Tax-Free Arizona Fund seeks to provide a high level
of current income exempt from federal income tax and the Arizona personal income
tax, consistent with the preservation of capital.
57
<PAGE>
Delaware-Voyageur Tax-Free California Fund seeks to provide a high level of
current income exempt from federal income tax and the California personal income
tax, consistent with the preservation of capital. Delaware-Voyageur Tax-Free
Iowa Fund seeks to provide a high level of current income exempt from federal
income tax and the Iowa personal income tax, consistent with the preservation of
capital. Delaware-Voyageur Tax-Free Idaho Fund seeks to provide a high level of
current income exempt from federal income tax and the Idaho personal income tax,
consistent with the preservation of capital. Delaware-Voyageur Minnesota High
Yield Municipal Bond Fund seeks to provide a high level of current income exempt
from federal income tax and the Minnesota personal income tax primarily through
investment in medium and lower grade municipal obligations. Delaware-Voyageur
Tax-Free New York Fund seeks to provide a high level of current income exempt
from federal income tax and the personal income tax of the state of New York and
the city of New York, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Wisconsin Fund seeks to provide a high level of
current income exempt from federal income tax and the Wisconsin personal income
tax, consistent with the preservation of capital.
Delaware-Voyageur Tax-Free Colorado Fund seeks to provide a high level
of current income exempt from federal income tax and the Colorado personal
income tax, consistent with the preservation of capital.
Aggressive Growth Fund seeks long-term capital appreciation, which the
Fund attempts to achieve by investing primarily in equity securities believed to
have the potential for high earnings growth. Although the Fund, in seeking its
objective, may receive current income from dividends and interest, income is
only an incidental consideration in the selection of the Fund's investments.
Growth Stock Fund has an objective of long-term capital appreciation. The Fund
seeks to achieve its objective from equity securities diversified among
individual companies and industries. Tax-Efficient Equity Fund seeks to obtain
for taxable investors a high total return on an after-tax basis. The Fund will
attempt to achieve this objective by seeking to provide a high long-term
after-tax total return through managing its portfolio in a manner that will
defer the realization of accrued capital gains and minimize dividend income.
Delaware-Voyageur Tax-Free Minnesota Fund seeks to provide a high level
of current income exempt from federal income tax and the Minnesota personal
income tax, consistent with the preservation of capital. Delaware-Voyageur
Tax-Free North Dakota Fund seeks to provide a high level of current income
exempt from federal income tax and the North Dakota personal income tax,
consistent with the preservation of capital.
For more complete information about any of the Delaware Group funds,
including charges and expenses, you can obtain a prospectus from the
Distributor. Read it carefully before you invest or forward funds.
Each of the summaries above is qualified in its entirety by the
information contained in each fund's prospectus(es).
58
<PAGE>
GENERAL INFORMATION
The Manager is the investment manager of the Fund. The Manager also
provides investment management services to certain of the other funds in the
Delaware Group. The Manager, through a separate division, also manages private
investment accounts. While investment decisions of the Fund are made
independently from those of the other funds and accounts, investment decisions
for such other funds and accounts may be made at the same time as investment
decisions for the Fund.
The Manager, or its affiliate Delaware International Advisers Ltd.,
also manages the investment options for Delaware Medallion (sm) III Variable
Annuity. Medallion is issued by Allmerica Financial Life Insurance and Annuity
Company (First Allmerica Financial Life Insurance Company in New York and
Hawaii). Delaware Medallion offers fifteen different investment series ranging
from domestic equity funds, international equity and bond funds and domestic
fixed income funds. Each investment series available through Medallion utilizes
an investment strategy and discipline the same as or similar to one of the
Delaware Group mutual funds as available outside the annuity. See Discipline
Group Premium Fund, Inc., above.
Access persons and advisory persons of the Delaware Group of funds, as
those terms are defined in SEC Rule 17j-1 under the 1940 Act, who provide
services to the Manager, 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. Prior to May 31, 1997, Voyageur Fund
Distributors, Inc. served as the national distributor for the Fund.
59
<PAGE>
The Transfer Agent, an affiliate of the Manager, acts as shareholder
servicing, dividend disbursing and transfer agent for each Fund and for the
other mutual funds in the Delaware Group. The Transfer Agent is paid a fee by
the Fund 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 unaffiliated directors. The Transfer
Agent also provides accounting services to the Fund. Those services include
performing all functions related to calculating the Fund's net asset value and
providing all financial reporting services, regulatory compliance testing and
other related accounting services. For its services, the Transfer Agent is paid
a fee based on total assets of all funds in the Delaware Group for which it
provides such accounting services. Such fee is equal to 0.25% multiplied by the
total amount of assets in the complex for which the Transfer Agent furnishes
accounting services, where such aggregate complex assets are $10 billion or
less, and 0.20% of assets if such aggregate complex assets exceed $10 billion.
The fees are charged to each fund, including the Fund, on an aggregate pro-rata
basis. The asset-based fee payable to the Transfer Agent is subject to a minimum
fee calculated by determining the total number of investment portfolios and
associated classes.
Norwest Bank Minnesota, N.A. ("Norwest"), Sixth Street & Marquette
Avenue, Minneapolis, Minnesota 55402 is custodian of the Fund's securities and
cash. As custodian for the Fund, Norwest maintains a separate account or
accounts for the Fund; receives, holds and releases portfolio securities on
account of the Fund; receives and disburses money on behalf of the Fund; and
collects and receives income and other payments and distributions on account of
the Fund's portfolio securities.
Capitalization
Mutual Funds, Inc. has a present authorized capitalization of 10
trillion shares of capital stock with a $0.01 par value per share.
The Board of Directors has allocated the following number of shares to
the Fund and its respective classes:
National High Yield Municipal Bond Fund 100 billion
Class A Shares 10 billion
Class B Shares 10 billion
Class C Shares 10 billion
All shares have no preemptive rights, are fully transferable and, when
issued, are fully paid and nonassessable and, except as described above, have
equal voting rights.
Shares of each Class of the Fund represent a proportionate interest in
the assets of the Fund, and have the same voting and other rights and
preferences as the other classes of the Fund. Shareholders of Class A Shares,
Class B Shares and Class C Shares of a Fund may vote only on matters affecting
the 12b-1 Plan that relates to the Class of shares that they hold. However,
Class B Shares may vote on any proposal to increase materially the fees to be
paid by the Fund under the 12b-1 Plan relating to its Class A Shares. General
expenses of the Fund will be allocated on a pro-rata basis to the classes
according to asset size, except that expenses of the 12b-1 Plans of the Fund's
Class A, Class B and Class C Shares will be allocated solely to those classes.
Beginning June 9, 1997, the name of Voyageur National High Yield
Municipal Bond Fund changed to National High Yield Municipal Bond Fund.
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Noncumulative Voting
Mutual Funds, Inc.'s shares have noncumulative voting rights which
means that the holders of more than 50% of the shares of Mutual Funds, Inc.
voting for the election of directors can elect all the directors if they choose
to do so, and, in such event, the holders of the remaining shares will not be
able to elect any directors.
This Part B does not include all of the information contained in the
Registration Statement which is on file with the SEC.
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APPENDIX A -- RATINGS
Earnings and Dividend Rankings for Common Stocks
Standard & Poor's Corporation. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, Standard & Poor's
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. The rankings,
however, do not pretend to reflect all of the factors, tangible or intangible,
that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of
protection for principal and interest, called creditworthiness, cannot be
applied to common stocks, and therefore rankings are not to be confused with
bond quality ratings which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
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recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management changes,
internal company policies not yet fully reflected in the earnings and dividend
record, public relations standing, recent competitive shifts, and a host of
other factors that may be relevant to investment status and decision.
Commercial Paper Ratings
Standard & Poor's Corporation. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
Moody's Investors Service, Inc. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of short-term promissory
obligations.
Prime-2 Strong capacity for repayment of short-term promissory
obligations.
Prime-3 Acceptable capacity for repayment of short-term
promissory obligations.
Corporate Bond Ratings
Standard & Poor's Corporation. Its ratings for corporate bonds have
the following definitions:
Investment grade:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
Debt rated "A" has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade:
Debt rated "BB," "B," "CCC" and "CC" and "C" is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
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speculation and "C" the highest. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major exposures to adverse conditions.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. Its ratings for corporate bonds
include the following:
Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Bonds which are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Bonds which are rated "Ba" are 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.
Bonds which are rated "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.
Bonds which are rated "Caa" are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Bonds which are rated "C" are 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.
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Preferred Stock Rating
Standard& Poor's Corporation. Its ratings for preferred stock have the
following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rate "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Moody's Investors Service, Inc. Its ratings for preferred stock
include the following:
An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
An issue which is rate "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
An issue which is rated "baa" is considered to be medium-grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
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An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "c" is the lowest rated class of preferred or
preference stock. Issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
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APPENDIX B
General Characteristics and Risks of Options and Futures
General. As described in the Prospectus under "Investment Objectives
and Policies -- Options and Futures," the Fund may purchase and sell options on
the securities in which it may invest and the Fund may purchase and sell options
on futures contracts (as defined below) and may purchase and sell futures
contracts. The Fund intend to engage in such transactions if it appears
advantageous to Voyageur to do so in order to pursue the Fund's investment
objectives, to seek to hedge against the effects of market conditions and to
seek to stabilize the value of its assets. The Fund will engage in hedging and
risk management transactions from time to time in Voyageur's discretion, and may
not necessarily be engaging in such transactions when movements in interest
rates that could affect the value of the assets of the Fund occur.
Conditions in the securities, futures and options markets will
determine whether and in what circumstances the Fund will employ any of the
techniques or strategies described below. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the Commodity
Futures Trading Commission (the 'CFTC") and the federal tax requirements
applicable to regulated investment companies. Transactions in options and
futures contracts may give rise to income that is subject to regular federal
income tax and, accordingly, in normal circumstances the Fund does not intend to
engage in such practices to a significant extent.
The use of futures and options, and the possible benefits and
attendant risks, are discussed below.
Futures Contracts and Related Options. The Fund may enter into
contracts for the purchase or sale for future delivery (a "futures contract") of
fixed-income securities or contracts based on financial indices including any
index of securities in which the Fund may invest. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities, or
the cash value of an index, called for by the contract at a specified price
during a specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. The Fund
may also purchase and sell (write) call and put options on financial futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time during, or at the termination of, the
period specified in the terms of the option. Upon exercise, the writer of the
option delivers the futures contract to the holder at the exercise price. The
Fund would be required to deposit with its custodian initial margin and
maintenance margin with respect to put and call options on futures contracts
written by it.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. The Fund's
ability to establish and close out positions in futures contracts and options on
futures contracts will be subject to the liquidity of the market. Although the
Fund generally will purchase or sell only those futures contracts and options
thereon for which there appears to be a liquid market, there is no assurance
that a liquid market on an exchange will exist for any particular futures
contract or option thereon at any particular time. Where it is not possible to
effect a closing transaction in a contract or to do so at a satisfactory price,
the Fund would have to make or take delivery under the futures contract, or, in
the case of a purchased option, exercise the option. The Fund would be required
to maintain initial margin deposits with respect to the futures contract and to
make variation margin payments until the contract is closed. The Fund will incur
brokerage fees when they purchase or sell futures contracts.
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At the time a futures contract is purchased or sold, the Fund must
deposit in a custodial account cash or securities as a good faith deposit
payment (known as "initial margin"). It is expected that the initial margin on
futures contracts the Fund may purchase or sell may range from approximately 1
1/2% to approximately 5% of the value of the securities (or the securities
index) underlying the contract. In certain circumstances, however, such as
during periods of high volatility, the Fund may be required by an exchange to
increase the level of its initial margin payment. Initial margin requirements
may be increased generally in the future by regulatory action. An outstanding
futures contract is valued daily in a process known as "marking to market." If
the market value of the futures contract has changed, the Fund will be required
to make or will be entitled to receive a payment in cash or specified high
quality debt securities in an amount equal to any decline or increase in the
value of the futures contract. These additional deposits or credits are
calculated and required on a daily basis and are known as "variation margin."
There may be an imperfect correlation between movements in prices of
the futures contract the Fund purchases or sells and the portfolio securities
being hedged. In addition, the ordinary market price relationships between
securities and related futures contracts may be subject to periodic distortions.
Specifically, temporary price distortions could result if, among other things,
participants in the futures market elect to close out their contracts through
offsetting transactions rather than meet variation margin requirements,
investors in futures contracts decide to make or take delivery of underlying
securities rather than engage in closing transactions or if, because of the
comparatively lower margin requirements in the futures market than in the
securities market, speculators increase their participation in the futures
market. Because price distortions may occur in the futures market and because
movements in the prices of securities may not correlate precisely with movements
in the prices of futures contracts purchased or sold by the Fund in a hedging
transaction, even if Voyageur correctly forecasts market trends the Fund's
hedging strategy may not be successful. If this should occur, the Fund could
lose money on the futures contracts and also on the value of its portfolio
securities.
Although the Fund believes that the use of futures contracts and
options thereon will benefit it, if Voyageur's judgment about the general
direction of securities prices or interest rates is incorrect, the Fund's
overall performance may be poorer than if it had not entered into futures
contracts or purchased or sold options thereon. For example, if the Fund seeks
to hedge against the possibility of an increase in interest rates, which
generally would adversely affect the price of fixed-income securities held in
its portfolio, and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged due
to the decrease in interest rates because it will have offsetting losses in its
futures positions. In addition, particularly in such situations, the Fund may
have to sell assets from its portfolio to meet daily margin requirements at a
time when it may be disadvantageous to do so.
Options on Securities. The Fund may purchase and sell (write) options
on securities, which options may be either exchange-listed or over-the-counter
options. The Fund may write call options only if the call option is "covered." A
call option written by the Fund is covered if the Fund owns the securities
underlying the option or has a contractual right to acquire them or owns
securities which are acceptable for escrow purposes. The Fund may write put
options only if the put option is "secured." A put option written by the Fund is
secured if the Fund, which is obligated as a writer of a put option, invests an
amount, not less than the exercise price of a put option, in eligible
securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security.
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The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option will permit the Fund to write another put option to
the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the option or
is more than the premium paid to purchase the option; the Fund will realize a
loss from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
The Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, the Fund will reduce
any profit it might otherwise have realized in the underlying security by the
amount of the premium paid for the put option and by transaction costs.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the option, and, unless
the price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
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The Fund may purchase and sell options that are exchange-traded or
that are traded over-the counter ("OTC options"). Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange
on which the option is listed which, in effect, guarantees every exchange-traded
option transaction. In contrast, OTC options are contracts between the Fund and
its counterparty with no clearing organization guarantee. Thus, when the Fund
purchases OTC options, it must rely on the dealer from which it purchased the
OTC option to make or take delivery of the securities underlying the option.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the loss of the expected benefit of the transaction.
Although the Fund will enter into OTC options only with dealers that
agree to enter into, and which are expected to be capable of entering into,
closing transactions with the Fund, there can be no assurance that the Fund will
be able to liquidate an OTC option at a favorable price at any time prior to
expiration. Until the Fund is able to effect a closing purchase transaction in a
covered OTC call option the Fund has written, it will not be able to liquidate
securities used as cover until the option expires or is exercised or different
cover is substituted. This may impair the Fund's ability to sell a portfolio
security at a time when such a sale might be advantageous. In the event of
insolvency of the counterparty, the Fund may be unable to liquidate an OTC
option. In the case of options written by the Fund, the inability to enter into
a closing purchase transaction may result in material losses to the Fund.
Regulatory Restrictions. To the extent required to comply with
applicable SEC releases and staff positions, when entering into futures
contracts or certain option transactions, such as writing a put option, the Fund
will maintain, in a segregated account, cash or liquid high-grade securities
equal to the value of such contracts. Compliance with such segregation
requirements may restrict the Fund's ability to invest in intermediate- and
long-term Tax Exempt Obligations.
The Fund intend to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that futures and options
positions be used (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Fund currently does not
intend to engage in transactions in futures contracts or options thereon for
speculation.
Accounting Considerations. When the Fund writes an option, an amount
equal to the premium received by it is included in the Fund's Statement of
Assets and Liabilities as a liability. The amount of the liability subsequently
is marked to market to reflect the current market value of the option written.
When the Fund purchases an option, the premium paid by the Fund is recorded as
an asset and subsequently is adjusted to the current market value of the option.
In the case of a regulated futures contract purchased or sold by the
Fund, an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset subsequently is adjusted to reflected changes in the amount
of the deposit as well as changes in the value of the contract.
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FINANCIAL STATEMENTS
KPMG Peat Marwick LLP served as the independent auditors for Voyageur
Mutual Funds, Inc. through December 31, 1996 and, in its capacity as such,
audited the annual financial statements of the Fund. Beginning May 1, 1997,
Ernst & Young LLP began serving in such capacity. The Fund's Statements of Net
Assets, Statements of Operations, Statements of Changes in Net Assets, and Notes
to Financial Statements, as well as the report of KPMG Peat Marwick LLP,
independent auditors, for the fiscal year ended December 31, 1996 are included
in Voyageur Mutual Funds, Inc.'s Annual Report to shareholders. The financial
statements, the notes relating thereto and the report of KPMG Peat Marwick LLP,
listed above are incorporated by reference from the Annual Report into this Part
B.
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The Delaware Group includes funds with a wide range of investment
objectives. Stock funds, income funds, national and state-specific 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, shareholders of the
Fund Classes should contact their financial adviser or call Delaware Group at
800-523- 4640.
INVESTMENT MANAGER
Delaware Management Company, Inc.
One Commerce Square
Philadelphia, PA 19103
NATIONAL DISTRIBUTOR
Delaware Distributors, L.P.
1818 Market Street
Philadelphia, PA 19103
SHAREHOLDER SERVICING,
DIVIDEND DISBURSING,
ACCOUNTING SERVICES
AND TRANSFER AGENT
Delaware Service Company, Inc.
1818 Market Street
Philadelphia, PA 19103
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young, LLP
One Commerce Square
Philadelphia, PA 19103
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
Philadelphia, PA 19103
CUSTODIANS
Norwest Bank Minnesota, N.A.
Sixth Street & Marquette Avenue
Minneapolis, MN 55402
- --------------------------------------------------------------------------------
NATIONAL HIGH YIELD MUNICIPAL BOND
FUND
- --------------------------------------------------------------------------------
A CLASS
- --------------------------------------------------------------------------------
B CLASS
- --------------------------------------------------------------------------------
C CLASS
- --------------------------------------------------------------------------------
CLASSES OF VOYAGEUR MUTUAL
FUNDS, INC.
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PART B
STATEMENT OF
ADDITIONAL INFORMATION
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AUGUST 28, 1997
DELAWARE
GROUP
